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2022 (5) TMI 1002
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....red in law and on facts in confirming the disallowance of Rs. 21,76,575/- (correct figure is Rs. 18,44,925/-) being the professional fees paid to GT UK LLP u/s 40(a)(ia) of the Act due to non-deduction of TDS ignoring the facts and evidences placed on record to show that the said payments were not taxable in India and therefore not liable to tax deduction u/s 195 of the Act. Thus the disallowance so made should be deleted. 3. The dispute in ground no. 1 relates to disallowance of Rs.2,73,52,203/- under section 40(a)(i) of the Income-tax Act, 1961 (for short 'the Act') for alleged non-deduction of tax at source on payment made towards membership/subscription fee. 3.1 Briefly the facts are, the assessee, a resident company, is engaged in the business of advisory services. For the assessment year under dispute, the assessee filed its return of income on 29.09.2022 declaring income of Rs.35,59,230/-. In course of assessment proceedings, the Assessing Officer while perusing the materials on record, noticed that in the year under consideration, the assessee has paid Rs.2,73,52,203/- to Grant Thornton International Ltd., London, UK (GTIL) towards membership/ subscription. He observe....
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....reimbursement of expenses incurred to develop GT brand in India, however, rejecting the submissions of the assessee, learned Commissioner (Appeals) held that the amount paid by the assessee for user of the brand has to be treated as royalty, hence, taxable in India. Since, the assessee had failed to deduct tax at source under section 195 of the Act while making such payment, learned Commissioner (Appeals) sustained the disallowance made by the Assessing Officer, though, on a completely different reasoning. 3.3 Before us, learned counsel for the assessee submitted, GTIL, an overseas entity, is a non-profit, non-practicing international association of accountancy and assurance firm which works for mutual benefit of members on no profit/no loss basis. He submitted, GTIL has neither any office nor any business connection in India. He submitted, the objective of GTIL is to move towards the adoption of common standards and policies for professional services rendered by its member firms. He submitted, since GTIL does not have any independent source of income, its operational expenses are shared/borne by its members. He submitted, the receipts from the members constitute some percentage....
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....a Pty. Ltd. Vs. DDIT (International Taxation) (2013) 141 ITD 598 (Pune) (c) CIT Vs De Beers India Minerals Pvt. Ltd. (2012) 346ITR 467 (Karn) (d) ISR0 Satellite Centre (ISAC) (2008) 307 ITR 59 (AAR) (e) Intertek Testing Services India (P) Ltd. Vs. Authority for Advance Rulings (2008) 307 ITR 418 (f) BharatiAxa General Insurance Co. Ltd. (2010) 326 ITR 477 (AAR) (g) Cable & Wireless Networks India Pvt. Ltd. (2009) 315 ITR 72 (h) Invensys Systems Inc., (2009) 317 ITR 438 (i) Guy Carpenter & Co. Ltd. Vs ADIT (2012) 18 ITR (Trib) 414 (Delhi) (j) WNS North America Inc. Vs ADIT (International Taxation) (2013) 141 ITD 117 (Mumbai) : (2013) 25 ITR (Trib) 582 (Mumbai) k) Emst & Young Pvt. Ltd., (2010) 323 ITR 184 (Pages 197 - 204 of the PB) 3.4 He submitted, the assessee renders consultancy and advisory services; hence, there is no use of technical design or processes. Therefore, there was no transfer or development of any technical plan or technical design. That being the case, the payment cannot be treated as FTS under the Tax Treaty provision. Without prejudice, he submitted, the membership fee cannot com....
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.... proceeding, this was never the case of the assessee. Therefore, the first appellate authority has rightly rejected the fresh claim of the assessee. Proceeding further, he submitted, the assessee has paid the amount to its AE not only for using the brand, but also for availing certain services. Therefore, the amount paid has to be treated as royalty, both under section 9(1)(vi) as well as under the provisions of India - UK DTAA. 5. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The controversy between the parties is with regard to the nature of membership and subscription fee paid to GTIL and whether such payment required withholding of tax at source under section 195 of the Act. It is evident, the Assessing Officer treated the payment made towards membership and subscription fee as FTS, both under section 9(1)(vii) as well as Article 13(4) of India - UK DTAA. Whereas, learned Commissioner (Appeals) proceeded in a completely different footing by holding that the payment made to GTIL towards membership and subscription fee is in the nature of royalty. While coming to such conclusion, learned Commissioner (Appeal....
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....name use agreement under which a member firm can request for entering into a name use agreement which will enable such member firm to use the name 'Grant Thornton" or an approved derivative thereon. However, such request of a member firm to enter into a name use agreement has to be approved by the members of Board of GTIL present at a meeting with Corum by at least 75% vote. Thus, from the aforesaid clause, it is very much clear that user of brand name/trade mark (Grant Thornton) is not mandatory, but on request of a particular member firm. Clause 5 of the agreement speaks of permanent contribution by member firm to GTIL. Clause 9.1 of the agreement provides that in order to assist in equitable allocation of GTIL expenses amongst members who have benefited from GTIL membership, a member firm shall pay to GTIL a service charge to be computed as a percentage of total net fees billed and collected by a member firm arising from international work referred to such member firm by another correspondent firm. It is further provided, in order to, encourage member and correspondent firms to refer work to member and correspondent firms, the board of GTIL may permit either some or all of the s....
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.... documentation that the GTIL provides with the software; and (ii) the source code version of the software to the extent necessary to correct errors, ingredients or otherwise operate the software for member firms' for internal business purposes and make as many copy of the software as reasonably necessary for such permitted use, modification and enhancement and such backup copies as are necessary for its lawful use. Clause 17.5 puts further restrictions/conditions to the aforesaid license right as provided under section 17.4. 5.3 Thus, on a reading of the salient features of the agreement as a whole, it is very much clear that GTIL on its own does not render any services to its members. On the contrary, the members, if required, render services to GTIL. Further, GTIL does not have any source of income. The operational expenses of GTIL are shared/borne by its members. Keeping in perspective the facts as discussed hereinbefore, it is necessary to examine, whether the payment made by the assessee to GTIL would fall within the four corners of the expression "royalty" under Article 13(3) of India - UK DTAA. Article 13(3) of the Tax Treaty is reproduced hereunder: "13(3). For ....
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.... of the agreement further demonstrate that the excess of expenses over receipt are allocated to member firms. If, that is so, assessee's claim that these are reimbursement of expenses on cost to cost basis cannot be rejected. In fact, the reimbursement of expenses is implicit in Member Firms Agreement and one does not have to go to the cost reimbursement agreement dated 05.05.2010, whose genuineness learned Commissioner (Appeals) doubted. 5.6 Further, clause 17.1 of the agreement, as discussed earlier, makes it absolutely clear that GTIL shall be the sole owner of all intellectual property rights, including trademarks, trade name, logos and associated goodwill. On the contrary, this clause provides for assignment of right, title and interest held by any firm in respect of software to GTIL. Thus, the member firms agreement read as a whole would clearly demonstrate that the payment made by the assessee to GTIL is in the nature of reimbursement of expenses and under no circumstance can be said to be a payment for use of or right to use of any intellectual property, including trade name/brand name. While treating the membership fee paid by the assessee as royalty learned Commissione....
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....with M/s. Hindustan Polyamides & Fibres Ltd. to conduct a limited scope tax due diligence of M/s Tessenderlo Fine Chemicals Ltd., an international chemical group. Since, such professional work has to be performed in UK, GT Firm entered into an agreement with GT UK LLP to do the work. For rendering professional services GT Firm raised a bill of 25,500 GBP on Hindustan Polyamides & Fibres Ltd. Whereas, for the services rendered to GT Firm, GT UK LLP raised a bill of Rs.18,44,925/- equivalent to 25,500 GBP on the assessee which was paid to GT UK LLP. However, the assessee received the amount of Rs.18,50,000/- from GT Firm as reimbursement of the amount paid to GT UK LLP, which the assessee credited to its profit and loss account as professional fee. Similarly, the payment to GT UK LLP was claimed as expenses. The Assessing Officer was of the view that while paying the professional fee to GT UK LLP, the assessee should have withheld tax under section 195 of the Act as the amount received by GT UK LLP was for professional services rendered or deemed to have been rendered in India. Referring to section 9(1)(i) and 9(1)(vii) of the Act, the Assessing Officer held that the payment made to ....
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....ade by the assessee cannot be regarded as FTS as the payee has not made available technical knowledge, experience, skill, know-how or processes, or transferred a technical plan or technical design while rendering the services. He submitted, the meaning of FTS under the Treaty provision is narrower than the meaning under section 9(1)(vii) of the Act. He submitted, since, there is no provision akin to explanation 2 to section 9 in the India - UK DTAA, such meaning cannot be given to the payment made while applying the Treaty provision. Thus, he submitted, under no circumstances, the legal and professional fee paid by the assessee can come within the definition of FTS under Article 13(4) of the Treaty. He submitted, at best, the payment made by the assessee can come within the expression 'independent personal services', as provided under Article 15 of the Tax Treaty. He submitted, even the payment is not taxable in India under Article 15 as the services were neither performed in India, nor any of the employees visited in India for rendering such services or GT UK LLP has a fixed base regularly available to it for performing its activity. Thus, he submitted, even under Article 15, the ....
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.... is a fairly well settled legal principle propounded by the Hon'ble Supreme court in case of GE India Technology Cent. Pvt. Ltd. Vs. CIT (Civil Appeal Nos. 7541- 77542 of 2010, dated 09.09.2010). Therefore, what logically follows is, the liability of the assessee to withhold tax at source under section 195 of the Act would arise only where the income is chargeable to tax in India. 10.1 In the facts of the present case, an Indian company had engaged a group entity of the assessee in India to render certain professional services which required to be performed in UK. Instead of deploying its employees to travel to UK to do the work, GT Firm engaged another group entity GT UK LLP to do the work on its behalf. GT UK LLP instead of raising the invoice for the services rendered on GT Firm raised it on the assessee. Whereas, GT Firm reimbursed the expenses incurred by the assessee on actual basis after deduction of tax at source. Obviously, the departmental authorities have treated the payment made by the assessee to GT UK LLP as FTS under section 9(1)(vii) of the Act. However, the departmental authorities have not at all examined, whether it can be regarded as FTS under Article 13(4) o....