Case Law Details
Grant Thornton India LLP Vs JCIT (ITAT Delhi)
The intricate world of international taxation often poses complex challenges for businesses operating across borders. This is exactly the case in the recent Indian tax tribunal case of Grant Thornton India LLP v. Joint Commissioner of Income-tax (ITAT Delhi), ITA No. 274/Del/2019, Dated: 31/03/2023 where a seemingly straightforward payment to a German accounting firm led to a nuanced legal battle with significant implications for international transactions.
In this article, we will discuss the details of this case, analyzing its arguments, rulings, and wider impact on the international tax landscape.
Grant Thornton India LLP, a well-established Indian company, provides international accounting and advisory services to clients both within India and abroad. During the assessment year 2013-14, the company made professional fee payments to Warth & Klein Grant Thornton AG, a partnership firm of Chartered Accountants based in Germany. These payments were for services like the due diligence of a client and the valuation of shares. However, what appeared to be a routine business expense soon became the subject of intense tax scrutiny.
The Bone of Contention:
The Indian tax authorities, represented by the Joint Commissioner of Income-tax, contended that the payments made to the German firm were taxable in India and disallowed Grant Thornton India LLP’s deduction for them. Their argument rested on two key pillars:
1. Fee for Technical Services (FTS): The Revenue argued that the payments fell under the definition of FTS as per Article 12(4) of the India-Germany Double Taxation Avoidance Agreement (DTAA). This would make them taxable in India with an obligation on Grant Thornton India LLP to withhold tax at source (TDS).
2. Independent Personal Services: Alternatively, the Revenue claimed that even if the payments weren’t FTS, they could be considered “Independent Personal Services” under Article 14 of the DTAA. This, again, would make them taxable in India, though without the TDS requirement.
Grant Thornton India LLP’s Defense:
The company fiercely contested the Revenue’s claims, presenting robust counter-arguments:
1. Not FTS: They emphasized that the services provided by the German firm were not managerial, technical, or consultancy in nature, as stipulated in the definition of FTS under Article 12(4). Instead, they were specific professional fees for due diligence and valuation, distinct from the broader categories mentioned in the treaty.
2. Not Independent Personal Services: Grant Thornton India LLP argued that Article 14 of the DTAA, covering “Independent Personal Services,” applies only to individuals, not partnership firms like the recipient. Therefore, they asserted that this provision wasn’t applicable in this case.
The Tribunal’s Verdict:
After careful consideration of the arguments presented by both sides, the tax tribunal delivered a landmark decision in favor of Grant Thornton India LLP. They agreed with the company’s arguments on both counts:
1. Not FTS: The tribunal acknowledged that the services provided by the German firm were not typical FTS as defined in the DTAA. They clarified that professional fees for specific tasks may not necessarily fall under this broader category.
2. Not Independent Personal Services: The tribunal upheld the company’s interpretation of Article 14, emphasizing that it exclusively applies to individuals and not partnership firms like the recipient. This restricted the scope of its applicability and ultimately rendered it inapplicable in this case.
Impact and Implications:
The Grant Thornton India LLP v. Joint Commissioner of Income-tax case sets a significant precedent in the realm of international tax jurisprudence. It highlights several crucial takeaways:
- Careful Interpretation of Treaty Provisions: The case underscores the importance of meticulously examining the specific wording and intent of each article within a DTAA. Even seemingly similar services can attract different tax treatments depending on the precise definitions and limitations laid out in the treaty.
- Distinguishing FTS from Professional Fees: The tribunal’s differentiation between FTS and professional fees offers valuable guidance for businesses navigating international payments. It clarifies that mere professional engagements may not automatically fall under the broader FTS category, which carries specific tax implications.
- Individual vs. Partnership Firm Distinctions: The ruling emphasizes the relevance of distinguishing between individuals and partnership firms when applying provisions like “Independent Personal Services” within DTAAs. This distinction can significantly impact the taxability of income derived from such services.
Conclusion
The Grant Thornton India LLP case serves as a valuable reminder for companies operating across borders to actively seek professional guidance and thoroughly understand the tax implications of their international transactions. It also highlights the need for continued evolution and clarifications within DTAAs to address the complexities of contemporary business landscapes and emerging service models. The path towards smoother international taxation lies in meticulous interpretation, precise distinctions, and open communication between business entities and tax authorities.
Do let me know your learnings from above article in the comments below
FULL TEXT OF THE ORDER OF ITAT DELHI
1. Present appeal by the assessee arises out of order dated 15.11.2018 of learned Commissioner of Income-Tax (Appeals), New Delhi pertaining to assessment year 2013-14.
2. The dispute in the present appeal is confined to disallowance of 7,57,940 made under Section 40(a)(i) of the Income-Tax Act,1961.
3. Briefly, the facts relating to this issue are, the asses see is a limited liability partnership firm and is a resident of India. As stated by the Assessing Officer, the assessee provides international accounting and advisory services to various clients within India and abroad. For the assessment year under dispute, the assessee filed its return of income on 27.09.2013 declaring income of Rs.20,05,79,536.
4. In course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee had paid professional fee amounting to Rs.33,06,542 to various overseas entities without withholding tax at source.
5. Noticing this, the Assessing Officer called upon the assessee to explain why the payments made should not be disallowed under Section 40(a)(i) of the Act. In response to the show cause notice issued by the Assessing Officer, the assessee submitted that the payments made are taxable at the hands of the overseas entities as profit of business and profession. It was submitted, since, as per the relevant Double Taxation Avoidance Agreements (DTAAs) business profit of the non-residents are not taxable in India in absence of Permanent Establishment (PE), there was no obligation on the part of the assessee to withhold tax at source. The assessee further submitted, the payment made cannot be treated as either royalty or Fee for Technical Services (FTS). The assessee submitted, at best, the payment made can be considered to be for ‘Independent Personal Services’ which is taxable in the country of residence of the recipient. In support of such contention, assessee relied upon various judicial precedents. The Assessing Officer, however, did not accept assessee’ s contention. He was of the view that the payment made is in the nature of FTS, hence, taxable in India. Since, the assessee had not deducted tax at source, he disallowed the amount of Rs.33,06,542 under Section 40(a)(i) of the Act. Assessee contested the aforesaid disallowance before learned Commissioner (Appeals).
5. After considering the submissions of the assessee in the context of facts and material on record, learned Commissioner (Appeals) held that, though, the payment made to entities based in UK, USA and Singapore, are in the nature of managerial, technical and consultancy services, however, since, the make available condition enshrined in the treaties is not fulfilled, they will not qualify as FTS. Accordingly, he deleted the disallowance made under Section 40(a)(i) of the Act in respect of such payments. Further, he deleted the disallowance made under Section 40(a)(i) in respect of payments made to entities in Cyprus and Indonesia on different reasonings.
5. Admittedly, the Revenue is not in appeal against such decision of learned Commissioner (Appeals). The only disallowance sustained by learned Commissioner (Appeals) was in respect of payment made of Rs.7,57,940 to Warth & Klein Grant Thornton AG of Germany.
6. Learned Commissioner (Appeals) observed that the payment made is consultancy services, hence, has to be treated as FTS under Article 12(4) of India-Germany DTAA. Further, he observed that the definition of FTS under Article 12(4) of the India-Germany Treaty does not speak of make available condition. Accordingly, he upheld the disallowance to that extent.
7. Before us, learned counsel appearing for the assessee submitted that the entity to whom the assessee has made the payment is a firm of Chartered Accountants (CA) and the payment made is in the nature of professional fee for due diligence of a client and for valuation of shares of another client. Thus, he submitted, the payment made cannot be treated to be for managerial, technical or consultancy services. Thus, he submitted, it cannot be treated as FTS under Article 12(4) of the Treaty.
8. On the contrary, he submitted, the payment made falls within the definition of “Independent Personal Services” under Article 14 of the Tax-Treaty, hence, taxable in the country of residence of the recipient. He submitted, this is the ratio laid down by the Tribunal while deciding identical issue in assessee’s own case in assessment years 2010-11 to 2012-13.
9. Learned Departmental Representative strongly relied upon the observations of learned Commissioner (Appeals).
10. We have considered rival submissions and perused material on record.
11. Undisputedly, the assessee has paid the amount to an entity in Germany towards certain professional services rendered to assessee’ s clients in Germany. The issue which falls for consideration is the nature of payment made and its taxability in India at the hands of the recipient. While, learned Commissioner (Appeals) has treated it as FTS under Article 12(4) of India-Germany Treaty, the assessee claimed it as payment for Independent Personal Services falling under Article 14 of the treaty. On careful reading of Article 14 of treaty as a whole and specifically Article 14(1), it is observed that it is only applicable to income derived by an individual towards certain professional services. The term “Professional Services” has been defined under Article 14(2) to mean independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. No doubt, while, considering identical nature of payments made in assessee’s own case in assessment years 2010-11 to 2012-13, the Tribunal has held that payments made were in the nature of Independent Personal Services falling under Article 15 of India-UK, India-US, India-France and India Netherlands DTAA. However, on careful reading of the provisions relating to Independent Personal Services in aforesaid treaties considered by the Tribunal in the preceding assessment years in contrast to Article 14 of India-Germany Treaty, we find a marked difference. While, in all other treaties considered by the Tribunal in the preceding assessment years, Articles governing Independent Personal Services refer to both individual and partnership firm, however, Article 14 of India-Germany Treaty is quite restricted in its scope as paragraph 1 of Article 14 refers only to income earned by an individual. Therefore, in our view, the decisions of the Tribunal in preceding assessment years would not apply, qua, the payment made to a German entity, which no doubt, is a partnership firm. Therefore, the assessee cannot take the benefit o Article 14 of India-Germany Treaty.
12. Having held so, the next issue arising for consideration is whether the payment made can be treated as FTS under Article 12(4) of the India-Germany Treaty. From the nature of services for which payment was made, it can very well be said that neither it is managerial, nor technical nor consultancy services. Even, the Assessing Officer has admitted that it is in the nature of professional fee. Thus, undoubtedly, payment made by the assessee to CA firm is for professional services rendered. The fact that payment made for professional services will not fall within the definition of FTS under Article 12(4) of the treaty is evident from putting it under Article 14 of the treaty, though, it applies to Individuals only. Thus, in absence of a specific provision under the treaty, the payments have to be treated as business profit at the hand of the recipient. Thus, once the payment does not fall either under Article 12 or Article 14, in absence of any other provision in the treaty specifically dealing with such payment, it has to be treated as business profit at the hands of the recipient. Thus in absence of a PE or fixed base, the payment is not taxable at the hands of the recipient. That being the case, there was no obligation on the assessee to withhold tax at source on such payment. Therefore, we delete the disallowance made under Section 40(a)(i) of the Act.
13. In the result, the appeal is allowed.
Order pronounced in the open court on 31st March, 2023.
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