2017 (11) TMI 2084 - AT - Income Tax

ISO 14001 certification support payments to non-resident body-treated as non-royalty/FTS, so no TDS u/s 195; disallowance removed.

Payments made by the assessee to a non-resident certifying body towards assistance in ISO 14001 certification were held not to be 'royalty' under ... Income chargeable to tax - KPMG is a mutual association - TDS u/s 195 - payment of professional fees without deduction of tax at source to KPMG certification Netherlands towards assistance in execution of ISO 14001 certification work for various clients of the assessee - whether expenses incurred by the assessee company toward alleged reimbursement of cost is actually in the nature of royalty as laid down in section 9(1)(vi)? - AO made disallowance under section 40(a)(i) as tax was required to be deducted at source from payments made outside India HELD THAT:- This issue is squarely covered in favour of assessee’s by Tribunal decision in assessee’s own case for AY 2004-05 [2013 (11) TMI 188 - ITAT MUMBAI] held that these payments which were not liable or chargeable to be taxed in India, no TDS was required to be deducted u/s 195. Also held looking to the nature of services rendered by all these persons, which has been discussed in detail, it is seen that, firstly, none of these services fall in the nature of make available of any technical knowledge, experience, skill, know-how or process. The provisions of Indo- U.S. and U.K. treaties are absolutely clear that in case of fees for technical services, it is essential that technical knowledge skill knowhow should be made available to the assessee and the assessee should be at liberty to use them in its own right. If the service does not result in making available of any such thing, then the same would not fall within the ambit of fees for technical service. These payments also cannot be taxed under Article-7 as none of them were having any P.E. or fixed base in India and the duration of their visit in India was also for a very less period as has been discussed upon. Therefore, such a payment does not attract the provisions of TDS under section 195. Provisions of section 195(1) uses the expression “chargeable under the provisions of the Act”. The payer is bound to deduct tax at source only if the sum paid is assessable to tax in India. The obligation to deduct tax is limited to the appropriate proportion of income which is chargeable under the Act and not otherwise. Appeals of Revenue are dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether remittances made to an international association of member firms were covered by the doctrine/principle of mutuality, resulting in no 'income' element and therefore no liability to withhold tax under section 195, with consequential deletion of disallowance under section 40(a)(i). (ii) Whether payment of professional fees to a non-resident service provider for certification-related assistance was not chargeable to tax in India (including on the basis that it did not fall within 'fees for technical services' under the applicable tax treaty and there was no permanent establishment in India), thereby attracting no withholding obligation under section 195 and no disallowance under section 40(a)(i). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Mutuality and tax withholding/disallowance on remittances to international association Legal framework: The Court proceeded on the basis that section 195 requires withholding only from 'sums chargeable to tax' in India, and that section 40(a)(i) disallowance depends on a failure to deduct tax where such obligation exists. The Court also treated the doctrine of mutuality as determinative of whether any taxable income arises in the hands of the recipient association. Interpretation and reasoning: The Court accepted that the recipient was a mutual association of member firms and that, on identical facts, a coordinate decision had already upheld the application of mutuality by finding complete identity between contributors and participators, absence of profit element, and that contributions could only be expended or returned to members. Since there was no difference in facts between the years under consideration and the year covered by the earlier tribunal decision, the Court applied the same reasoning. Conclusions: The remittances were held to have no embedded income due to mutuality and therefore were not 'chargeable to tax' in India; consequently, there was no obligation to deduct tax at source under section 195 and the disallowance under section 40(a)(i) was not sustainable. The Revenue's grounds on this issue were dismissed. Issue (ii): Professional fees paid to non-resident-chargeability in India, section 195 withholding, and section 40(a)(i) disallowance Legal framework: The Court applied the proposition that tax is deductible under section 195 only from sums chargeable to tax in India, and that the payer may determine chargeability at the withholding stage. It further examined treaty-based limitations, including whether the services fell within 'fees for technical services' under the applicable tax treaty and whether the non-resident had a permanent establishment in India, with consequences for taxability of business profits. Interpretation and reasoning: The Court upheld the finding that the services for certification assistance did not fall within 'fees for technical services' under the relevant tax treaty and that the non-resident did not have a permanent establishment in India. On these premises, the consideration was not taxable in India and thus did not trigger section 195 withholding. The Court also treated the issue as covered by an earlier tribunal decision in the same assessee's case on comparable payments, which held that where payments are not chargeable to tax in India, no tax is deductible under section 195 and disallowance under section 40(a)(i) cannot be made. Conclusions: As the payment was held not chargeable to tax in India, no tax deduction obligation arose under section 195; therefore, the disallowance under section 40(a)(i) was deleted and the Revenue's ground was dismissed.