2014 (2) TMI 1165 - AT - Income Tax

Non deduction of TDS on carrier payments made to M/s. Clickatel, South Africa - Disallowance u/s 40(a)(i) - CIT(A) deleted disallowance - Held that - Nature of services rendered by non-resident i.e. M/s. Clickatel is only to transmit bulk SMS. The nature of service provided by Clickatel requires no technical knowledge and what was rendered was just transmission of data which requires no technical skill. The finding of the Commissioner of Income Tax (Appeals) that carrier which is a medium for sending bulk SMS and as such cannot be considered to be rendering any technical services and no TDS is required to be made is correct. The Commissioner of Income Tax (Appeals) held that Clickatel which is a non-resident carrier rendered services outside India and no part of the payment made to Clickatel is chargeable to tax in India. See CIT v. Bharti Cellular Ltd 2010 (8) TMI 332 - Supreme Court of India . - Decided against revenue. Income accrued not offered to tax - CIT(A) deleted addition - Held that - Assessee received advance income from its customers and whenever services were provided by the assessee, assessee adjusts the advances received from customers and recognizes the income in the year in which services were rendered. Since the appellant maintains books on accrual system, income shall be recognized only when it accrues. In the given case, the income accrues only when the appellant sends the required no. of SMS. Therefore, the service charges received in advance for the service to be rendered in future years are not liable to tax in the year of receipt. Only on completion of the service, the appellant has right over the amount that was received in advance. - Decided against revenue.

Summary

Issues:
1. Disallowance under section 40(a)(i) for carrier payments made without TDS deduction.
2. Addition of income accrued but not offered to tax.

Issue 1: Disallowance under section 40(a)(i) for carrier payments made without TDS deduction:

The appeal involved a dispute over disallowance made under section 40(a)(i) of the Act for carrier payments made to a service provider in South Africa without deduction of tax at source. The Assessing Officer disallowed the payments, but the Commissioner of Income Tax (Appeals) deleted the disallowance. The Revenue contended that the services provided were technical and required TDS deduction, while the assessee argued that the payments were not for technical services. The Commissioner analyzed the nature of services provided by the non-resident carrier and concluded that they did not fall under the definition of technical services as per the Double Taxation Avoidance Agreement (DTAA) between India and South Africa. The Commissioner also cited relevant legal precedents to support the decision. The ITAT Chennai upheld the Commissioner's decision, emphasizing that the services were not technical and no TDS was required.

Issue 2: Addition of income accrued but not offered to tax:

The second issue revolved around the addition of Rs. 1.33 crores by the Assessing Officer towards income accrued but not offered to tax. The Assessing Officer argued that the advance income received from customers should be taxed as there was no liability attached to the assessee if services were not rendered. However, the Commissioner of Income Tax (Appeals) disagreed and deleted the addition. The ITAT Chennai concurred with the Commissioner's decision, noting that the income accrues only when the services are provided, and the advance income received for future services should not be taxed in the year of receipt. Citing the accrual system of accounting followed by the appellant, the Commissioner held that the action of the Assessing Officer in making the addition was not justified. The ITAT Chennai upheld this decision, rejecting the Revenue's appeal on this issue.

In conclusion, the ITAT Chennai dismissed both the appeal of the Revenue and the cross objection of the assessee, affirming the decisions of the Commissioner of Income Tax (Appeals) on both issues. The judgment highlighted the importance of analyzing the nature of services provided and the timing of income recognition in determining tax liabilities, as evidenced by the detailed legal analysis and precedents cited in the judgment.