2013 (8) TMI 363 - AT - Income Tax

TDS u/s 195 - Nature of payment made to parent compnay - PE - Purchases of Online advertisement space - Article 7 of DTAA with USA - Disallowance u/s 40(a)(i)(A) - Held that - neither of the party is acting or doing the business activity on behalf of other but the transactions are independent business transaction wherein the respective margins are recover from each other. Moreover, the transaction of payment towards purchase of space on foreign website by the assessee for its client in any case does not constitute a transaction carried out by the assessee on behalf of its parent company. The assessee is doing the business transaction on behalf of its client and offering the income earned from the said business transaction which has been accepted by the AO. Therefore nothing has been brought on record by the Assessing Officer to show that the transaction of purchase of space on foreign website by the assessee from its parent company constitutes the assessee as PE - merely because one of the directors is common in both the companies does not constitute the assessee as PE - risk and reward of the business carried out by the assessee is born by the assessee which itself shows that it is the assessee who is answerable to the customers and therefore the activity of purchase of space on website from the parent company is on principle to principle basis - Decided against Revenue. Nature of payment was made towards sharing of cost for a third party server platform and use of licence - Held that - When the payment is not towards the cost of any services or supply by the parent company to the assessee but the payment is towards the use of server platform and licence belongs to the third party. Therefore, such payment relates to the use of server and licence of third party routed through its parent company. When the Assessing Officer has disallowed this payment for none withholding of tax by invoking the provision of Section 40(a)(i)(A) then we do not agree with the contention of the assessee that this is a new issue raised by the Ld. DR. This issue requires a proper verification of the real nature of payment and withholding of tax u/s 195. - Issue remmitted back - Decided against assessee

Summary

Issues Involved:

1. Deletion of addition made on account of disallowances of Purchases of Online advertisement space under Section 40(a)(i)(A) of the Act.
2. Deletion of addition made on account of disallowance of the reimbursement of expenditure under Section 40(a)(i)(A) of the Act.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Made on Account of Disallowances of Purchases of Online Advertisement Space:

The Revenue's appeal challenges the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which deleted the disallowance of Rs. 2,68,28,859/- for the purchase of online advertisement space. The Assessing Officer (AO) had treated the assessee as a Permanent Establishment (PE) of its parent company, M/s Komli Inc US, based on multiple factors such as common directorship, similar business activities, and the parent company's significant shareholding. The AO argued that the payments made by the assessee to its parent company were taxable in India under Article 7 of the Indo-US DTAA and hence required tax withholding.

The CIT(A) refuted this by holding that the transactions between the assessee and its parent company were on an arm's length basis, indicating independent business activities rather than a PE relationship. The CIT(A) further noted that the payments were business income of the parent company, which, in the absence of a PE in India, were not taxable in India under Article 7 of the DTAA. Consequently, there was no requirement for tax withholding under Section 195 of the Income Tax Act.

The Tribunal upheld the CIT(A)'s findings, emphasizing that the transactions were independent and conducted on a principal-to-principal basis. The Tribunal also noted that the AO had not provided sufficient evidence to prove that the assessee's activities constituted a PE of the parent company. The Tribunal concluded that the mere commonality of a director and the similarity in business activities did not establish a PE. Thus, the disallowance under Section 40(a)(i)(A) was rightly deleted by the CIT(A).

2. Deletion of Addition Made on Account of Disallowance of the Reimbursement of Expenditure:

The second issue pertained to the disallowance of Rs. 24,94,631/- for the reimbursement of expenses related to the use of a software license. The AO disallowed this amount, treating it as a payment requiring tax withholding. The CIT(A) overturned this disallowance, holding that the payment was a pure reimbursement of expenses without any profit element, and therefore, did not constitute a reward or compensation for services rendered.

The Tribunal examined the nature of the payment and noted that it was made towards the cost of a third-party server platform and software license, shared between the assessee and its parent company. The Tribunal observed that the CIT(A) had treated the payment as a cost-sharing arrangement rather than a service fee, thereby negating the requirement for tax withholding under Section 195.

However, the Tribunal found that the payment's nature and the requirement for tax withholding needed further verification. It directed the AO to re-examine the issue, considering the relevant material and providing the assessee with an opportunity for a hearing. The Tribunal referenced similar cases where payments routed through an associated enterprise were not considered pure reimbursements.

Conclusion:

The Tribunal partly allowed the appeal, upholding the deletion of the disallowance for the purchase of online advertisement space while remitting the issue of reimbursement of expenses back to the AO for fresh consideration. The Tribunal's decision emphasized the importance of distinguishing between independent business transactions and those that might constitute a PE, as well as the need for thorough verification in cases of cost-sharing arrangements.