2014 (1) TMI 1742 - AT - Income Tax

Disallowance made u/s 40(a)(i) - failure on the part of the assessee to deduct tax at source on the payment of royalty - Held that - Considering the submission of the parties in the light of the ratio laid down in case of CIT vs. Dynamic Vertical Software India P. Ltd (2011 (2) TMI 77 - DELHI HIGH COURT ) and keeping in view the direction given by the co-ordinate bench in assessee s own case for the assessment years 2004-05 and 2005-06 we also remit the issue back to the file of the Assessing Officer who shall consider it afresh after examining all the facts and materials on record. The Assessing Officer shall also take into consideration any decision which may be relied upon by the assessee in support of its claim. Since we have remitted the issue back to the file of the Assessing Officer for considering the same afresh it will be open to the assessee to raise all other contentions with regard to its claim of not being liable to deduct tax at source u/s 195 of the Act. With the aforesaid observation the matter is remitted to the file of the Assessing Officer for deciding the same in accordance with law after affording a reasonable opportunity of being heard to the assessee.

Summary

Issues:
Disallowance made under section 40(a)(i) of the Act for failure to deduct tax at source on royalty payments.

Analysis:
1. The appeals were filed against CIT (A) orders for assessment years 2007-08 and 2008-09 by the assessee, involving common issues related to disallowance under section 40(a)(i) of the Act for not deducting tax at source on royalty payments.
2. The learned AR did not press grounds related to violation of natural justice, leading to the dismissal of specific grounds in both appeals.
3. The main issue in both appeals was the disallowance under section 40(a)(i) concerning the failure to deduct tax at source on royalty payments.
4. The Assessing Officer disallowed the expenditure claimed by the assessee as royalty payments, adding it to the income due to non-deduction of tax at source. The CIT (A) upheld this disallowance.
5. The assessee contended that it was a distributor of software procured from its associated enterprises and not liable for royalty payments. The AR argued that the payment was not for royalty as the assessee did not have access to the source code and only provided configuration services.
6. The Departmental Representative also suggested remitting the matter back to the Assessing Officer for fresh consideration.
7. The Tribunal considered the submissions and directed the issue to be remitted back to the Assessing Officer for reevaluation in light of supporting evidence and legal provisions.
8. Following the decision in a similar case, the Tribunal remitted the issue back to the Assessing Officer for both assessment years, allowing the assessee to present all contentions regarding tax deduction.
9. Both appeals were treated as allowed for statistical purposes, and the matter was remitted back to the Assessing Officer for fresh consideration in accordance with the law.

This detailed analysis covers the main issue of disallowance under section 40(a)(i) of the Act for failure to deduct tax at source on royalty payments, highlighting the arguments presented by the parties and the Tribunal's decision to remit the matter back to the Assessing Officer for reevaluation.