KPMG v. Jt. CIT - Taxpublishers.in

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The Tax Publishers2013 TaxPub(DT) 1543 (Mum-Trib) : (2013) 142 ITD 0323 : (2013) 157 TTJ 0722 : (2013) 092 DTR 0421 Income Tax Act, 1961 --TDS--Disallowance under section 40(a)(i)Payment for professional services vis-a-vis payee not resident of foreign state and not paying tax there --Assessee had made reimbursement of expenses to 'V' of UAE and claimed that 'V' had not stayed in India for more than 183 days and did not have a fixed base in India (PE) therefore, 'V's income was not chargeable to tax in India as such no TDS was required. However, assessing officer observed and held that 'V' could not be treated as resident of UAE under article 4(1) of DTAA as he was not paying tax in UAE and also held that as per article 4(1) of DTAA 'resident' of a 'Contracting State' meant any person who paid tax therein as such assessing officer invoked section 40(a)(i) on income accrued in India. *Held:* Not justified. Term liable to tax in contracting state has been held by a catena of decisions that it does not necessary imply that person actually pay tax in that contracting State. Right to tax on such person was sufficient, by reason of domicile, place of management or incorporation. 'V' had, therefore, not chargeable to tax in India. Insofar as the payment made to Mr. V who was the sole proprietor of the KPMG, Dubai, it is not in dispute that he has not stayed in India for more than 183 days and did not have fixed base in India. The main allegation of the assessing officer which has been confirmed by the Commissioner (Appeals) is that Mr. 'V', cannot be treated as resident of U.A.E. within the meaning of Article-4(1) of DTAA, as Mr. V., was not paying tax in U.A.E. Article-4(1) provides that under the agreement, the term 'Resident' of a 'Contracting State' means any person, who, under the laws of that State (U.A.E.), is liable to tax therein by reason of his domicile resident: place of management, place of incorporation, or any other criterion of similar nature. The term liable to tax in the contracting State have been held by catena of decisions that it does not necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient. This aspect of the matter was clarified by the Supreme Court in Azadi Bachao Andolan (supra). This principle has been reiterated by the co-ordinate Bench of the Tribunal in several cases. [Para 14] Taxability in one country is not sine qua non for availing relief under the treaty from taxability in other country. All that is necessary is that a person should be liable to tax in the contracting State by reason of domicile, resident, place of management, place of incorporation or any other similar criterion which refers to fiscal domicile of such person. If a fiscal domicile of a person is in the contracting State, which in the present case has not been doubted is in U.A.E. then is to be treated as resident of that contracting State irrespective of whether or not that person is actually liable to pay tax in that country. Liable to tax in the contracting State cannot be implied as the person is actually liable to tax but would also cover the cases where the other contracting State has the right to tax such person. It is immaterial whether or not such right has been exercised. Accordingly, the Tribunal reject the basis for deducting the TDS under section 195 by the assessee for making the payment to Mr. V, amounting to Rs. 1,38,41,163. [Para 15] On a perusal of the bills and details of expenses, as are appearing in the paper book, it is seen that they are all in the nature of expenses incurred by Mr. V, for the professional services rendered by him in India. On such reimbursement of expenses, there is no requirement to deduct TDS. Otherwise also, it is a settled principle of law that obligation to deduct tax arise only if the sum paid is taxable to tax in India. There has to be some element of income embedded in the remittances. [Para 17] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1543 (Mum-Trib) : (2013) 142 ITD 0323 : (2013) 157 TTJ 0722 : (2013) 092 DTR 0421

Income Tax Act, 1961

--TDS--Disallowance under section 40(a)(i)Payment for professional services vis-a-vis payee not resident of foreign state and not paying tax there --Assessee had made reimbursement of expenses to 'V' of UAE and claimed that 'V' had not stayed in India for more than 183 days and did not have a fixed base in India (PE) therefore, 'V's income was not chargeable to tax in India as such no TDS was required. However, assessing officer observed and held that 'V' could not be treated as resident of UAE under article 4(1) of DTAA as he was not paying tax in UAE and also held that as per article 4(1) of DTAA 'resident' of a 'Contracting State' meant any person who paid tax therein as such assessing officer invoked section 40(a)(i) on income accrued in India. Held: Not justified. Term liable to tax in contracting state has been held by a catena of decisions that it does not necessary imply that person actually pay tax in that contracting State. Right to tax on such person was sufficient, by reason of domicile, place of management or incorporation. 'V' had, therefore, not chargeable to tax in India.

Insofar as the payment made to Mr. V who was the sole proprietor of the KPMG, Dubai, it is not in dispute that he has not stayed in India for more than 183 days and did not have fixed base in India. The main allegation of the assessing officer which has been confirmed by the Commissioner (Appeals) is that Mr. 'V', cannot be treated as resident of U.A.E. within the meaning of Article-4(1) of DTAA, as Mr. V., was not paying tax in U.A.E. Article-4(1) provides that under the agreement, the term 'Resident' of a 'Contracting State' means any person, who, under the laws of that State (U.A.E.), is liable to tax therein by reason of his domicile resident: place of management, place of incorporation, or any other criterion of similar nature. The term liable to tax in the contracting State have been held by catena of decisions that it does not necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient. This aspect of the matter was clarified by the Supreme Court in Azadi Bachao Andolan (supra). This principle has been reiterated by the co-ordinate Bench of the Tribunal in several cases. [Para 14] Taxability in one country is not sine qua non for availing relief under the treaty from taxability in other country. All that is necessary is that a person should be liable to tax in the contracting State by reason of domicile, resident, place of management, place of incorporation or any other similar criterion which refers to fiscal domicile of such person. If a fiscal domicile of a person is in the contracting State, which in the present case has not been doubted is in U.A.E. then is to be treated as resident of that contracting State irrespective of whether or not that person is actually liable to pay tax in that country. Liable to tax in the contracting State cannot be implied as the person is actually liable to tax but would also cover the cases where the other contracting State has the right to tax such person. It is immaterial whether or not such right has been exercised. Accordingly, the Tribunal reject the basis for deducting the TDS under section 195 by the assessee for making the payment to Mr. V, amounting to Rs. 1,38,41,163. [Para 15] On a perusal of the bills and details of expenses, as are appearing in the paper book, it is seen that they are all in the nature of expenses incurred by Mr. V, for the professional services rendered by him in India. On such reimbursement of expenses, there is no requirement to deduct TDS. Otherwise also, it is a settled principle of law that obligation to deduct tax arise only if the sum paid is taxable to tax in India. There has to be some element of income embedded in the remittances. [Para 17]