2014 (4) TMI 199 - AT - Income Tax

TDS u/s 194C - assessee is a wholly owned subsidiary - payment to holding company where holding company was to make available to the appellant staff, infrastructure, administrative support and support services. - Whether, conditions of MOU constituted work contract u/s 194C Held that - As per MOU, the appellant neither had any employee on its roll nor any separate office space/infrastructurewhole agreement Documents reveals that said agreement is essentially an agreement of contract for work and services - There is no mention in the MOU that the assessee will reimburse the actual salary or actual cost of the services to the first party - Company thus falls within definition of service provider i.e. contractor as defined under section 194 C of act - Though technical services have also been agreed to be provided under MOU, but since it is a composite agreement providing all type of services by service provider, hence, provisions of section 194 C are attracted in this case Decided against Assessee. Nature of payments covered u/s. 194C/194J - A.O. held that payment made by appellant company to its holding company were in nature of payments covered u/s. 194C/ 194J of Act Expenditure was Disallowed by A.O. u/s. 40(a)(ia) of Act Held that - Agreement in question is a composite agreement - Perusal of clauses of agreement reveals that there is no such clause in agreement from which it can be gathered that services provider i.e. first party in the agreement will provide services on actual cost basis or that no profit element is involved as has been alleged by the ld. Authorized Representative - There is specific clause in agreement regarding payment on service charges - Even assessee has claimed that it has deducted the tax in relation to service fee - It may be observed that sum payable or paid to a contractor for the work, as provided under section 194C, refers to entire payment and not profit element only - Such payment u/s 194C refers to the entire payment i.e. cost to contractor for work carried out plus profit element if any Decided against Assessee. Disallowance for non-deduction of TDS u/s 40(a)(ia) - Disallowing expenses from business and profession on ground that TDS has not been deducted, amount should be payable and not which has been paid by end of year Held that - This question came for consideration before Hon ble Calcutta High Court in CIT v. Crescent Export Syndicate 2013 (5) TMI 510 - CALCUTTA HIGH COURT wherein High court held that provisions of section 40(a)(ia) are applicable not only to amount which is shown as payable on date of balance-sheet - But it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year - Correct law is that s. 40(a)(ia) covers not only to the amounts which are payable as on 31th March of a particular year but also which are payable at any time during the year - Assessee claimed deduction and payment of TDS regarding service fee - A.O. therefore is directed to verify the said claim and delete disallowance in respect of payments upon which tax was deducted and duly deposited by assessee in accordance with law - Matter restored to AO only on this specific point Decided partly in favour of Assessee.

Issues Involved:
1. Addition under Section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS.
2. Nature of payments made by the assessee to its holding company.
3. Applicability of Section 194C and Section 194J of the Income Tax Act.
4. Interpretation of the term "payable" under Section 40(a)(ia).

Detailed Analysis:

1. Addition under Section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS:

The assessee appealed against the order of the CIT(A) confirming the addition made by the Assessing Officer (AO) under Section 40(a)(ia) due to non-deduction of TDS on payments totaling Rs. 1,12,06,172/- to its holding company. The AO observed that the payments were for services provided by the holding company and fell under Sections 194C and 194J, requiring TDS deduction. The CIT(A) upheld the AO's decision, leading to the current appeal.

2. Nature of payments made by the assessee to its holding company:

The assessee argued that the payments were reimbursements for services provided by its holding company under a Memorandum of Understanding (MOU). The MOU stipulated that the holding company would provide staff, infrastructure, and administrative support, and the costs incurred would be reimbursed by the assessee. The assessee contended that since no direct payment was made to any outside service provider, TDS deduction was not applicable.

3. Applicability of Section 194C and Section 194J of the Income Tax Act:

The Tribunal examined the MOU and concluded that the agreement was a composite contract for various services, including technical and skilled services. The Tribunal noted that the MOU did not specify that reimbursements were on an actual cost basis. Therefore, the holding company was considered a contractor, and the payments fell under Section 194C, requiring TDS deduction. The Tribunal rejected the assessee's argument that the payments were merely reimbursements without a profit element.

4. Interpretation of the term "payable" under Section 40(a)(ia):

The assessee argued that disallowance under Section 40(a)(ia) should only apply to amounts payable as of March 31 of the relevant financial year, citing the Special Bench verdict in Merlyn Shipping & Transports v. Asstt. CIT and the Allahabad High Court's decision in CIT v. Vector Shipping Services (P) Ltd. The Tribunal, however, relied on the Calcutta High Court's decision in CIT v. Crescent Export Syndicate and the Gujarat High Court's decision in CIT v. Sikandarkhan N, which held that Section 40(a)(ia) applies to amounts payable at any time during the year, not just those outstanding as of March 31.

Conclusion:

The Tribunal upheld the AO's disallowance under Section 40(a)(ia) for non-deduction of TDS on payments made to the holding company. The Tribunal found that the agreement between the assessee and its holding company was a composite contract for services, falling under Section 194C. The Tribunal also rejected the assessee's argument regarding the interpretation of "payable" under Section 40(a)(ia), following the Calcutta and Gujarat High Courts' decisions. However, the AO was directed to verify the assessee's claim of TDS deduction on service fees and delete the disallowance if TDS was duly deducted and deposited. The appeal was partly allowed for statistical purposes.

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