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Cost Shared by Group Companies on Cost to Cost Basis is Not Liable to TDS

Cost Shared by Group Companies on Cost to Cost Basis is Not Liable to TDS

2017 (11) TMI 1139 - ITAT MUMBAI

Dy. CIT, Cir. 6 (2) , Mumbai Versus M/s KPMG Advisory Services Pvt Ltd. And Vice-Versa

TDS u/s 194I - disallowance of support service charges in respect of rent payment sustained by the CIT(A) u/s 40(a)(i) for failure to deduct tax at source - Held that:- In this case, there is no dispute with regard to the fact that KPMG has taken premises on rent from landlords. There is no dispute with regard to the fact that KPMG has complied with TDS provisions on such rental payments. The assessee has made the payment on the basis of agreement with KPMG which clearly states that the common cost incurred by KPMG shall be shared by group companies on cost to cost basis. Therefore, considering the facts and relying upon the ratio in Result Services Pvt Ltd (2012 (7) TMI 217 - ITAT DELHI) we are of the view that there is no obligation on the part of the assessee to deduct TDS on reimbursement of support service charges to KPMG. Hence, we direct the AO to delete the disallowance made u/s 40(a)(i) towards rent payments. - Decided in favour of assessee. 


No.- I.T.A No.4556/Mum/2013, I.T.A No.4862/Mum/2013, I.T.A No.4554/Mum/2013 And I.T.A No.4918/Mum/2013
Dated.- October 13, 2017
Shri C.N. Prasad(JUDICIAL MEMBER) And G Manjunatha (ACCOUNTANT MEMBER)
For The Revenue : Shri M.V. Rajguru
For The Assessee : Shri Anjit Chakravarty / Shri Abhishek Tilak
ORDER
Per G Manjunatha, AM :
These cross appeals by two different assessees as well as revenue are directed against separate, but identical orders of the CIT(A|)-12, Mumbai dated 20-03-2013 and 22-03-2013 for the assessment years 2005-06 and 2006- 07. Since, common facts and identical issues are involved, these appeals were heard together and are disposed of by this common order, for the sake of convenience.
2. The assessee as well as revenue have raised more or less common grounds of appeal. For the sake of brevity, the grounds of appeal raised by the assessee in ITA No.4862/Mum/2013 and the grounds of appeal raised by the revenue in ITA No.4556/Mum/2013 are reproduced below:-
ITA No.4862/Mum/2013
1. On the facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals) erred iii upholding the disallowance of ₹ 68,53,700 made tinder Section 40(a)(i) of the Income tax Act, 1961 by the Assessing Officer out of the reimbursement of support service charges aggregating ₹ 2,02,34,000 made to KPMG. an Indian partnership firm.
2. On the facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals) erred in upholding the addition made by the Assessing Officer in respect of amounts aggregating ₹ 1 7,20,344 being alleged undisclosed income from professional services appearing in Annual Information Return”
ITA No. 4556/Mum/2013
1. “On the facts and circumstances of case and in law, the Ld. CIT(A) erred in holding that payment made to non-resident r-Gen Consultants Ltd., Bangladesh, of ₹ 1,30,8901- was in the nature of professional charges on which there was no liability for deducting taxes u/ s. 195 r.w.s. 1 95A of the I. T. Act, 1961.”
2. “On the facts and circumstances of case and in law, the Ld. CIT(A) erred in ignoring that rendering of consultation service which required high level of technical and industrial knowledge would be covered by definition of 'royalty'.”
3. “On the facts and circumstances of case and in law, the Ld.CIT(A) erred in holding that support service charges payment of ₹ 2,02,34,0001- (excluding rent paid) by the assessee company to KPMG were in the nature of reimbursement and therefore not liable to withholding of tax at source.”
4. “On the facts and circumstances of case and in law, the Ld. CIT(A) erred in not appreciating that payments made by the assessee to M/s. KPMG on the basis of sharing agreement would be treated as contractual payment liable for deduction u/s. 194C.”
3. From these grounds of appeal, the assessee has challenged two issues, viz. (i) disallowance of support service charges in respect of rent payment sustained by the CIT(A) u/s 40(a)(i) for failure to deduct tax at source u/s 194-I of the Act; and (ii) addition towards undisclosed income from professional services appeared in Annual Information Report (AIR) by the CIT(A). The revenue has challenged two issues, viz. (i) deletion of addition made by the AO towards professional charges paid outside India without deduction of tax at source u/s 195 r.w.s. 195A of the Income-tax Act, 1961; and (ii) deletion made by the CIT(A) towards support service charges excluding rent paid u/s 40(a)(i) of the Act.
4. The brief facts of the case extracted from ITA No. 4556/Mum/2013 are that the assessee company part of global network of KPMG, engaged in the business of consultancy services in the fields of strategy, infrastructure, performance improvements and software services, etc filed its return of income for the assessment year 2006-07 on 23-11-2006 declaring total income of ₹ 334,33,838. The case was selected for scrutiny and accordingly notices u/s 143(2) and 142(1) of the Act alongwith detailed questionnaire were issued. In response to notices, the authorized representative of the assessee attended from time to time and filed the details. The assessment was completed u/s 143(3) on 24-12-2008 determining total income at ₹ 662,32,585, interalia making additions on account of support service charges payments u/s 40(a)(i) for failure to deduct tax at source u/s 194C and addition on the basis of AIR information as undisclosed income from business or profession and disallowance of professional charges paid outside India without deduction of tax at source u/s 195 of the Act. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A).
5. Before the CIT(A), the assessee has filed elaborate written submissions to challenge each and every additions made by the AO. The assessee further contended that professional charges paid outside India are not coming under the provisions of section 195 and hence, the question of deduction of tax at source does not arise. The assessee also submitted that it is providing professional services in the areas of power sector, financial re-structuring and recovery plan for Bangladesh Power Sector Development through e-Gen Consultants Ltd, Bangladesh and such services rendered by e-Gen Consultants Ltd, Bangladesh fell under the ambit of Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Bangladesh. Further, e-Gen Consultants Ltd, Bangladesh did not have a fixed / permanent establishment in India, the income from the services was not chargeable to tax in India, consequently there was no requirement of tax withholding from the remittances made to e-Gen Consultants Ltd, Bangladesh. As regards disallowance made by the AO towards payment of support service charges, the assessee submitted that it is part of KPMG group of companies and entered into an agreement with M/s KPMG for sharing common facilities such as infrastructure cost, communication & technology cost and office space and such cost has bee shared amongst group companies on cost to cost basis without any element of profit. The assessee further submitted that M/s KPMG procures these services from various vendors on payment and such payment has been allocated to various group companies on the basis of pre-determined ratio in accordance with the common facilities shared by each group companies. Therefore, the said payments are in the nature of re-imbursement of actual expenditure incurred by M/s KPMG on behalf of the assessee and hence, the provisions of section 194C has no application and accordingly disallowance provided u/s 40(a)(i) cannot be made. As regards addition made by the AO towards undisclosed income on the basis of AIR information, the assesse submitted that it has re-conciled the difference to the extent possible within the time allowed to give additional information. The professional charges appeared in the AIR information of assessee’s PAN does not pertain to the assessee. The AO added back the total amounts appeared in the AIR information over and above the gross receipts admitted by the assessee in its books of account as undisclosed professional charges on the sole basis of letter sent to various persons u/s 133(6) of the Act. The assessee further submitted that the information in the AIR is only provisional which can be corrected later stage by the parties and hence, addition cannot be made only on the basis of nonresponse from the parties to the letters issued u/s 133(6) of the Act.
6. The CIT(A), after considering the relevant submissions of the assessee, observed that the assessee is not liable for deduction of tax at source u/s 195 of the Act, to the payments made to e-Gen Consultants Ltd, Bangladesh since, the services rendered by the foreign entity is purely professional services and not for supply of scientific, technical, industrial or commercial knowledge or information. Insofar as disallowance of support service charges, the CIT(A) observed that support service charges payments made to KPMG are purely reimbursements without any profit element and, therefore, cannot be treated as income chargeable to tax so as to attract tax deduction at source. However, the only exception to the above reimbursement is the payment of rent which is specifically liable to tax at source u/s 194-I of the Act, as the rent is paid to outside parties for a rented accommodation utilized by KPMG and the group companies and as KIPL which is a group company pays part of the rent of the building for which benefit is taken by debiting it to the P&L account and hence, the payment will be liable for TDS u/s 194-I of the Act. The assessee has made the payment for use of space which is a rented accommodation; therefore, non deduction of tax on such rent payment would attract provisions of section 40(a)(i) of the Act, and accordingly, the AO was directed to give relief towards support service charges payment other than rent payment. Insofar as addition made by the AO towards undisclosed professional income on the basis of AIR database, the CIT(A) observed that during the course of appellate proceedings, the AO has submitted remand report on replies received in response to notices issued u/s 133(6) alongwith assessee’s explanation with regard to the addition made on the basis of AIR information. The AO, in his remand repot has made party-wise comments on each items appeared in the AIR information. Considering the remand report of the AO and explanations of the assessee, the CIT(A) deleted the addition in respect of parties except four parties listed in her order at paragraph 7.5 on page 24 on the ground that the transactions reported in the AIR could not be reconciled or verified by the assessee. Aggrieved by the order of CIT(A), the assessee as well as the revenue are in appeal before us.
7. The first issue that came up for our consideration in assessee’s appeal is addition sustained by the CIT(A) towards rent included in support service charges payment made to KPMG. The facts which lead to the impugned addition are that the assessee is a group company of KPMG involved in providing professional and consultancy services. M/s KPMG procures various services from vendors including premises on rent, communication expenses, technology cost and office space which has been shared among group companies on the basis of agreement entered into with KPMG. The assessee claims that the infrastructure cost excludes the rent payment on premise taken on rent and other related costs which has been directly paid by KPMG to landlords on the basis of separate rent agreements. The assessee further contended that the rent agreement entered into by KPMG with various landlords specifically provides for allowing KPMG to occupy the premises jointly with other group companies. However, does not permit KPMG to sublet the premise to any third parties.
8. The Ld. AR referring to one of the rent agreements entered into with M/s Kamala Mills Ltd submitted that clause (f) of the agreement provides for sharing of premises with other group companies. However, no subletting is allowed to any third party. The assessee has paid support service charges to M/s KPMG on the basis of agreement, as per which the cost incurred by KPMG shall be shared by other group companies on cost to cost basis without any element of profit. The Ld.AR further submitted that the assessee has reimbursed actual cost incurred by KPMG towards infrastructure and other expenses which has been directly procured by KPMG through various vendors on payment and applicable TDS provisions has been complied with by KPMG, wherever applicable. Since support service charges paid by the assessee is on cost to cost basis and reimbursement of actual expenditure incurred by a group company, it cannot come under the purview of contractual payment within the meaning of section 194C or 194-I of the Act.
9. The Ld.DR, on the other hand, submitted that the assessee has paid rent for use of premises which has been paid to the landlords. Therefore, the element of lessor and lessee exists and hence, the assessee is required to deduct TDS u/s 194-I on rent payments. The Ld.DR further submitted that though payment is made to KPMG, such amount is paid on the basis of contractual obligation, therefore, the assessee ought to have deducted TDS as per the provisions of section 194-I of the Act. Since the assessee has failed to deduct tax at source, the AO has rightly made disallowance u/s 40(a)(i) and his order should be upheld.
10. We have heard both the sides and considered material on record. The AO has disallowed support service charges paid to KPMG on the ground that impugned payment is in the nature of contractual payments which attracts tax deduction u/s 194C of the Act. The assessee contends that it has entered into an agreement with KPMG, wherein it has agreed to share, office space, infrastructure and immovable assets including softwares, telephones and internet connection and consumables database, etc. The assessee further contended that support service charges paid to KPMG is on cost to cost basis without any profit element and such expenditure has been reimbursed on actual cost incurred by M/s KPMG. Therefore, the assessee is not required to deduct tax at source u/s 194-I of the Act.
11. Having heard both the sides, we find force in the arguments of the assessee for the reason that as per the agreement entered into between KPMG the assessee has agreed to share common cost like infrastructure cost, communication cost and technology cost on actual basis. We further observe that the assessee has reimbursed actual cost incurred by KPMG. We further observe that KPMG has paid rent directly to landlords on the basis of rental agreements entered into between them. The said rent agreements entered into between KPMG and landlords provides for sharing premises with other group companies. M/s KPMG also deducted tax at source wherever applicable on rental payments. Therefore, we are of the considered view that the impugned amount paid by the assessee to M/s KPMG is a reimbursement of actual expenditure incurred on behalf of the assessee. The assessee has reimbursed actual cost incurred by KPMG without any element of profit. Therefore, we are of the considered view that the provisions of section 194C or 194-I has no application to the impugned payments. This view was further supported by the decision of co-ordinate bench of ITAT, Delhi ‘F’ Bench in the case of Result Services Pvt Ltd (2012) 52 SOT 598 (Del) wherein the co-ordinate bench under similar facts observed that where holding company of assessee took a premises on rent and allowed to use a part of it and there was no relationship of a lessor-lessee between them, assessee had no TDS obligation u/s 194-I of the Act while reimbursing a part of the rent to the holding company. Relevant part of the order is extracted below:-
“6. We have heard both the sides. The assessee is a 100% subsidiary of holding company of Mccann Erickson India Pvt. Limited. Mccann Erickson India Pvt. Ltd. has taken on rent office premises located at Delhi and Mumbai. Copies of these two Lease and Licence deeds entered with the landlords are on record. The holding company, Mccann Erickson India Pvt. Ltd., has permitted assessee to use part of theses premises. Assessee had reimbursed the amount to holding company without deducting TDS. The rent for the whole premises was paid directly by the holding company to the Lessors and the tax was deducted as per provisions of section 194-1 of the Income-tax Act. 1961. The clause 5 of the lease deed for Delhi premises dated 22.10.2007 between CEPCO Industries Pvt. Ltd. and Mccann Erickson India Pvt. Ltd. read as following:
“5. The LESSEE may use the Demised Premises or parts thereof for their commercial use as well as for the offices of its subsidiaries and associates and allied companies and for the purposes of companies / firms and business in which the Directors of the LESSEE are interested or concerned, however, any such companies / subsidiaries shall not acquire any interes t in thl Derni sed Pren J Fl ia”Tr “ unt c rent, other outgoing, etc . sTi c i l l remain so e responsibilities of the LESSEE.”
Similarly, the Lease & Licence Agreement between National Organic Chemical Industries Limited and Mafatlal Industries Limited and Mccann Erickson India Pvt. Ltd. also provide in clause 7 (d) as under:-
“d. Not to sub-let or give on leave and license basis or on any other basis the Licensed Premises or any portion thereof, nor permit any third party to use and occupy the Licensed Premises or any portion thereof save and except to its subsidiaries, affiliates, group entities. associates, which shall be without any prior written consent of the Licensor.” The assessee is paying rent to the holding company as reimbursement since last many years. This position has been accepted by the department all through and it has been never disputed even when provisions for TDS were on statute since 1994. Section 194-1 of the Income-tax Act, 1961 was inserted in Act w.e.f. 01.06.1994. Similarly, this position was also not disputed even after the amendment in section 40(a)(1a) of the Act by the Taxation Law (Amendment) Act. 2006 w.e.f. 1.4.2006. on this issue, there is no material change in the facts and law during the year under consideration. The lease deed provides for use of the premises by the subsidiary companies. The actual payments made by the lessee (holding) company) to the lessor and necessary tax was deducted therefrom. The holding company has also not debited the whole of rent to its books of account. It has only debited the rent which pertains to the part of the premises occupied by it. Therefore. in our considered view, there was no lessor and lessee relationship between the holding company and assessee where the provisions of section 194-1 are attracted. Keeping these facts in view, we find merits in the order of the CIT (A) in deleting the addition made u/s 40(a)(i) of the Act. We sustain the order of the CIT (A) and dismiss revenue's appeal.”
12. In this case, there is no dispute with regard to the fact that KPMG has taken premises on rent from landlords. There is no dispute with regard to the fact that KPMG has complied with TDS provisions on such rental payments. The assessee has made the payment on the basis of agreement with KPMG which clearly states that the common cost incurred by KPMG shall be shared by group companies on cost to cost basis. Therefore, considering the facts and circumstances of the case and also relying upon the ratio of co-ordinate bench of Delhi ITAT in Result Services Pvt Ltd (supra), we are of the view that there is no obligation on the part of the assessee to deduct TDS on reimbursement of support service charges to KPMG. Hence, we direct the AO to delete the disallowance made u/s 40(a)(i) towards rent payments.
13. The next issue that came up for our consideration in assessee’s appeal is addition sustained by CIT(A) towards undisclosed income from professional services on the basis of AIR information. The AO made addition of ₹ 105,97,352 on the basis of unreconciled entries appeared in the AIR information. According to the AO, the assessee has failed to offer any explanations with regard to certain entries appeared in AIR information. The AO further observed that the assessee not only failed to offer explanations, but also failed to reconcile the difference between AIR information and its books of account. The AO further observed that notices issued u/s 133(6) to various parties appeared in AIR information which were not answered by the parties. The assessee contends that addition cannot be made only on the basis of AIR information as the information in the AIR is only provisional which can be corrected at later stage by the parties. The assessee further submitted that it has fully account, its professional receipts and also reconciled to the extent possible the difference noticed by the AO. However, the other entries, which are unreconciled, are not received by it. Therefore, the AO was incorrect in making additions only on the basis of AIR information.
14. Having heard both the sides and considered material on record, we find that the AO has made additions of ₹ 1,05,97,352 on the basis of unreconciled entries appeared in AIR information. The AO made addition on the basis of assessee’s letter dated 29-23-2008 which states that the entries to the extent of Rsa.1,05,97,352 did not relate to assessee and also not able to reconcile with its books of account. The CIT(A), during the course of appellate proceedings, after considering the remand report submitted by the AO on the basis of additional information submitted by the assessee and also information received from parties to whom notices u/s 133(6) were issued, deleted additions made by the AO except in the case of four parties where either the parties have not responded to letter issued u/s 133(6) or no information has been submitted by the parties. The facts remain unchanged. The Ld.AR for the assessee except stating that no addition can be made only on the basis of AIR information, could not furnish any evidences to reconcile the difference between AIR information and books of account. The AIR information appeared in assessee’s PAN in the database of the income-tax department contains certain payments made to the assessee. Once there is an entry in the AIR information, it is incumbent upon the assessee to reconcile the difference in AIR with its books of account. The assessee neither reconciled the difference nor filed any explanations as to how entries appear in the AIR does not belong to the assessee. Merely stating that the entries in the AIR information is not relating to the assessee would not absolve the assessee’s responsibility of explaining the entries appeared in AIR. At the same time, the AO made additions only on the basis of AIR information without conducting any further enquiry with regard to the receipts appeared in assessee’s AIR database. Though the AO has issued notices u/s 133(6) to the parties, completed the assessment without obtaining any information from such parties. Therefore, we are of the considered view that the issue needs to be reconsidered in the light of the explanations of the assessee. Hence, we set aside the issue to the file of the AO and direct him to cause necessary enquiry. Needless to say, the assessee is directed to reconcile the difference appearing in AIR information with its books of account with necessary evidence.
15. In the result, appeal filed by the assessee in ITA No. 4862/Mum/2013 is partly allowed, for statistical purpose.
16. The facts and issues involved in ITA No.4918/Mum/2013 for the assessment year 2005-06 are identical to the facts and issues discussed in ITA No.4862/Mum/2013 but for the figures. Therefore, for the detailed discussion / reasons appended in the preceding paragraphs while deciding appeal in ITA No. 4862/Mum/2013, the appeal filed by the assessee in ITA No.4918/Mum/2013 is also partly allowed, for statistical purpose.
ITA Nos 4554 & 4556/Mum/2013
17. The first issue that came up for our consideration from revenues appeals is deletion of addition made by the AO towards professional charges paid outside India without deduction of tax at source u/s 195 of the Income-tax Act, 1961. The AO made disallowance u/s 40a)(i) for failure to deduct tax at source u/s 195 towards professional charges paid to non-resident, e-Gen Consultants Ltd, Bangladesh for ₹ 1,30,890. According to the AO, the payment made to e-Gen Consultants Ltd, Bangladesh is in the nature of royalty within the meaning of section 9(1)(vi) and Article 13(2) of the India Bangladesh DTAA.
18. The Ld.AR of the assessee and the Ld.DR at the time of hearing submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT in assessee’s own case for the assessment year 2003- 04 in ITA No.8824/Mum/2004, wherein under similar circumstances, the ITAT observed that professional charges paid outside India does not fall in any of the terms / definition given for ‘royalty’ under India and USA DTAA or within the meaning of royalty as defined in section 9(1)(vi) of the Income-tax Act, 1961. Thus, on such payments, there was no liability to deduct tax at source and consequently, section 40(a)(i) will not be applicable. We find that the co-ordinate bench has considered similar issue for the assessment year 2001-02 in assessee’s own case. After considering the relevant provisions of the Act, has held that professional charges paid outside India does not fall under any of the terms of definition given for ‘royalty’ under Article 12 of Indo USA DTAA or section 9(1)(vi) of the Income-tax Act, 1961. The relevant portion of the order is extracted below:-
“18. We have carefully considered the rival submissions and also gone through the findings given by the Assessing Officer as well as the CIT(A). The relevant facts are that the assessee company was engaged as a consultant by Essar Oil Limited to provide consultancy services in connection with sale of its energy business. Such a sale was expected to require application of high level office skills besides technical and industry knowledge. For rendering such consultancy a significant number of such overseas companies are based in USA The assessee engaged the services of KPMG Dallas, which is a firm of individual and resident of USA, which had the skill and technical knowledge relating to energy division based industry and technical parameters in giving such consultations and conduct negotiations with the potential parties. It was in lieu of this, that a professional fee of USD 46,248 which in terms of INR come to .20,89,906I-, was paid. The second payment was made to KPMG consulting LP Canada for rendering professional services for the Essar Oil Limited for retail oil marketing and other related services. The payment towards fee was made at USD 30,678/- which in terms of INR is .13,37,229/-, which al so i nc l uded re imbur s ement of e x pe ns e s i n the nature of transportation, lodging, meals and other expenses. The Assessing Officer has given categorically finding that so far as the Article 15 of DTAJ4 is concerned, the same does not apply to KPMG USA as it does not have any PE or business based in India and the services were not rendered for a period exceeding 90 days within the period of 12 months. His only case is that the professional fees paid to KPMG USA are in the nature of royalties within the meanings of 'explanation' to section 9(1)(vi) and is taxable under Article 12 of Indo-US DTAA. The royalties and fees for included services is taxable as per Article 12 in clause 3, reads as under :-
“3. The term “royalties” as used in this Article means: (a) payments of any kind received as a consideration for the use of or the right to use any copyright or a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity use or disposition thereof: and'
18.1 Looking to the nature of professional services rendered to the KPMG USA, it is evident that it does not fall in any of the terms of definition given for Royalty under Article 12 of Indo US DTAA. It was purely a professional service for consultancy which were rendered outside India and nor for supply of scientific, technical, industrial or commercial knowledge or information. Thus, nature of payment do not fall within the meaning of Article 12 and, therefore, there was no liability to deduct TDS and consequently disallowance made under section 49(la) is uncalled for. Similarly, in the caseof payment made to KPMG, Canada were also purely for professional services and reimbursement of expenses, which in any manner does not fall under Article 12. Thus, on such payment also there was no liability to deduct TDS and consequently Section 40(ia) will not be applicable. The finding of the CIT(A) is, thus, upheld. Accordingly, ground No.1 as raised by the department is dismissed.”
19. In this view of the matter and being consistent with the earlier decision taken by the co-ordinate bench in assessee’s own case for the earlier assessment year, we are of the view that there is no obligation on the part of the assessee to deduct tax at source on professional charges paid to e-Gen Consultants Ltd, Bangladesh as such payment neither falls under the definition of ‘royalty’ under Article 12 of Indo-Bangladesh DTAA or under Explanation to section 9(1)(vi) of the Income-tax Act, 1961. The CIT(A), after considering relevant facts, has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the order of CIT(A) and reject ground raised by the revenue.
20. The next issue that came up for our consideration is disallowance of support service charges paid to KPMG. The facts with regard to the impugned disallowances are that the assessee has made payment to KPMG towards sharing common facilities like infrastructure cost, communication expenses, technology cost and office supplies. The assessee has made the payment on the basis of agreement entered into with KPMG. As per the agreement, the assessee has agreed to use common facilities and also agreed to share expenses incurred in such facilities on cost to cost basis. The AO made addition towards support service charges on the ground that the impugned payments are in the nature of contractual payments coming within the definition of ‘contracts’ as defined in section 194C of the Act. According to the AO, the assessee has made the impugned payments as per the support service agreement with KPMG which is basically in the nature of contract between the assessee company and KPMG. The AO relying upon the CBDT circular No.681 dated 08-03-1994 came to the conclusion that all types of contracts where carrying out any work including transport contracts, service contracts and advertisement contracts, come within the meaning of ‘contract’ as defined in section 194C. It is the contention of the assessee that payment made to KPMG is reimbursement of actual expenditure incurred for common facilities like communication cost, technology cost and office supplies. M/s KPMG has procured such service from various vendors on payment and allocated the cost of procurement of services to various group companies on the basis of agreement entered into with its group companies. KPMG has complied with TDS provisions wherever applicable while making payment to vendors. Therefore, the payment made by the assessee to KPMG is only reimbursement of expenses cannot be called as payments made for carrying out any work.
21. We have heard both the parties and considered material available on record. The facts with regard to sharing of common expenses by KPMG and its group companies are not disputed by the AO. The AO is only on the point that the payment made by the assessee are in the nature of contractual payments coming under the definition of ‘contracts’ as defined u/s 194C of the Income-tax Act, 1961. We do not find any merit in the findings of the AO for the reason that there is no contract between the assessee and KPMG for carrying out any works. The assessee as part of the KPMG group of companies agreed to share common facilities like infrastructure cost and office supplies. Such costs are incurred by KPMG on payment and the same has been allocated to group of companies on cost to cost basis without any element of profit. The assessee being part of KPMG group has used common facilities provided by KPMG for which it has reimbursed expenditure incurred by KPMG on cost to cost basis. Therefore, we are of the view that the impugned payments are only in the nature of reimbursement of actual expenditure incurred by the assessee for which provisions of section 194C has no application. The assessee is not under obligation to deduct tax at source on amount reimbursed on actual cost basis. The CIT(A), after considering relevant submissions has rightly deleted additions made by the AO. We do not find any error in the order of the CIT(A); hence, we are inclined to uphold the order of CIT(A) on this issue and reject ground raised by the revenue.
22. In the result, the appeal filed by the revenue is dismissed.
ITA No.4554/Mum/2013
23. The facts and issues involved in ITA No.4554/Mum/2013 are identical to the facts and issues in appeal No.4556/Mum/2013 already discussed / decided by us but for the figures. Therefore, our decision in the preceding paragraphs applies mutatis mutandis to the present appeal also. Therefore, we are of the view that there is no merit in the appeal filed by the revenue. Hence, we dismiss the same.
26. In the result, appeals filed by the assessee are partly allowed and appeals filed by the revenue are dismissed.
Order pronounced in the open court on 13th October, 2017.


CA Ankit Gulgulia (Jain) | +91-9811653975

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