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2014 (1) TMI 1701 - AT - Income TaxTDS u/s 195 - Computing deduction under section 10A - Whether the assessee is responsible for incurring the expenses towards the employees necessitating the reimbursement of cross charges ? - Whether these payments were liable for TDS under section 195 of the Act ? - Held that - The assessee was the real and economic employer of the secondees from the UK Company and the reimbursement of salary costs etc. to the UK Company was without any profit element and therefore cannot be regarded as income chargeable in the hands of UK Company the above questions at (iii) and (iv) are answered in favour of the assessee. In other words the reimbursement made by the assessee to the UK Company were not liable for TDS under section 195 of the Act and consequently the said payments are not liable for disallowance under section 40(a)(ia) of the Act. Since these payments have been held to be not liable to be disallowed under section 40(a) (ia) of the Act the question of computing deduction under section 10A of the Act on enhanced income does not arise. - Decided in favour of assessee
Issues Involved:
1. Deduction under section 10A of the Income Tax Act. 2. Disallowance under section 40(a)(ia) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deduction under section 10A of the Income Tax Act: The primary issue pertains to the deduction under section 10A of the Income Tax Act. The assessee claimed a deduction amounting to Rs. 3,30,28,510, which was restricted by the Assessing Officer to Rs. 2,96,26,025. This restriction was due to the exclusion of expenses related to internet connectivity (Rs. 54,73,725) and traveling incurred in foreign currency (Rs. 1,90,88,594) from the export turnover. The CIT(Appeals) directed the Assessing Officer to recompute the deduction by reducing these expenses from both the export turnover and total turnover, following the Karnataka High Court's decision in CIT Vs. Tata Elxsi and Others (349 ITR 98). The Tribunal upheld the CIT(Appeals) decision, stating that the expenses incurred on internet connectivity and travel in foreign currency should be reduced from both export turnover and total turnover for computing the deduction under section 10A. This decision was based on the principle that the numerator and denominator in the formula for computing the deduction should be consistent to avoid anomalies or absurd results. The Tribunal cited the Karnataka High Court's ruling in Tata Elxsi Ltd., which emphasized uniformity in the components of the formula. 2. Disallowance under section 40(a)(ia) of the Income Tax Act: The second issue involves the disallowance under section 40(a)(ia) amounting to Rs. 1,38,36,518, which was upheld by the CIT(Appeals). The disallowance was made because the assessee did not deduct tax at source on payments made to AON Ltd., UK, which were considered reimbursements for seconded employees' salaries. The CIT(Appeals) held that these payments were not in the nature of reimbursement and required tax deduction at source under section 195. The Tribunal, however, found that the assessee was the real and economic employer of the seconded employees, and the payments made to the UK Company were pure reimbursements without any profit element. Consequently, these payments did not constitute income in the hands of the UK Company and were not liable for TDS under section 195. Therefore, the disallowance under section 40(a)(ia) was not justified. The Tribunal referred to the decision of the co-ordinate bench in Abbey Business Services (India) Pvt. Ltd., which held that the Indian company having effective control over the seconded employees should be considered the real employer. The Tribunal also cited the Special Bench decision in Mahindra & Mahindra Ltd. (313 ITR (AT) 263), which stated that reimbursements without profit element are not liable for TDS. In conclusion, the Tribunal dismissed the revenue's appeal regarding the computation of deduction under section 10A and allowed the assessee's cross objections, holding that the reimbursements made to the UK Company were not liable for disallowance under section 40(a)(ia). Final Order: The Tribunal dismissed the revenue's appeal for Assessment Year 2008-09 and partly allowed the assessee's cross objections. The order was pronounced in the open court on 30th January, 2014.
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