2011 (5) TMI 700 - AT - Income Tax

Foreign operational payments - Payments foreign company for services rendered outside India and the foreign company having no branches or business place in India, the payments made by the assessee to the foreign companies are not liable for deduction at source u/s 195 of the Act - expenditure is not disallowable by invoking the provisions of section 40(a)(i) of the Act

Summary

Issues Involved:
1. Disallowance of foreign operational payments under section 40(a)(i) due to non-deduction of TDS under section 195 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Disallowance of Foreign Operational Payments under Section 40(a)(i)
The primary issue in this case is the disallowance of Rs. 5,14,78,766/- under section 40(a)(i) of the Income Tax Act, 1961, due to non-deduction of TDS under section 195. The Revenue argued that the CIT(A) erred in deleting this disallowance, citing several judicial precedents, including the Supreme Court's decision in Transmission Corporation of A.P Ltd. (239 ITR 587).

Revenue's Argument:
The Revenue contended that the CIT(A) should have upheld the Assessing Officer's action based on the Supreme Court's decision in Transmission Corporation of A.P Ltd., which emphasized the necessity of deducting tax at source on payments to non-residents. The Revenue also cited decisions from the jurisdictional ITAT in the cases of Frontier Offshore Exploration (I) Pvt. Ltd. and West Asia Maritime Ltd., which supported the Assessing Officer's stance.

Assessee's Argument:
The assessee argued that the payments were made to foreign companies for services rendered outside India, and these companies did not have any branches or business places in India. They provided a Chartered Accountant's certificate confirming that no tax was deductible in India, and the payments were made in accordance with the Reserve Bank of India's circular and CBDT circular No. 10/2002. The assessee also relied on the Special Bench decision in Prasad Productions (125 ITD 263) and the ITAT Madras 'A' Bench decision in Indopel Garments Pvt. Ltd. v. DCIT (86 ITD 102).

Tribunal's Analysis:
The Tribunal considered the rival submissions and reviewed the assessment order. It was noted that the Assessing Officer disallowed the payments on the ground that the assessee could not decide on the tax deductibility of payments to non-residents suo motu. However, the assessee had confirmed that the payments were made for services rendered outside India, and the foreign companies did not have branches or business places in India. These facts were undisputed and un-rebutted by the Revenue.

The Tribunal referred to the Supreme Court's decision in G.E. India Technology Cen. (P.) Ltd. v. CIT (327 ITR 456), which held that if the payment does not contain the element of income chargeable under the Act, the payer cannot be made liable for TDS under section 195. Since the payments were made to foreign companies for services rendered outside India and these companies had no taxable presence in India, the Tribunal concluded that the payments were not liable for TDS under section 195. Consequently, the disallowance under section 40(a)(i) was not warranted.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the payments made by the assessee to foreign companies for services rendered outside India were not liable for TDS under section 195. Therefore, the disallowance under section 40(a)(i) was not justified, and the Revenue's appeal was dismissed.