Fees received by KPMG for assisting an Indian Company in acquisition of Sugar mills in Brazil is not Fees for Technical Services under the Income-tax Act

ITA No. 63/MUM/09

2007- 08

Date of pronouncement : 12.08.2011

ORDER

PER N.V.VASUDEVAN, J.M,

This is an appeal by the assessee against the order dated 17/09/2008 of CIT(A) 33 Mumbai relating to assessment year 2007-08.

2. The assessee is a company. It is engaged in the business of manufacturing of sugar. According to the assesse, it engaged the services of M/s. KPMG Corporate Finance Ltd., Brazil (KPMG)(Non-Resident), to advice and assist the assessee in acquisition of Sugar Mills/Distilleries in Brazil. In connection with the services rendered by KPMG for the said purpose, the assessee had made payment to KPMG. The question before the ITO (International Taxation),TDS-3, Mumbai (AO), was as to whether the Assessee was bound to deduct tax at source on the payment made to KPMG in terms of Sec. 195 of the Income Tax Act, 1961 (the Act). That would again depend on the question whether the payment by the Assessee to KPMG would be taxable in the hands of KPMG in India.

3. According to Sec.9 of the Act, the following incomes shall be deemed to accrue or arise in India.

(vii) income by way of fees for technical services payable by……..

(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

The aforesaid clause (b) provides two exceptions. In the first case, the payment if made by a resident for services which are utilized in a business or profession carried out by such person outside India, then the said payment would not be deemed to be income accruing or arising to the payee in India. The second exception envisaged by clause(b) of Sec.9(1)(vii) of the Act, is if the payment is made by a resident for the purpose of making or earning any income from any source outside India, then the said payment would not be deemed to be income accruing or arising to the payee in India.

4. The AO was of the view that the assessee ought to have deducted tax at source on the payment made to KPMG. According to the AO the amount received from the assessee by KPMG was in the nature of fees for technical services rendered. The AO was also of the view that in terms of section 9(1)(vii) of the Income Tax Act, 1961(the Act) income by way of Fees for Technical Services (FTS) payable to a person who is a resident shall be income deemed to accrue or arise in India. According to the AO the payment by the assessee to KPMG did not fall within the exceptions and, therefore, the payment would be income which accrues or arises in India in the hands of KPMG chargeable to tax. The AO therefore held that since the amount was chargeable to tax in India in the hands of KPMG, the assessee in the terms of section 195 of the Act ought to have deducted tax at source on the payment made to KPMG. Since the assessee had not done so the AO treated the assessee as an assessee in default and passed an order for recovery of the taxes that ought to have been deducted and interest thereon in terms of section 201(1) and 201(1A) of the Act.

5. Before CIT(A), the assessee submitted that the assessee was the largest sugar producer in India and in order to expand their operations they appointed KPMG to explore the possibility of acquiring sugar mill/distillery plant in Brazil. In this regard the assessee submitted that KPMG was to provide the assessee the following services:

(i) Assistance in the identification of targets fitting assessee’s needs and contact of those companies;

(ii) Present the assessee selected information on those targets.

(iii) Perform pricing analysis of selected targets;

(iv) Assit the assessee in the acquisition process of target(s), with the internal team of the Assessee and other external advisors named by the company, for a closing of the transactions) in the best possible conditions.

6. It was further submitted that the assessee incorporated a company called Bajaj International Paatici Pacoes Ltd. in Brazil in order to acquire sugar mills/ distillery plants in Brazil. A copy of the Memorandum of Association of the subsidiary company so incorporated in Brazil was also filed. It was pointed out that the objective of appointing KPMG was to identify and acquire sugar mills/distillery plants in Brazil. Thus the assessee made the payment in question to carry on business outside India and for the purpose of earning any income from any source outside India. It was submitted that the payment made by the Assessee was towards services which would be utilised in the business which will be carried out outside India i.e. Brazil through the Assessee’s subsidiary company and therefore the aforesaid payment would be squarely covered by the first exception provided in section 9(1) (vii) (b) of the Act and will therefore not be taxable in India. It was submitted that the very fact that the sugar mills/distillery plants to be acquired are located outside India would only mean that the income derived from the said mills/plants will be earned from a source outside India therefore payment made to KPMG would be covered even by the second exception provided in clause (b) of section 9(1) (vii) of the Act viz., “for the purposes of making or earning any income from any source outside India”. It was therefore submitted that the payment of USD 100,000 to KPMG does not constitute income deemed to accrue or arise in India under section 9(1)(vii) of the Act and is not taxable in India in the hands of KPMG and therefore the Assessee was not liable to liable to deduct tax at source thereon.

7. Since the aforesaid submission was made by the assessee for the first time before the CIT(A), the CIT(A) called for a remand report from the AO. In his remand report dated 18/1/08, the AO accepted that the contention put forth by the assessee was legal contention and requested the CIT(A) to consider the said contention on merits. However, the CIT(A) informed the CIT(A) that the facts regarding incorporation of a subsidiary by the Assessee in Brazil needed to be verified.

8. On a consideration of the above submissions the CIT(A) noticed that the agreement between the assessee and KPMG was in the form of proposal dated 11/5/2006. The proposal refers to the Assessee being the largest sugar producer in India and its desire to study the possibility of expanding its operations, through transactions involving the acquisition of a sugar mills/ distillery plants in Brazil. For the said purpose the Assessee was considering appointment of a financial advisor to assist during the acquisition process. KPMG being one of the leaders in Brazin in Mergers and Acquisitions (M&A) in the sugar and alcohol section and have already advised in transactions related to disposals of sugar mills and sugar refinery were being engaged for the aforesaid purpose. The proposal also mentions that the acquisition is to be done by the Assessee or any of its subsidiaries or its nearest company or any company controlled by the Assessee.

9. On a consideration of the above features of the Agreement, the CIT(A) was of the view that the Assessee wanted to acquire sugar mills/ distillery plants in Brazil. For that purpose, the Assessee had availed the services of KPMG. He found that the services were to be rendered in Brazil and that services are connected with the acquisition of sugar mills/distilleries in Brazil. The CIT(A) was of the view that the words used in Sec.9(1)(vii) clause (b) second exception was ” for the purposes of earning any income from any source outside India.”. He was of the view that the services rendered by KPMG were to be used for the purpose of acquisition of sugar mill / distillery in Brazil for the purpose of earning income from sugar mill / distillery from Brazil. He was of the view that the words used in sec. 9(1)(vii) were vide enough to cover even future source of income. The CIT(A) therefore held that that the services rendered by M/s. KPMG was utilised by the Assessee for the purpose of earning income from a source outside India and therefore the payment by the Assessee of fees for technical services rendered by M/s. KPMG was outside the scope of Sec. 9(1)(vii) of the Income Tax Act. Hence it cannot be considered as income deemed to have accrued in India and not chargeable to tax in India and hence the Assessee is not liable to deduct tax u/s. 195 of Income Tax Act. The demand raised for tax and interest u/s.201(1) and 201(1A) of the Act was deleted.

10. Aggrieved by the order of the CIT(A) the revenue has preferred the present appeal before us.

11. The ld. D.R submitted that the assessee initially accepted before the AO that there was an obligation on its part to deduct tax at source while making payment to KPMG. Only on 17/8/2007 the assessee in a letter to the AO took a stand that the services rendered by KPMG were in the nature of market research and, therefore, not in the nature of FTS. The ld. D.R also drew our attention to the proposal dated 11/5/06 and submitted that the proposal( contained in page 1 to 17 of the assessee’s paper book) is not in the form of an agreement and the genuineness of the claim of the assessee that this was the agreement for rendering services is doubtful. We have examined this contention and find that in the letter dated 17/08/2007 the assessee has made a claim that the proposal( contained in page 1 to 17 of the assessee’s paper book) was the agreement between assessee and KPMG. The Assessee also made it clear that KPMG was engaged to study the possibility of expansion of assessee’s business for acquisition of sugar mills/distillery plants in Brazil. The AO has proceeded to examine the proposal dated 11/5/2006 accepting the same as an agreement between the parties. At this stage it is not open to the ld. D.R to raise issues concerning the genuineness of the agreement. We, therefore, proceed to examine the case on the basis that the proposal dated 11/5/2006 as contained in page 1 to 17 of the assessee’s paper book constitutes the agreement between the assessee and KPMG in connection with which the assessee made payment to KPMG.

12. The next submission of the ld. D.R was that the assessee was utilizing the services of KPMG in respect of a business or profession carried on by the assessee in India and, therefore, the payment was FTS. Further it was submitted that the claim of the assessee that the payment made to KPMG was “for the purpose of earning any income from any source outside India” ought not to have been accepted by the CIT(A) because the exception contemplated in section 9(1) (vii) (b) of the Act is only in respect of an existing source of income. It was submitted by him that in a case where the source of income is to come into existence at future date the exception cannot apply. It was pointed out by the ld. D.R that the payment in question was for the purpose of earning income from a source outside India which source had not come into the existence and the assessee only proposed to create the source of earning income outside India in future. The ld. D.R brought to our notice Circular No.202, para 16.2 which explains the provisions of Finance Bill 1976, wherein it has been observed as follows:

“16.2 Under the new provision, income by way of “fees for technical services” of the following types will be deemed to accrue or arise in India:

(a) fees for technical services payable by the Central Government or any State Government;

(b) fees for technical services payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India,  and

(c) fees or technical services payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India.”

13. It was argued that even the Circular talks about source of income outside India which means that it should be an existing source. It was submitted that the exception in clause (b) cannot apply to a future source to be set up. Reliance was also placed on the decision of the ITAT Mumbai in the case of Hindalco Industries Ltd. vs. ITO 91 ITD 64(Mum), wherein it was held that utilisation of services is essential by the resident only in business or profession carried on by the resident outside India. If a resident pays FTS outside India for the services to be utilised in India then that income per-se will be treated as income accruing or arising to the person in India.

14. We have considered the arguments of ld. D.R. There is not dispute that the payment in question made by Assessee to KPMG is in respect of services which otherwise fell within the definition of FTS as given in the Act. The dispute is whether the exceptions mentioned in clause (b) to Sec.9(1)(vii) of the Act would apply so that it can be said that the fees in the nature of FTS has not accrued or arisen to KPMG in India. As far as the first exception in Sec.9(1)(vii) clause (b) of the Act, is concerned viz., “where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India”, we find that the Assessee carries on business in India and has utilised the services of KPMG in connection with such business. Therefore the case of the Assessee would not fall within the first exception, notwithstanding the fact that services were rendered only in Brazil. As far as the second exception mentioned in Sec.9(1)(vii) clause (b) is concerned viz., “for the purposes of earning any income from any source outside India.”, the undisputed facts are that the Assessee wanted to acquire sugar mills/ distillery plants in Brazil and for that purpose also wanted to set up a subsidiary company. In fact, the Assessee had set up a subsidiary company on 8.8.2006 in Brazil. Thus the Assessee was contemplating to create a source for earning income outside India. It is no doubt true that the source of income had not come into existence. But there is nothing in Sec.9(1)(vii) clause (b) of the Act, to show that the source of income should have come into existence so as to except the payment of fees for technical services. The expression used is “for the purpose of earning any income from any source outside India”. There is nothing in the language of Sec.9(1)(vii) clause (b) of the Act, which would go to show that the same is restricted to only to an existing source of income. We therefore agree with the conclusions of the CIT(A) on this aspect. We therefore uphold the order of the CIT(A) holding that the payment by the Assessee of fees for technical services rendered by M/s. KPMG was outside the scope of Sec. 9(1)(vii) of the Income Tax Act. Hence it cannot be considered as income deemed to have accrued in India and not chargeable to tax in India and hence the Assessee was not liable to deduct tax u/s. 195 of Income Tax Act. The demand raised for tax and interest u/s.20 1(1) and 201 (1A) of the Act was therefore rightly directed to be deleted. We find no grounds to interfere with the order of the CIT(A) and uphold the order of CIT(A) and dismiss the appeal by the Revenue.