Payments to foreign professional firms by Indian CA firm for audit, taxation, VAT services not fee for technical services for disallowance u/s 40(a)(ia)

Payments to foreign professional firms by Indian CA firm for audit, taxation, VAT services not fee for technical services  for making disallowance u/s 40(a)(ia)  for non-deduction of tax at source. This was held by ITAT Mumbai in its following recent judgment

Case Law Details:
ITA No. 1917/MUM/2013 (Assessment Year : 2009-10)
Asstt. Commissioner of Income Tax (Appellant) vs. M/s. BSR & Co. (Respondent)
Date of Judgment/Order: 06/05/2016

Important Case Law relied by Assessee:
Channel Guide India Ltd. vs. ACIT, 25 taxmann.com 25 (Mum.)  ITAT Mumbai

Brief Facts of the Case:
The respondent assessee was a firm of Chartered Accountants and during the year under consideration, it had paid a sum of Rs.1,45,89,345/- to 12 different professional entities based in 10 different countries (KPMG LLP in USA, UK, Canada and Singapore , KPMG USMCG Ltd. UK, KPMG Tax Services Pvt. Ltd. Singapore, KPMG Mauritius, Hazen Hassan, Egypt, KPMG Dubai, UAE and KPMG, Sri Lanka etc.). The assessee firm explained that the payments were made to various non-residents and it is not in the nature of income chargeable to tax in India and thus, tax was not required to be deducted in terms of section 195 of the Act. The Assessing Officer however, did not accept the submissions of the assessee and instead held that tax was required to be deducted tax at soruce and on the failure to do so, he disallowed expenditure of Rs.1,45,89,345/- u/s 40(a)(i) of the Income Tax Act, 1961.

On appeal, CIT(A), deleted the additions. However the Revenue filed an appeal before ITAT.

Contentions of the Assessee:
The assessee contended that the payments could not be considered as ‘fee for technical services’ as assessee had obtained professional services (not technical services) from the recipients. The nature of the services rendered by such entities were for assistance in audit, taxation, IT services, professional services in relation to transfer pricing, VAT, etc. and professional services have been rendered by the aforesaid entities outside India. Assessee contended that the payments made to various nonresident entities was governed by the provisions of Double Taxation Avoidance Agreement (DTAA) with the respective countries, in terms of which such payments were not income chargeable to tax in India.

ITAT observed that there was no material to establish that services rendered were in the nature of technical knowledge, skill, etc. and payments made to various nonresident entities were governed by the provisions of Double Taxation Avoidance Agreement (DTAA) with the respective countries, in terms of which such payments were not income chargeable to tax in India and therefore in the absence of any permanent establishment/fixed place of business of the various recipients in India, the payments were not chargeable to tax in India. 

Important Excerpts from ITAT Judgment:
Apart therefrom, even if we were to accept, for the sake of argument, that the services by the aforesaid entities are in the nature of technical services and are rendered and utilized in India so as to be taxable in terms of section 9(1)(vii) of the Act, even then the disallowance is not warranted as the following discussion would show. Ostensibly, the requirement of rendering services in India in order to attract section 9(1)(vii) of the Act was removed by insertion of Explanation by the Finance Act, 2010 with retrospective effect from 1/4/1976. This has been understood by the Revenue to say that inspite of the services having been rendered by the recipients outside India, the same is taxable in India by applying the aforesaid amendment. In our view, such retrospective amendment would be determinative of the tax liability in the hands of the recipients of income. So however, in the present case, what is held against the assessee is the failure to deduct tax at source at the time of payment of such income. Ostensibly, dehors the aforesaid amendment, the impugned income was not subject to tax deduction at source in India as per the prevailing legal position. Taxability of a sum in the hands of recipient, on account of a subsequent retrospective amendment would not expose the assessee-payer to an impossible situation of requiring deduction of tax at source on the date of payment. Therefore, on this count also the assessee cannot be held to be in default in not deducting tax at source so as to trigger the disallowance under section 40(a)(i) of the Act.