2014 (11) TMI 1014 - AT - Income Tax

Disallowance u/s.40(a)(i) - non deduction of TDS on payment to one, Sangeeta Choudhary, a resident of Canada, - CIT(A) deleted the disallowance - Held that - though for a consideration for marketing and sale support services and, thus, only in the nature of commission or service charges, the same has no nexus with India. All that, in our clear view, the said Explanation does is to remove the issue of the determination of the tax incidence on the basis of whether the payee is a tax resident in India from being a consideration for non-deduction of tax at source u/s.195. The payee in the instant case, being admittedly a resident of Canada, with the services being rendered thereat, the issue of place of business in India is not an issue. The assessee s stating of the payee having no place of business or establishment in India, is only toward and in support of its contention of the services being rendered wholly outside India. There is in fact no charge by the Revenue of the payee having any place of business or otherwise business connection in India. The said explanation would, therefore, be of no consequence - Decided against revenue

Summary

Issues:
Validity of disallowance under section 40(a)(i) for non-deduction of tax at source on payment to a non-resident.

Analysis:
The appeal by the Revenue challenges the Commissioner of Income Tax (Appeals)'s order allowing the assessee's appeal against the assessment under section 143(3) of the Income Tax Act for the assessment year 2009-10. The main issue raised is the validity of the disallowance of Rs. 91,05,348 under section 40(a)(i), which was deleted by the first appellate authority. The assessee made a payment to a non-resident without deducting tax at source, leading to the disallowance by the Assessing Officer. However, the assessee argued that the payment was for services outside India and not chargeable to tax in India, citing relevant legal precedents.

The key legal provision in question is section 40(a)(i) of the Income Tax Act, which restricts the allowance of deductions for certain payments made to non-residents on which tax is deductible at source. The appellate tribunal analyzed the interpretation of section 195, which deals with tax deduction at source for payments to non-residents. The tribunal referred to the decision in GE India Technology Centre (P.) Ltd. vs. CIT, highlighting that tax deduction is not mandatory for payments not chargeable to tax in India.

The tribunal emphasized that the Revenue failed to challenge the basis of the assessee's claim that the payment was not chargeable to tax in India. The tribunal also discussed the implications of Explanation 2 to section 195(1), clarifying that the obligation to deduct tax applies to all persons, resident or non-resident. However, in this case, where the services were rendered outside India, the obligation to deduct tax at source did not apply.

Based on the legal analysis and precedents, the tribunal dismissed the Revenue's appeal, upholding the decision to delete the disallowance under section 40(a)(i). The judgment reaffirmed that tax deduction at source is not mandatory for payments to non-residents if the income is not chargeable to tax in India, as established in relevant legal interpretations and precedents.

This detailed analysis of the judgment highlights the legal intricacies involved in determining the validity of disallowance under section 40(a)(i) for non-deduction of tax at source on payments to non-residents, emphasizing the importance of considering the taxability of income in India while interpreting relevant provisions of the Income Tax Act.