Case Law Details

Case Name : Grant Thornton Advisory (P.) Ltd. Vs DCIT (ITAT Delhi)
Appeal Number : ITA No. 3259/Del/2017
Date of Judgement/Order : 29/04/2022
Related Assessment Year : 2011-12

Grant Thornton Advisory (P.) Ltd. Vs DCIT (ITAT Delhi)

Conclusion: No TDS was to be deducted under section 195 on payment made by assessee to GTIL, UK towards membership and subscription fee as the relationship between GTIL, UK and its members would be governed by the principle of mutuality, hence, would not be taxable.

Held: Assessee, a resident company, was engaged in the business of advisory services. AO noticed that assessee had paid to Grant Thornton International Ltd., London, UK (GTIL) towards membership/ subscription. AO observed such payment made to overseas entity was in the nature of income deemed to accrue or arise in India. Therefore, before paying the amount, assessee should have deducted tax at source in terms of section 195. Since, assessee had failed to do so, AO show-caused assessee to explain, as to why the amount should not be disallowed under section 40(a)(i). Assessee submitted that the overseas entity did not have any fixed base in India and rendered professional services outside India. AO however, was not convinced with the submissions of the assessee. AO disallowed the amount of Rs.2,73,52,203/- under section 40(a)(i). It was held that the Member Firms Agreement read as whole would demonstrate that the umbrella association, GTIL, was formed for the benefit of its members. Therefore, the relationship between GTIL and its members would be governed by the principle of mutuality. While dealing with, more or less, identical issue concerning payment of membership fee by KPMG to an international association/umbrella association, viz, KPMG International, the Coordinate Bench held that the amount paid by a member firm to the umbrella association would fall within the ambit of principle of mutuality, hence, would not be taxable. Therefore, the Bench held that there was no obligation on the assessee to deduct tax at source. Following the same, it was held that the payment made by assessee to GTIL towards membership and subscription fee was not taxable at the hands of the payee and assessee was not required to withhold tax at source in terms with section 195.

FULL TEXT OF THE ORDER OF ITAT DELHI

Captioned appeal of the assessee arises out of order dated 30.03.2017 of learned Commissioner of Income Tax (Appeals)-16, New Delhi, pertaining to assessment year 2011-12.

2. The effective grounds raised by the assessee read as under:

1. The CIT (A) erred in law and on facts in confirming the disallowance of Rs. 2,73,52,203/- being the membership fees paid by the assessee to Grant Thornton International Ltd. a non-practising non-profit organization u/s 40(a)(ia) due to non-deduction of tax at source ignoring the facts, submissions and explanation of the assessee that the said amount was not liable to tax deduction at source. Thus the disallowance so made should be deleted.

2. The CIT (A) erred 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 observed, the assessee has entered into an agreement with Grant Thornton International Ltd. on 01.07.2007, as per which, the assessee is paying certain percentage of its receipts towards membership and subscription fee. Referring to section 9(1) of the Act, the Assessing Officer observed, such payment made to the overseas entity is in the nature of income deemed to accrue or arise in India. Therefore, before paying the amount, the assessee should have deducted tax at source in terms of section 195 of the Act. Since, the assessee had failed to do so, the Assessing Officer show-caused the assessee to explain, as to why the amount should not be disallowed under section 40(a)(i) of the Act. In reply, it was submitted by the assessee that the overseas entity does not have any fixed base in India and renders professional services outside India. Further, it was submitted, since the overseas entity does not have any Permanent Establishment (PE) in India, the amount paid towards subscription and membership fee outside India is not subject to TDS under section 195 of the Act. The Assessing Officer, however, was not convinced with the submissions of the assessee. Referring to certain clauses of the agreement and the provision contained under section 9(1)(vii) of the Act, the Assessing Officer observed that there is an element of consultancy, technical and managerial services, for which, the assessee had paid the subscription and membership fee. Thus, he held that subscription and membership fee paid by the assessee would fall within the category of Fees for Technical Services (FTS). Accordingly, he held that the amount paid by the assessee to Grant Thornton International Ltd., London, UK, being in the nature of FTS, the assessee was required to deduct tax at source under section 195 of the Act. The assessee having failed to do so, the Assessing Officer disallowed the amount of Rs.2,73,52,203/-under section 40(a)(i) of the Act. Contesting the disallowance so made, the assessee preferred appeal before learned Commissioner (Appeals).

3.2 After perusing the facts on record and the nature of payment, learned Commissioner (Appeals) called upon the assessee to explain, as to why the payment should not be treated as royalty under section 9(1)(vi) of the Act for using the brand of the overseas entity. Though, the assessee submitted that the payment made is purely in the nature of 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 of fees received by them on their internationally referred work by the members amongst them and deficit of receipts over expenses is as per a formula determined amongst them from time to time. He submitted, as such, GTIL does not render any services to its members. He submitted, the amount paid by the assessee to GTIL is not towards payment for any services rendered by GTIL but share of assessee in operational expenses of GTIL. He submitted, as a member of GTIL, the assessee gets benefitted as the other member of GTIL referred work in India to the assessee. Therefore, in a way, membership in GTIL helps assessee to get more business in this manner. Referring to India – UK Tax Treaty, learned counsel for the assessee submitted, the definition of FTS under the DTAA is narrower than the definition under the Act. He submitted, the definition of ‘FTS’ in the Tax Treaty is much narrower as it speaks of make available of technical services. He submitted, neither in the year under consideration nor in any other assessment year GTIL rendered any technical, managerial consultancy to the assessee nor give technical material, information, managerial skills or advisory services to the assessee on any issues, as alleged by the Assessing Officer. He submitted, the payment of membership contribution does not involve any services being given by any of the employee of GTIL to the assessee. He submitted, the membership contribution is not a consideration for conferment of any right, GTIL takes contributions from its members for formulating the standard practices and other heads which can lead to overall growth of the members. Referring to Article 13(4) of the Tax Treaty, learned counsel submitted the assessee has never made payment for any services ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalties are paid. Therefore, he submitted, the payment cannot be treated as royalty. Further, he submitted, expression “make available” used in Article of the Tax Treaty implies that the technical knowledge, skill, etc. remain with the person utilizing the services even after the particular transaction is over or even after the particular contract comes to an end. In support of such contention, he relied upon the following decisions:

(a) Cushman & Wakefiled (S) Pte. Ltd. (2008) 305 ITR 208

(b) Sandvik Australia 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 come within the ambit of royalty as per Article 13(3) of the DTAA. Drawing our attention to the said provision, he submitted, the assessee has not paid the membership fee for use of any copyright, patent, trademark, or any industrial, commercial or scientific equipment. Thus, it cannot be treated as royalty. In support of such contention, be relied upon the decision of the Authority for Advance Ruling (AAR) in case of ABB Ltd. (2010) 322 ITR 255. Proceeding further, he drew our attention to a decision of the Tribunal in case of DCIT Vs. KPMG (2017) 81 taxmann.com 118 (Mum.-Trib.). The point in dispute in the referred case was on the issue, whether the membership fee paid by KPMG to KPMG International can be disallowed under section 40(a)(i) of the Act for alleged non-deduction of tax at source. He submitted, while deciding the issue, the Tribunal held that there being a complete identity between the contributors and participators and their action being in furtherance of the mandate of the association, the payment made is not taxable. He submitted, both the assessee and KPMG are advisory firms and in the same business segment, and are members of their international associations. He submitted, while deciding the issue, the Tribunal held that the membership fee paid is neither in the nature of royalty nor FTS. Rather, it is reimbursement of cost incurred by the international association, though named as membership fee. He submitted, since there is complete identity between the contributors and participators, and their action is in furtherance of the mandate of the association, the payment would be governed by the principle of mutuality, hence not chargeable to tax as income at the hands of GTIL. Therefore, there is no need for the assessee to deduct tax at source. Thus, he submitted, the disallowance under section 40(a)(i), having been wrongly made, should be deleted.

4. Strongly relying upon the observations of learned Commissioner (Appeals), learned Departmental Representative submitted, in course of proceedings before learned appellate authority, the assessee tried to give a new angle to the entire dispute by claiming that the membership fee and subscription paid to GTIL is nothing but reimbursement of cost. He submitted, to support its claim the assessee has also furnished a separate agreement for reimbursement of cost. He submitted, in course of assessment 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 (Appeals), as is apparent, referred to the meaning of royalty as finds place under explanation 2(iii) to section 9(1)(vi) of the Act. He never examined, whether the payment would also fall within the ambit of royalty as defined under Article 13(3) of India –UK DTAA. It is further relevant to observe, on going through the reasoning of learned Commissioner (Appeals), it is very much clear that he has treated the payment made by the assessee to GTIL as royalty for alleged use or right to use of brand name/trade mark. Admittedly, the Revenue has not challenged the decision of learned Commissioner (Appeals) in treating the payment made by the assessee to GTIL towards membership and subscription fee as royalty.

5.1 Therefore, in the facts of the present case, we have to examine, whether the payment made by the assessee to GTIL falls within the definition of royalty either under the India- UK DTAA or domestic law. Before doing so, it is necessary to take note of some relevant facts which would be crucial for deciding the issue at hand. On a perusal of member firms agreement between the assessee and GTIL executed on 1st July, 2007, it is evident that as per the description of GTIL in the preamble of the agreement, it is a non-practicing and not for profit international umbrella entity organized as a private company limited by guarantee not having share capital and incorporated in England and Wales. On further examination of the agreement, it is observed that GTIL had neither any office, nor any business connection in India. The objective of GTIL is to facilitate adoption of common standard and policies for professional services to be rendered by its member firms in various fields, including assurance, tax, legal, specialized, advisory, consulting and related services in accordance with GTIL policies and professional standards. It is further evident, GTIL by itself does not render any service to its members. Rather, the member firms get benefited from each other by way of referral. In other words, if a member firm located in a particular country is entrusted with professional work by a client located in another country, such work can be referred to a member firm located at the place where the client is located. Of course, the choice to entrust work to such member firm is completely at the discretion of the client.

5.2 Clause 4 of the agreement provides for a separate 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 service charges received from member or correspondent firms in respect of such referral to be paid to the referring member or correspondent firms. Clause 9.2 of the agreement says, an annual membership contribution shall be paid to GTIL by each member firm. Such annual membership contribution shall be based on the anticipated excess of operating expenses over referral fees and other income as set forth in the budget for the year in question and as approved by Board. This annual subscription fee has to be allocated amongst member firms on a basis to be determined by Board from time to time. Clause 9.4 of the agreement provides that any travel and other expenses incurred by partners, owners and personnel or their member firms in providing services to GTIL in connection with the operation of GTIL or any other recovery in connection therewith shall be reimbursed by GTIL periodically. Clause 11.4 provides that on dissolution/liquidation of GTIL, the amount received from realization of assets, if is in excess after discharging liabilities, will be distributed amongst the members. Clause 17.1 of the agreement makes it clear that GTIL shall be the sole owner of copyright, design rights, database rights, patent rights, rights in know-how or trade secret, trademark, trade names, logos and associated goodwill and other intellectual property rights that subsists or may arise in connection with software and related materials described in Exhibit–A and all modifications and enhancements thereon, whether made by GTIL or a member firm. Further, it provides that a member firm can assign to GTIL with full title guarantee any right, title and interest that such member firm may be having at any time in the software and the intellectual property right. On perusal of Exhibit–A to the agreement, it is noticed that GTIL has permitted use of software only for the purpose of performing the work in accordance with uniform standard prescribed by GTIL. No member is permitted to effect modification/enhancement to the software owned by GTIL. Further, clause 17.4 of the agreement stipulates that GTIL will grant each member firm a limited royalty-free, non-exclusive, non transferable and non-sublicensable right and licence (a) to use the software in object code format; (b) to modify and enhance (i) the object code version of the software to the extent, if any, provided on Exhibit–A or in the 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 the purposes of this Article, the term “royalties” means:

(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and

(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.”

5.4 On a reading of Article 13(3)(a), it becomes clear that payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience is treated as royalty. Article 13(3)(b) explains the meaning of royalty further by saying that payments received for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived from the operation of ships or aircraft in international traffic can be considered as royalty. Obviously, at the threshold, Article 13(3)(b) would not be applicable to the payments made. Thus, if at all, the payment may come within Article 13(3)(a) of the Treaty.

5.5 As discussed earlier, learned Commissioner (Appeals) has treated the payment as royalty for use of trade mark/trade name of GTIL. However, the different clauses of the agreement, as discussed earlier, which provide for permanent contribution, annual contribution etc. do not demonstrate that the payments are made for use of or right to use of trademark/brand name etc. Rather, the clauses in the agreement make it clear that the payments received from members in a given circumstance can be given to a member firm either fully or in part towards fees for referral to another member firm. The clauses 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 Commissioner (Appeals) has alleged that assessee never provided straightforward reply to the query raised as to whether the use of trade mark/brand name is voluntary and mandatory. In our view, irrespective of the fact whether use of trade mark/brand name is mandatory or voluntary, the nature and character of payment made has to be determined by looking at the terms of the agreement under which payment was made. A reading of the Member Firms Agreement as a whole does not indicate that the payment made was for use of brand name.

5.7 The Member Firms Agreement read as whole would demonstrate that the umbrella association, GTIL, was formed for the benefit of its members. Therefore, the relationship between GTIL and its members would be governed by the principle of mutuality. While dealing with, more or less, identical issue concerning payment of membership fee by KPMG to an international association/umbrella association, viz, KPMG International, the Coordinate Bench in case of DCIT Vs. KPMG (supra) has held that the amount paid by a member firm to the umbrella association would fall within the ambit of principle of mutuality, hence, would not be taxable. Therefore, the Bench held that there was no obligation on the assessee to deduct tax at source. In our view, the ratio laid down by the Coordinate Bench in case of DCIT Vs. KPMG (supra) will also apply to the facts of the present appeal. In a recent decision rendered in case of DCIT vs. M/s. Deloitte Touche Tohmastu, ITA No. 6703/Del/2015 and others dated 11.04.2022, the Coordinate Bench has reiterated the view expressed in case of DCIT Vs. KPMG. Thus, the issue in dispute, in a way, is covered by the aforesaid decisions of the Tribunal.

5.8 Thus, on overall consideration of facts and materials on record and keeping in view the ratio laid down in the judicial precedents cited before us, we hold that the payment made by the assessee to GTIL towards membership and subscription fee is not taxable at the hands of the payee. That being the case, the assessee was not required to withhold tax at source in terms with section 195 of the Act. In view of the aforesaid, we delete the addition. This ground is allowed.

6. The next issue as raised in ground no. 2 relates to the disallowance of Rs.21,76,575/- under section 40(a)(i) of the Act.

7. Briefly the facts are, Grant Thornton India (GT Firm) entered into an agreement 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 GT UK LLP is in the nature of Fees for Technical Services (FTS), hence, taxable under the provisions of the Act. Since, the assessee had failed to deduct tax at source while making payment to GT UK LLP, the Assessing Officer disallowed an amount of Rs.21,76,575/- under section 40(a)(i) of the Act. While deciding the issue in appeal, learned Commissioner (Appeals) endorsed the view of the Assessing Officer by holding that GT UK LLP has provided services in India. Even, learned Commissioner (Appeals) went a step further by holding that the payments made to GT UK LLP establish that assessee was acting as an agent of GT UK LLP. Accordingly, he upheld the decision of the Assessing Officer. However, he directed the Assessing Officer to verify, whether an amount of Rs.3,31,650/- pertains to the year under consideration or subsequent year.

8. Learned counsel for the assessee submitted, GT UK LLP is a non-resident company having no permanent establish or liason office in India. He submitted, merely because it holds debentures of an Indian company it cannot be said that it is a Permanent Establishment (PE) in India. He submitted, there cannot be any dispute that while performing the work entrusted by GT Firm, GT UK LLP has not rendered any part of the services in India. None of the professionals/ employees came to India to render their services. Mentioning of name of the Indian group entities on the invoices was only to keep track as to who was to be contacted in the respective firm for any reference in respect of the work assigned and under no circumstances it proves that any of the employees visited India. He submitted, when the assessee or the other group entity gets some assignment in UK instead of sending team from India they utilize the services of GT UK LLP. Similarly, if GT UK LLP has some work in India, it engages either assessee or other group entity to carry out the work. Therefore, the services of each other are utilized on reciprocal basis. He submitted, while treating the payment made as FTS under section 9(1)(vii) of the Act, the departmental authorities have totally overlooked the fact that the taxability of the amount paid to GT UK LLP has to be examined by applying the provisions of India – UK DTAA. Drawing our attention to Article 13(4) of the India – UK DTAA which defines the scope of FTS, learned counsel for the assessee submitted, the payment made 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 amount is not taxable as none of the conditions of paragraph 1 to Article 15 of the Tax Treaty are fulfilled.

8.1 Without prejudice, he submitted, the assessee remitted the amount to GT UK LLP based on a certificate obtained from the Chartered Accountant who has opined that no tax is required to be withheld on the payment made. So, the assessee acted bonafide. Learned counsel submitted, in any case of the matter, the amount paid by the assessee to GT UK LLP was reimbursed by GT Firm and the assessee has also offered such amount as income and paid the tax by way of TDS. Therefore, no prejudice has been caused to the Revenue. He submitted, while deciding similar nature of dispute in assessee’s own case in assessment year 2009-10, the Tribunal has remanded the issue to the Assessing Officer to examine applicability of explanation 2 to section 9 of the Act. He submitted, the applicability of explanation 2 to section 9 will arise only when assessee’s case is not covered under India – UK DTAA or the provisions of Tax Treaty are less beneficial. Thus, he submitted, when the Treaty provisions are more beneficial to the assessee, there is no need for examining the applicability of explanation 2 to section 9 of the Act. Thus, he submitted, there is no need to remand the matter to the Assessing Officer in the impugned assessment year.

9. Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

10. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The issue arising for consideration is, whether the assessee was required to withhold tax under section 195 of the Act on the payment made to GT UK LLP. A reading of section 195 of the Act makes it clear that the assessee is required to deduct tax at source while making payment of certain income arising to a non­resident, if such income is chargeable to tax in India. Therefore, the crucial words which need to be kept in mind is ‘income chargeable to tax in India’. Thus, obligation of the assessee to withhold tax arises only when the payment to be made to the non-resident assumes character of income chargeable to tax in India. If the payment made has no element of income chargeable to tax in India, there is no requirement of withholding of tax under section 195 of the Act. This 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. 7541­77542 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) of the Tax Treaty. On a reading of Article 13(4) as a whole, it becomes very much clear that the payment made is not coming within Article 13(4)(a) as it is not in connection with any servicer ancillary or subsidiary to the application or enjoyment of right, property, information for which payment was made. In other words, the payment is not in the nature of enjoyment of any right which can be termed as royalty. Therefore, the only other clause under which it can come is Article 13(4)(b). However, the said provision also speaks of making available technical knowledge, experience, knowhow or processes, including transfer of a technical plan or technical design. There is no material on record to demonstrate that the payee has made available any technical knowledge, experience, skill, know-how or processes or has transferred technical plan or technical design for which the payment was made. Thus, in our view, the payment made cannot be regarded as FTS under Article 13(4) of the Tax Treaty. The only other provision under which it can fall is Article 15 of the Tax Treaty which speaks of independent personal services. However, the payment cannot also fit into Article 15 as neither the services were rendered in India or any employees of the payee came to India to render such services. Even, there is no material on record to suggest that the payee has rendered such services from any fixed base in India. Thus, the payment made cannot even come under Article 15. In any case of the matter, the amount in dispute has been subjected to TDS in India, though, may not be at the hands of the payee but certainly at the hands of the assessee.

That being the factual position, in our view, the assessee was not obliged to deduct tax at source under section 195 of the Act while remitting the amount to GT UK LLP. Accordingly, the disallowance is deleted. Ground is allowed.

11. In the result, the appeal is allowed.

Order pronounced in the open court on 29th April, 2022

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