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2019 (3) TMI 1834 - AT - Income TaxTDS u/s 194J - disallowance of data processing cost u/s.40(a)(ia) - Non deduction of TDS - whether data processing cost paid to head office is in the nature of royalty as per Clause-3, Explanation 1 to Section 9(1)(vi) of the Income Tax Act, 1961 which is liable for withholding tax u/s.194J? - HELD THAT - Similar issue has been the subject matter of discussions by the Co-ordinate Benches of ITAT in assessee s own case for the A.Y.2012-13 wherein after considering relevant provisions of the Act, and also scope of Article 12(3)(a) of DTAA between India and Netherlands held that data processing cost did not constitute royalty and is merely reimbursement of expenses not liable for withholding tax and therefore, no disallowance could be made u/s.40(a)(i). Disallowance of interest paid to head office and taxability of the same in the hands of the head office - HELD THAT - In assessee s own case for earlier years Tribunal after considering relevant facts in the light of the provisions of Article 11 of DTAA between India and Netherlands hold that interest paid by the branch office to head office is not chargeable to tax in view of the specific provisions of Article 11 of DTAA between India and Netherlands - CIT(A) was right in deleting the addition made by the AO towards disallowance of interest paid to head office. Hence, we are inclined to uphold the findings of the ld. CIT(A) and reject the ground taken by the revenue. Disallowance u/s 14A r.w.r. 8D - HELD THAT - As with view taken by the Co-ordinate Bench in assessee s own case for earlier years, we are of the considered view that there is no error in the findings of the ld. CIT(A) in deleting additions made towards disallowance of expenditure incurred in relation to exempt income u/s. 14A of the Act. Hence, we are inclined to upheld the findings of ld. CIT(A) and reject the ground taken by the revenue.
Issues Involved:
1. Disallowance of data processing cost under Section 40(a)(i) of the Income Tax Act, 1961. 2. Disallowance of interest paid to head office and its taxability in the hands of the head office. 3. Disallowance of expenditure incurred in relation to exempt income under Section 14A of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance of Data Processing Cost: The first issue pertains to the disallowance of data processing cost under Section 40(a)(i) of the Income Tax Act, 1961, for failure to deduct tax at source under Section 194J. The assessee argued that the data processing cost paid to its head office does not constitute "royalty" as per Clause-3, Explanation 1 to Section 9(1)(vi) of the Act, and is merely reimbursement of expenses. This argument was supported by the ITAT Mumbai in the assessee's own case for the A.Y. 2012-13, where it was held that data processing cost did not amount to royalty and was not liable for withholding tax. The Tribunal, after reviewing the relevant provisions and the DTAA between India and Netherlands, upheld the CIT(A)'s decision to delete the addition made by the AO, confirming that the data processing cost is not subject to disallowance under Section 40(a)(i). 2. Disallowance of Interest Paid to Head Office: The second issue involves the disallowance of interest paid to the head office and its taxability in the hands of the head office. The assessee contended that interest paid by the branch office to the head office is not taxable under the Income Tax Act due to the provisions of Article 11 of the DTAA between India and Netherlands. The ITAT Mumbai, in the assessee's case for the A.Y. 2012-13, held that the branch office and head office are separate entities for tax purposes, and interest paid by the branch to the head office is not chargeable to tax. The Tribunal, consistent with its earlier decisions, upheld the CIT(A)'s order, deleting the addition made by the AO for disallowance of interest paid to the head office. 3. Disallowance of Expenditure Incurred in Relation to Exempt Income: The third issue relates to the disallowance of expenditure incurred in relation to exempt income under Section 14A read with Rule 8D. The assessee argued that since no exempt income was claimed, the provisions of Section 14A should not apply. This was supported by the ITAT Mumbai in the assessee's case for the A.Y. 2012-13, where it was held that if no exempt income is earned, no disallowance under Section 14A can be made. The Tribunal found that the CIT(A) correctly deleted the disallowance made by the AO, as no exempt income was claimed by the assessee, and therefore, no disallowance under Section 14A was warranted. Conclusion: The Tribunal dismissed the appeals filed by the revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal's consistent application of its earlier rulings in the assessee's own cases for previous years was a key factor in its judgments. The appeals for both A.Y. 2013-14 and A.Y. 2014-15 were dismissed, with the Tribunal confirming that the data processing cost is not royalty, interest paid to the head office is not taxable, and no disallowance under Section 14A is applicable in the absence of exempt income.
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