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Issues involved: Disallowance of expenditure u/s 40(a)(i) for failure to deduct tax at source while making payment outside India.
Summary: The appeal before the Appellate Tribunal ITAT Hyderabad pertained to the disallowance of &8377; 38,34,905 by the Revenue for failure to deduct tax at source while making payments outside India during the assessment year 2003-04. The departmental representative argued that the assessee claimed expenses for sales promotion paid outside the country without deducting tax as required u/s 40(a)(i) of the Income-tax Act, 1961. The CIT (A) allowed the claim stating that payments were made directly by the branch office situated outside India. The representative contended that tax should have been deducted while making the payments to foreign agents for services rendered in the form of media relations. In response, the representative for the assessee argued that no payments were made in India, the foreign agents had no permanent establishment in India, and all payments were made in US dollars by the branch office situated outside India. Therefore, the provisions of sec. 195(1) of the Income-tax Act may not be applicable, and there was no requirement to deduct tax at source. After considering the submissions and examining the records, the Tribunal noted that the payments were indeed made by the branch office of the assessee situated in the USA to foreign agents outside India. Since the foreign agents did not have a permanent establishment in India, the provisions of sec. 195(1) may not apply. Consequently, the Tribunal held that the disallowance made by the Assessing Officer was unjustified, and the CIT (A) correctly deleted the addition. The Tribunal confirmed the lower authority's order, dismissing the appeal of the Revenue. In conclusion, the Tribunal upheld the decision to dismiss the appeal, emphasizing that the payments made by the branch office outside India to foreign agents did not warrant tax deduction at source as per the relevant provisions of the Income-tax Act.
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