Itxa/690/2017 Of Commissioner Of Income Tax-16 v. M/S Kpmg

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 690 OF 2017 Commissioner of Income Tax-16 v/s. KPMG .. Appellant .. Respondent Mr. Suresh Kumar for the appellant Mr. Arijit Chakravarty a/w Mr. Abhishek Tilak for the respondent CORAM : M.S. SANKLECHA & NITIN JAMDAR, J.J. DATED : 24[th] SEPTEMBER, 2019 P.C. 1.This appeal under Section 260A of the Income Tax Act, 1961(Act) challenges the order dated 18[th] March, 2016 passed by theIncome Tax Appellate Tribunal (Tribunal). This appeal relates toAssessment Year 2008-09. 2.The Revenue has urged the following questions of law for ourconsideration :- (i) Whether on the facts and in the circumstances of thecase and in law, the Tribunal was justified in holding that thedis-allowance u/s 40(a)(ia) of the I.T. Act, 1961 cannot bemade in respect of the payment of professional fees outsideIndia without realizing that the tax was required to bededucted on these payments u/s 195 of the Income Tax Act,1961? (ii)Whether on the facts and in the circumstances of thecase and in law, the Tribunal was justified in holding that therequirement of ‘rendering of services’ in India was done awaywith by the insertion of an Explanation by the Finance Act,2010, with retrospective effect without appreciating that thesaid explanation was merely clarificatory in nature and as suchthe tax was supposed to be deducted on receipts taxable onIndia even if the services were rendered outside India? 3.The respondent is engaged in the business of renderingtaxation business, advisory audit related services and otherconsultancy services. During the previous year relevant to thesubject assessment year, the respondent had paid fees forprofessional services outside India without TDS deduction to (1)Rahman Rahman Haq.,Bangladesh (2) KPMG Huazhen, China (3)KPMG, Mauritius (4)KPMG, Portugal (5) KPMG, Sweden (6) KPMG,Accounts N.V. The Netherlands (7) Background Bureau Inc. USA (8)Sidney Austin LLP, USA (9) Scherzer International, USA (10)Conference Board Inc. USA (11) KPMG IFRG Ltd. UK (12) KPMG,LLP, USA (13) KPMG USCMG Ltd. UK and (14) KPMGInternational, the Netherlands (“service providers” for short). 4.During the course of assessment proceedings for the subject assessment year, the Assessing Officer disallowed the professionalfees paid under Section 40(a)(i) of the Act to the service providersoutside India. This on account of the fact that no tax had beendeducted at source. This by following his order in case of the samerespondent for A.Y. 2007-08. In the above year, the respondent’scontention that no tax is liable to be deducted in view of the fact thatthe payments made to service providers for service outside Indiawere governed by the Double Taxation Avoidance Agreement (DTAA)entered into between India with the countries in which the serviceproviders render service. However, the Assessing Officer did notaccept the same. Consequently, the Assessing Officer disallowed theprofessional fees of Rs.7 crores paid under Section 40(a)(i) of theAct, for non deduction of tax at source on payments made to theservice providers in his Assessment Order dated 24[th] December, 2010. 5.Being aggrieved with the Assessment Order dated 24[th]December, 2010, the respondent filed an appeal to the Commissionerof Income Tax (Appeals) [CIT(A)]. By order dated 19[th] December,2012, the CIT(A) held that the amounts were paid to the serviceproviders in various countries (except China) were governed by the DTAA. Thus, the dis-allowance for not deducting tax was notjustified. Thus, the entire amount of Rs. 7 crores which wasdisallowed was deleted except the payment of Rs.33.54 lakhs madeto KPMG, China. 5.Being aggrieved with the Assessment Order dated 24[th]December, 2010, the respondent filed an appeal to the Commissionerof Income Tax (Appeals) [CIT(A)]. By order dated 19[th] December,2012, the CIT(A) held that the amounts were paid to the serviceproviders in various countries (except China) were governed by the DTAA. Thus, the dis-allowance for not deducting tax was notjustified. Thus, the entire amount of Rs. 7 crores which wasdisallowed was deleted except the payment of Rs.33.54 lakhs madeto KPMG, China. 6.Being aggrieved, both the Revenue and the Assessee filedappeals to the Tribunal. The Revenue being aggrieved with thedeletion of dis-allowance for non-deduction of tax at source toservice providers in all countries (save China). The Assessee beingaggrieved to the extent the disallowance for non deduction of tax atsource in respect of payment made to service providers in China.The Tribunal heard both the appeals together. The impugned orderis a common order for Assessment Year 2007-08 and 2008-09. Itallowed the respondent’s appeal and dismissed the Revenue’s appealfor the subject Assessment Year 2008-09 for the reasons indicated inits very order while dealing with the Assessment Year 2007-08. Inthe Revenue’s appeal it found that services received by therespondent outside India were in the nature of audit and Advisory. Itheld that none of the services had attributes of making available ofany technical knowledge to the respondents in India. It further held that none of the service providers had Permanent Establishment (PE)in India. Therefore, it held that the payment made to the serviceproviders outside India is covered by the DTAA. Consequently, thesame would be outside the scope of taxation in India. So far as therespondent’s appeal in respect of China, the Tribunal found that thenature of services rendered were professional services and the serviceproviders had no PE in India. Thus, covered by Indo-China DTAA.Thus, not taxable in India. 7.In any view of the matter, the impugned order further holdsthat at the relevant time there was no obligation to deduct tax atsource in respect of fees paid to service providers, on the basis of itsdeemed income under Section 9(1)(vii) of the Act. It was only bythe amendment made by the Finance Act, 2010 with retrospectiveeffect by adding an Explanation to Section 9(1)(vii) of the Act, thatthe requirement of the service providers providing the same in Indiawas done away with, for its application. Thus, making it deemedincome subject to tax in India and require tax deduction at source bythe respondent. However, the Tribunal held that yet the obligationto deduct tax cannot be created with the aid of an amendment made with retrospective effect, when such obligation was absent at thetime of making payment to the service providers. 8.We inquired of the Revenue the status of its challenge to theimpugned order to the extent it relates to A.Y. 2007-08. Mr. SureshKumar informed us that the appeal was dismissed for non-removal ofoffice objections. However, the tax effect is less than the limitprovided in the CBDT Circular dated 8[th] August, 2019. Thus, theappeal would not be pressed. In the above circumstances, we tookup this appeal for consideration. 9.From the questions proposed by the Revenue, it is clear thatthere is no challenge by them to the findings of the Tribunal that thepayments made by the respondent to its service providers is coveredby the DTAA. There is no challenge to the applicability of DTAA infavour of the respondent. In fact, the only challenge is the questionurged, as reiterated by the Revenue also at the hearing. In thesecircumstances, the findings of the Tribunal that the payments madeto the service providers are not subject to tax in India in view of theDTAA, is not a subject of challenge by the Revenue as it does not 9.From the questions proposed by the Revenue, it is clear thatthere is no challenge by them to the findings of the Tribunal that thepayments made by the respondent to its service providers is coveredby the DTAA. There is no challenge to the applicability of DTAA infavour of the respondent. In fact, the only challenge is the questionurged, as reiterated by the Revenue also at the hearing. In thesecircumstances, the findings of the Tribunal that the payments madeto the service providers are not subject to tax in India in view of theDTAA, is not a subject of challenge by the Revenue as it does not seem to be aggrieved by it. Thus, the issue stands covered in favourof the respondent in the absence of challenge by the Revenue. Interms of Section 90(2) of the Act, it is open to an assessee to adopteither the DTAA or the Act as is beneficial to it. The Revenue havingaccepted that the service providers during the relevant period, didnot receive any income in view of the DTAA, the occasion to deducttax at source would not arise. Therefore, dis-allowance under Section40(a)(i) of the Act will also not arise. 10.In the above view, the question no.(i) as proposed by theRevenue is academic in these facts as the application of DTAA whichresults in no income arising for the service providers in India is aconcluded issue. Therefore, the occasion to examine Section 195 ofthe Act in these facts would not arise. 11.So also, question (ii) as proposed is academic as no occasion todeduct tax at source would arise in the absence of any income in thehands of the service providers outside India in view of Section 195 ofthe Act. Even otherwise a retrospective amendment cannot cast anobligation to deduct tax when not in force at the relevant time i.e.when payment was made. In fact, this Court in Commissioner of Income Tax V/s. M/s. NGC Networks (India) Pvt. Ltd. (Income TaxAppeal No.397 of 2005, decided on 29[th] January, 2018) has held thata party cannot be called upon to perform an impossible act i.e. tocomply with the provision which was not in force at the relevanttime. Admittedly, the Explanation if applicable is introduced later bya retrospective amendment. Thus, there could be no obligation todeduct tax at source when the payments have been made to theservice providers abroad in the absence of a specific provision at thetime when the payments were made. 12.In view of the above facts, the questions as proposed by theRevenue are academic, as the basis of the Tribunal’s order that theamounts paid to the service providers is not income taxable in Indiain terms of DTAA. This is not being challenged by the Revenue inthe present proceedings. 13.Accordingly, the appeal is dismissed. (NITIN JAMDAR, J.) (M.S. SANKLECHA, J.)