2012 (9) TMI 285 - AT - Income Tax

Disallowance u/s 40(a)(i) - rate of TDS - whether deduction of tax at source @ 11.33% in case of payments made to nine non-residents engaged in rendering services in connection with oil exploration business which are taxable under the Income-tax Act as per the provisions of section 44BB, is sufficient compliance of section 40(a)(i) of the Act or any disallowance out of such payment is warranted u/s 40(a)(i) of the Act. - held that - following the decision of Apex Court in GE India Technology Centre (P.) Ltd., (2010 (9) TMI 7 - SUPREME COURT OF INDIA) and Frontier Offshore Exploration (India) Ltd vs DCIT, decided in favour of assessee. Disallowance u/s 40(a)(i) - consultancy charges/fees for technical services paid to not residence working in overseas off shore oil and gas exploration projects it Nigeria - Held that - As the payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee, the fees paid to such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. Therefore, clearly Section 9(1)(vii)(b) applied and the income earned by such non-residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason to hold a bonafide belief that no part of the payment had any element of income which was chargeable to tax in India & assessee could not be put in a position where it can be visited with the rigours associated with non-deduction of tax at source. It cannot be fastened with any liability associated with non-deduction of tax at source on such payments - in favour of assessee.

Issues Involved:
1. Disallowance under Section 40(a)(i) for consultancy charges/fees for technical services paid to non-residents.
2. Applicability of Section 44BB and appropriate rate of TDS.
3. Proportionate disallowance due to short deduction of tax.
4. Deletion of disallowance under Section 40(a)(i) for payments made to non-residents in overseas projects.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Consultancy Charges/Fees for Technical Services Paid to Non-Residents:
The primary issue in the assessee's appeal concerns the disallowance of Rs. 61,19,632 under Section 40(a)(i) for consultancy charges/fees paid to non-resident individuals of Indian origin working in off-shore oil and gas exploration projects in India. The Assessing Officer (AO) disallowed this amount due to short deduction of tax, as the assessee had deducted tax at 11.33% instead of the applicable 33.99%. The AO argued that the proportionate disallowance was necessary due to the shortfall in TDS.

2. Applicability of Section 44BB and Appropriate Rate of TDS:
The assessee contended that Section 44BB, which deals with the taxation of non-residents engaged in the business of providing services in connection with the extraction or production of mineral oils, should apply. Under Section 44BB, the tax rate would be 3.399%, as opposed to the 11.33% already deducted by the assessee. The assessee argued that the higher deduction of 11.33% should negate any need for proportionate disallowance.

3. Proportionate Disallowance Due to Short Deduction of Tax:
The CIT(A) upheld the AO's decision, citing a similar disallowance in the previous assessment year (2007-08), which had been sustained. However, the Tribunal noted that in the earlier year, the assessee had not pressed this ground of appeal, and thus it was dismissed for want of prosecution. The Tribunal referred to its decision in a similar case (Frontier Offshore Exploration (India) Ltd vs DCIT) where it was held that Section 44BB is a special provision and should apply, thereby validating the assessee's deduction rate of 11.33%.

4. Deletion of Disallowance under Section 40(a)(i) for Payments Made to Non-Residents in Overseas Projects:
In the Revenue's appeal, the issue was the deletion of a disallowance of Rs. 4,76,58,976 under Section 40(a)(i) for consultancy charges/fees paid to non-residents working in overseas off-shore oil and gas exploration projects in Nigeria. The AO had disallowed this amount, arguing that the income would be deemed to accrue in India, and thus TDS should have been deducted at 33.99%. The CIT(A) had deleted this disallowance, following the Tribunal's decision in the assessee's own case for the previous year (2007-08), where it was held that payments for services utilized in a business carried on outside India are not deemed to accrue in India under Section 9(1)(vii)(b).

The Tribunal, after considering the rival submissions and previous decisions, found that the payments made by the assessee to non-residents for services rendered in connection with oil exploration were sufficiently covered under Section 44BB. Therefore, the deduction of tax at 11.33% was deemed sufficient compliance with Section 40(a)(i). The Tribunal set aside the orders of the lower authorities and remanded the matter back to the CIT(A) for fresh consideration in light of the Tribunal's findings.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal, thereby upholding the applicability of Section 44BB and the sufficiency of the 11.33% TDS rate for payments made to non-residents in connection with oil exploration projects. The matter was remanded back to the CIT(A) for a fresh decision, taking into account the Tribunal's observations and the relevant legal precedents.

← Previous Next →