2011 (2) TMI 60 - AT - Income Tax

Allowance or disallowance of deduction - During the year under consideration it has carried on the activity of providing service in the form of DNA testing to the prospective Indian immigrants for USA Embassy located in Delhi and Mumbai - the assessee had incurred a liability towards MRO New Zealand for paying a sum of ₹ 27,11,280/- on account of services rendered by them to the assessee to facilitate to get the DNA test reports - The Assessing Officer has also mentioned about applicability of provisions of DTAA, sections 9(1) and 40(a) and 195 of the Income-tax Act and, accordingly disallowed the amount of ₹ 27,11,280 The chargeability of tax in India of a resident of New Zealand is governed by the agreement of DTAA - The assessee was not under an obligation to deduct tax at source u/s 195 hence, the question of disallowance to be made u/s 40 (a) of the Act does not arise - Appeal is dismissed

Summary

Issues Involved:
1. Justification of deduction of Rs. 27,11,280/- towards operating expenses paid to MRO International New Zealand.
2. Applicability of TDS provisions and section 40(a) of the Income-tax Act, 1961.
3. Consideration of section 44AD by the CIT(A).

Issue-wise Detailed Analysis:

1. Justification of Deduction of Rs. 27,11,280/-:
The assessee company, incorporated in India, engaged in providing DNA testing services to prospective Indian immigrants for the US Embassy. It had an agreement with MRO Ltd., New Zealand, for facilitating DNA test reports. The assessee incurred a liability of Rs. 27,11,280/- for services rendered by MRO New Zealand. The Assessing Officer questioned the allowance of this amount, arguing that necessary particulars were not provided and the nature of the services rendered did not justify the deduction. The assessee contended that these services were rendered outside India, and the income of the recipient company was not taxable in India, thus not attracting TDS provisions.

2. Applicability of TDS Provisions and Section 40(a):
The CIT(A) held that the payments made to MRO New Zealand were neither in the nature of "royalty" nor "fee for technical services," and were not chargeable to tax under the Indian Income-tax Act. Therefore, section 195, which mandates TDS on payments to non-residents, was not applicable. The CIT(A) found that MRO New Zealand did not have a Permanent Establishment (PE) in India, and the services provided were liaison and coordination services rendered outside India. Consequently, section 40(a), which disallows deductions for expenses on which TDS is not deducted, was not applicable.

3. Consideration of Section 44AD:
The Assessing Officer had mentioned the applicability of section 44AD, but the CIT(A) did not adjudicate on this matter. The CIT(A) focused on the nature of the payments and their taxability under Indian law, concluding that the payments were not chargeable to tax in India, thus not requiring TDS.

Judgment Summary:
The Tribunal upheld the CIT(A)'s decision, confirming that the payments to MRO New Zealand were not chargeable to tax in India and did not fall under the definitions of "royalty" or "fee for technical services" as per the Indo-New Zealand DTAA. Therefore, the assessee was not obligated to deduct TDS under section 195, and the disallowance under section 40(a) was not justified. The appeal filed by the revenue was dismissed.