2014 (7) TMI 85 - AT - Income Tax

Non application of mind by revenue before filing an appeal before ITAT - TDS on expenditure booked towards software development - TDS u/s 194C or u/s 194J - whether in the nature of payments towards technical services/fees - Levy of tax and interest short deducted u/s 201 and 201(1A) of the Act Held that - CIT(A) upheld the contention of the AO that the amounts are covered by the provisions of section 194J - assessee also preferred the appeal on the same issue - revenue is contesting on an issue which was decided in its favour, which indicates the non-application of mind not only by the AO but also by the CIT-(TDS), who approved the filing of appeal - This sort of mindless action by the Revenue does attract levy of cost - the Revenue authorities is advised to apply their mind before preferring appeals to ITAT Decided against Revenue. Categorisation of payment - TDS u/s 194C or 194J development of system for information management between Head Office and its on-site employees. - Held that - The packages are to be developed by vendors - payments made to the vendor companies do fall under 194C - Even though assessee is in the software business and services rendered/work undertaken are also on the field of software services, these cannot be considered as per professional services as they have not rendered any personal services to the company - It is a contract between a company and company - Even though the nature of contract differs from activity to activity, assessee s nature of work do indicate that those companies have not rendered any technical / professional services so as to come within the definition of section 9(1)(vii) - categorization of works contract as agreement for services cannot be accepted. Relying upon Glaxosmithkline Pharmaceuticals Ltd., vs. ITO 2011 (10) TMI 21 - ITAT, PUNE - payment made for services of security guard provided by contractor cannot be kept in the nature of managerial, technical or consultancy services so as to attract clause 7 to section 9(1) read with section 194J - for treating the payment for technical services to be covered u/s 194J, there should be consideration for acquiring or using technical knowhow simplicitor provided, or made available by human element and there should be direct or live link between payment and receipt/use of technical services information thus, the payments made are rightly covered u/s 194C and assessee has deducted tax - the demands to the extent of 201(1) and interest u/s 201(1A) cannot be sustained Decided in favour of Assessee. TDS on expenditure overseas for providing onsite services - TDS u/s 195 - whether payment is taxable in India - Held that - since the amounts are paid outside India to persons outside Indian territory, who does not have any tax liability as far as I.T. Act, 1961 is concerned, the amounts paid abroad cannot be considered as sums chargeable under the provisions of this Act. - No TDS - decided in favor of assessee.

Summary

Issues Involved:
1. Levy of tax as short deduction of tax under section 201.
2. Interest under section 201(1A) of the I.T. Act, 1961.
3. Classification of payments under sections 194C and 194J.
4. Tax deduction on payments made abroad.

Issue-wise Detailed Analysis:

1. Levy of Tax as Short Deduction of Tax Under Section 201:
The Assessee was engaged in software development and process outsourcing. A survey under section 133A revealed that the Assessee deducted tax under section 194C for software development charges instead of section 194J. The A.O. concluded that these payments were for technical services, thus liable under section 194J, and raised demands for tax and interest accordingly. The Assessee contended that the payments were for contracts, not technical services, and thus correctly deducted tax under section 194C.

2. Interest Under Section 201(1A) of the I.T. Act, 1961:
The A.O. calculated interest under section 201(1A) due to the shortfall in TDS deduction. The CIT(A) upheld this but directed the A.O. to verify if the deductees paid taxes on the income received from the Assessee, following the Supreme Court decision in Hindustan Coca Cola Beverages P. Ltd. If taxes were paid by the deductees, the demand under section 201(1) was to be deleted, and interest recalculated.

3. Classification of Payments Under Sections 194C and 194J:
The core issue was whether payments for software development should be categorized under section 194C (contract) or section 194J (technical services). The A.O. and CIT(A) classified these payments as technical services under section 194J. However, the Tribunal found that the payments were for developing an information system, not for rendering technical services. The Tribunal concluded that the Assessee's contracts with vendors were for works contracts under section 194C, not technical services under section 194J.

4. Tax Deduction on Payments Made Abroad:
For A.Y. 2007-08, the Assessee made payments abroad for on-site services in the USA. The A.O. argued these payments were subject to TDS under section 194J, citing Explanation (2) to section 195. The Tribunal disagreed, noting that the payments were made to entities with no business connection in India. Thus, these payments were not chargeable under the I.T. Act. The Tribunal emphasized that extraterritorial jurisdiction could not be applied, and the payments made abroad were not subject to TDS under section 195.

Conclusion:
The Tribunal allowed the Assessee's appeals, holding that the payments for software development were correctly categorized under section 194C and not section 194J. Consequently, the demands for tax and interest under sections 201(1) and 201(1A) were unsustainable. The Tribunal also ruled that payments made abroad were not subject to Indian TDS provisions, dismissing the Revenue's appeals. The Tribunal advised the Revenue to apply their mind before preferring appeals, emphasizing the need for careful consideration in such matters.