2011 (5) TMI 237 - AT - Income Tax

DTAA - Disallowance u/s 40(a)(i) - TDS on link charges paid to non resident - Royalty or fees for technical services - the applicability of the DTAA has to be examined and then a conclusion has to be arrived at as to whether the payment by the Assessee to CGIT can be said to be Royalty - The applicability of the provisions of section 9(1)(vi) of the Act, would depend on nature of services provided by Asia Sat to its customers as per the agreement executed between them - The assessee is directed explain the exact manner in which the services are rendered by the non-resident for which payment was made by the assessee Regarding interest expenditure - it is evident that assessee has utilized Rs. 44,41,583 of its interest bearing funds for making investment, the income of which does not form part of the taxable income of the assessee - Held that if it is found that the investment was made in the period when there was no overdrawn account from the bank Regarding Investment - Held that where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose - It has been the submission of the assessee that at the point of time when the investment in shares was made there was no overdrawn account in the bank - the appeal is partly allowed by way of remand

Issues Involved:
1. Disallowance of link charges due to non-deduction of tax at source under section 40(a)(i) of the Income-tax Act.
2. Disallowance of interest expenditure under section 14A of the Income-tax Act.

Detailed Analysis:

Issue 1: Disallowance of Link Charges

Background:
The assessee, engaged in software development, incurred an expense of Rs. 1,45,34,426 on account of connection charges, referred to as link charges. The payment was made to Citicorp Global Technology Infrastructure (CGTI), a non-resident company, for satellite services provided outside India.

Assessee's Argument:
The assessee contended that the link charges were not taxable in India as the services were rendered entirely outside India. They argued that the charges did not constitute "Fees for Technical Services" (FTS) under section 9(1)(vii) of the Income-tax Act and thus, there was no obligation to deduct tax at source.

Assessing Officer's (AO) Stand:
The AO viewed the link charges as fees for technical services and disallowed the deduction under section 40(a)(i) due to non-deduction of tax at source.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, referencing the decision of the Authority for Advance Ruling (AAR) in P. No. 30 of 1999, which held similar services taxable. The CIT(A) concluded that the payment constituted royalty under Article 12(3)(a) of the DTAA between India and the USA, and disallowed the deduction under section 40(a)(i).

Tribunal's Analysis:
The Tribunal noted the differing bases of AO (FTS) and CIT(A) (Royalty). It highlighted the necessity to understand the nature of services provided. The Tribunal referred to the agreement between the assessee and CGTI, which detailed the services provided. It found that the CIT(A) had not thoroughly analyzed the nature of services and the applicability of the DTAA.

Conclusion:
The Tribunal set aside the CIT(A)'s order and remanded the issue for fresh consideration. It directed the CIT(A) to examine the exact manner of services rendered by CGTI and decide the issue in light of relevant case laws, including the Delhi High Court's decision in Asia Satellite Telecommunications Co. Ltd. v. DIT.

Issue 2: Disallowance of Interest Expenditure

Background:
The AO disallowed interest expenditure of Rs. 4,37,272, asserting that the assessee had used borrowed funds to invest in shares, the dividend income from which is tax-exempt. The disallowance was made under section 14A of the Income-tax Act.

Assessee's Argument:
The assessee argued that the investments were made from interest-free funds and internally generated cash resources, not from borrowed funds.

CIT(A)'s Decision:
The CIT(A) held that both interest-free and interest-bearing funds were likely used for investments. It directed the AO to verify the periods of overdrawn accounts and make disallowances on a pro-rata basis for the period of overdraft.

Tribunal's Analysis:
The Tribunal referenced the Bombay High Court's decision in CIT v. Reliance Utilities & Power Ltd., which presumes that advances to sister concerns come from own funds if both own and borrowed funds are available. The Tribunal noted the need to consider the overall availability of funds rather than actual fund flow.

Conclusion:
The Tribunal set aside the CIT(A)'s order and remanded the issue for fresh consideration. It directed the CIT(A) to re-examine the issue in light of the Bombay High Court's decision and the assessee's claim regarding the timing of investments and overdraft accounts.

Final Order:
The appeal was partly allowed for statistical purposes, with both issues remanded to the CIT(A) for fresh consideration.

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