Relief to Grant Thornton: No TDS applicable on Payment made to GTIL, UK towards membership fee

The Income Tax Appellate Tribunal (The “ITAT”) in the matter of Grant Thornton Advisory (P.) Ltd (the “assessee”) vs DCIT has said that no TDS will be applicable on payment of membership/ subscription to Grant Thornton International Ltd., London, UK (GTIL). ITAT held that the payment made by the assessee to GTIL towards membership and subscription fee is not taxable at the hands of the That being the case, the assessee was not required to withhold tax at source in terms with section 195 of the Act.

Facts of the Case

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).

Appeal with CIT (Appeals)

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.

Contention of Taxpayer

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.

Contention of department

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.

ITAT Order

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.

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