2015 (7) TMI 737 - AT - Income Tax

Dis allowances u/s.40(a)(i) and u/s.40(a)(ia) - assessee had incurred operation cost towards connectivity services - Held that - Taking a consistent view, we are inclined to hold that the assessee is liable to deduct TDS for payment made to foreign service provider. However, if there is short deduction of TDS then the payment cannot be disallowed as short deduction is different from no deduction of TDS. Accordingly, the Assessing Officer is directed to segregate the short deduction and no deduction of TDS on the payments made to foreign provider and he has disallowed only payment where there is no deduction of TDS.See Frontier Offshore Exploration (India) Ltd. vs. DCIT 2007 (2) TMI 265 - ITAT MADRAS-A . Decided partly in favour of assessee for statistical purposes.

Issues Involved:
1. Disallowance under Section 40(a)(i) and 40(a)(ia) of the Income Tax Act, 1961.
2. Disallowance of management fees under Section 40(a)(i) of the Act.
3. Levy of interest under Sections 234B and 234D of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) and 40(a)(ia) of the Income Tax Act, 1961:

The assessee, engaged in providing audio, video, and web conferencing services, incurred operational costs towards connectivity services. The Assessing Officer disallowed sums under Sections 40(a)(i) and 40(a)(ia), which was confirmed by the Commissioner of Income Tax (Appeals). The assessee argued that payments to foreign service providers for international toll-free services did not constitute technical services under Section 9 and thus did not require tax withholding. The Department contended that tax should be withheld unless an application under Section 195(2) or 195(3) was made. The Tribunal referenced the case of Frontier Offshore Exploration (India) Ltd. vs. DCIT, emphasizing that the provisions of Section 195 necessitate tax deduction on sums chargeable under the Act. It was held that the assessee must deduct TDS on payments to foreign service providers, but short deduction should not lead to disallowance. The Assessing Officer was directed to segregate payments with no TDS deduction from those with short TDS deduction, allowing the appeal partly for statistical purposes.

2. Disallowance of management fees under Section 40(a)(i) of the Act:

For the assessment year 2009-2010, the assessee paid management fees to group companies, claiming these were not taxable under the relevant tax treaties as they did not meet the 'make available' test. The Assessing Officer disallowed the fees, arguing that the payments fell within the definition of 'fees for technical services' under Section 9(1)(vii) and thus required TDS deduction under Section 195. The Dispute Resolution Panel (DRP) noted that managerial services inherently make available knowledge and skills to the recipient, thus falling under 'fees for technical services'. The DRP directed the Assessing Officer to re-examine the issue in light of the relevant Double Taxation Avoidance Agreement (DTAA). The Tribunal confirmed the DRP's direction, requiring the Assessing Officer to properly examine the issue with reference to the DTAA.

3. Levy of interest under Sections 234B and 234D of the Act:

The assessee raised an issue regarding the levy of interest under Sections 234B and 234D. The Tribunal noted that interest under these sections is consequential and mandatory, directing the Assessing Officer to consider it while passing the consequential order.

Conclusion:

The appeal for the assessment year 2007-2008 (ITA No.484/Mds/2014) was partly allowed for statistical purposes, directing the Assessing Officer to segregate payments with no TDS deduction from those with short TDS deduction. The appeal for the assessment year 2009-2010 (ITA No.1057/Mds/2014) was dismissed, confirming the DRP's direction to re-examine the issue of management fees with reference to the DTAA. The levy of interest under Sections 234B and 234D was to be considered by the Assessing Officer in the consequential order.

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