Foreign consultant payments exempt from TDS under business income article of tax treaty without permanent establishment

The ITAT Mumbai dismissed the Revenue's appeal regarding TDS disallowance under section 40(a)(i) for professional fees paid to foreign entities without tax deduction. The tribunal held that payments to foreign consultants for services not made available to the assessee fall under business income article of DTAA, not fees for technical services. Without permanent establishment in India, such income cannot be taxed at source. Additionally, contributions to KPMG International cooperative were protected under mutuality concept, making them non-taxable. The tribunal relied on judicial precedents and coordinate bench decisions supporting the assessee's position.

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Issues Involved:
1. Disallowance of professional fees paid outside India without deduction of tax at source.
2. Disallowance of contribution and reimbursement of expenses paid to KPMG International cooperative, Switzerland without deduction of tax at source.

Summary:

Issue 1: Disallowance of Professional Fees
The learned assessing officer disallowed professional fees amounting to Rs. 79,915,590 paid to 21 parties outside India without tax deduction at source, arguing that these payments constituted fees for technical services (FTS) under various Double Taxation Avoidance Agreements (DTAAs). The assessee contended that the services did not "make available" technical knowledge and thus did not fall under FTS, but rather under independent personal services or business profits, which are not taxable in India without a permanent establishment.

The CIT(A) noted that the issue was covered in favor of the assessee by previous decisions, including those related to BSR and Co LLP, and deleted the disallowance. The Tribunal upheld this decision, stating that the services did not fall under the FTS article and that the payments were not taxable under the residuary article of "other income." Consequently, ground numbers 1-4 of the appeal were allowed in favor of the assessee.

Issue 2: Disallowance of Contribution to KPMG International Cooperative
The assessee remitted Rs. 434,019,511 to KPMG International cooperative, Switzerland, without tax deduction at source, arguing that the payments were either membership contributions or reimbursements, and thus not taxable. The AO held that the payments were for the use of the KPMG name, constituting royalty under the DTAA, and disallowed the amount for non-deduction of tax.

The CIT(A) referenced a previous decision in the assessee's own case for the assessment year 2001-02, which held that the relationship between KPMG and the assessee was one of mutual association, and thus, the contributions did not constitute taxable income. The Tribunal upheld this decision, dismissing ground numbers 5-6 of the appeal.

Conclusion:
The appeal filed by the learned assessing officer was dismissed, with the Tribunal upholding the CIT(A)'s deletion of disallowances for both the professional fees and the contributions to KPMG International cooperative. The order was pronounced on 30.10.2023.

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