2021 (12) TMI 1354 - AT - Income Tax

Disallowance u/s 40A(2) - payment to related party - Addition made as Ms. Anjali Lall does not possess the required qualification to undertake the job of interior decoration, repair and maintenance and secondly, the payment is unreasonable and excessive - HELD THAT - Expression the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities as used in section 40A(2) of the Act makes it abundantly clear that the opinion of the Assessing Officer cannot be formed in vacuum and without any cogent evidence. It is the Assessing Officer who has to establish on record that the payment made to the related party is unreasonable and excessive having regard to the market value of the goods, services or facilities for which payment is made. In the facts of the present case, admittedly, except stating that the related party is not technically qualified to undertake the work and the payment made is unreasonable and excessive, the Assessing Officer has not brought any material on record to demonstrate that the payment made is excessive and unreasonable having regard to the market value of the services for which such payment was made. Thus, the disallowance made under section 40A(2) without being back by cogent evidence and purely on conjectures and surmises, cannot be sustained. Accordingly, we delete the disallowance made - Decided in favour of assessee. TDS u/s 195 - disallowance u/s 40(a)(i) - failure to withhold tax at source on payment made to various persons/entities outside India towards professional/technical fee - HELD THAT - Payments made to non-resident attorneys cannot be regarded as FTS under section 9(1)(vii) of the Act. Further, a conjoint reading of section 40(a)(i) and 40(a)(ia) brings out a clear distinction between FTS and fees for professional services. Though, section 40(a)(ia) encompasses, both, FTS and fees for professional services, however, section 40(a)(i) is applicable only in case of failure to deduct tax on payments made for FTS. As rightly submitted by learned counsel for the assessee, this could be for the reason that payment of legal/professional fee to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India as per section 5 and section 9 of the Act. It is relevant to observe, in the case of NQA Quality Systems Registrar Ltd. Vs. DCIT 2004 (12) TMI 323 - ITAT DELHI-F the coordinate Bench has held that professional services are a category distinct from technical services. Thus we hold that the payments made to non-resident attorneys being not in the nature of FTS, there was no obligation on the assessee to deduct tax at source. Payments made to foreign attorneys are not chargeable to tax under the provisions of the Act, in terms of section 195 of the Act. Therefore, the assessee was not required to withhold tax on the payments made. Accordingly, we delete the disallowance made under section 40(a)(i) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under section 40A(2) of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(i) for failure to withhold tax under section 195 of the Income Tax Act, 1961.

Comprehensive, Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(2) of the Income Tax Act, 1961:
- Facts: The assessee, a resident individual and advocate, paid Rs. 9,00,000 to his wife, Ms. Anjali Lall, for professional services related to interior decoration, repair, and maintenance of office premises. The Assessing Officer (AO) disallowed this payment under section 40A(2) on the grounds that it was excessive and unreasonable, and that Ms. Anjali Lall did not have the required technical qualifications.
- Assessee's Argument: The assessee argued that the AO cannot disallow payments merely based on surmises and conjectures. The burden is on the AO to prove that the payment was not at arm's length. The assessee provided details of the services rendered by Ms. Anjali Lall and her qualifications, emphasizing that the payment was necessary due to the global expansion of his practice.
- Department's Argument: The Department contended that Ms. Anjali Lall lacked the technical knowledge or qualifications to justify the payment, and it was the assessee's responsibility to prove that the payment was neither excessive nor unreasonable.
- Judgment: The Tribunal noted that the AO did not provide any cogent evidence to demonstrate that the payment was excessive or unreasonable. The disallowance was based on conjectures and surmises. Therefore, the Tribunal deleted the disallowance of Rs. 9,00,000, allowing ground no. 1 in favor of the assessee.

2. Disallowance under Section 40(a)(i) for Failure to Withhold Tax under Section 195:
- Facts: The AO disallowed Rs. 65,94,144 under section 40(a)(i) because the assessee failed to deduct tax at source on payments made to non-residents for professional/technical fees. The AO noted that some payments were made to entities in countries with no DTAA with India, and for others, no Tax Residency Certificates (TRCs) were furnished.
- Assessee's Argument: The assessee argued that payments for reimbursement, official fees, publication, and trade fair services should not attract section 195. The payments were not for Fees for Technical Services (FTS) but for professional services, which are distinct from technical services under the Act. Even if considered FTS, the payments were for services rendered outside India and for earning income from sources outside India, thus not chargeable to tax in India. The assessee also argued that non-furnishing of TRCs should not lead to disallowance when other evidence was provided.
- Department's Argument: The Department maintained that the payments were income deemed to accrue or arise in India, and the assessee failed to furnish TRCs, justifying the disallowance.
- Judgment: The Tribunal found that payments totaling Rs. 17,41,450 for reimbursement, official fees, and trade fair services were not subject to section 195 and deleted the disallowance for these amounts. For the remaining Rs. 48,52,693, the Tribunal held that payments to non-resident attorneys for professional services rendered outside India did not qualify as FTS under section 9(1)(vii) and were not chargeable to tax in India. The Tribunal emphasized that the AO did not examine the taxability under applicable DTAAs and that TRCs' non-furnishing should not lead to disallowance. Thus, the Tribunal deleted the disallowance under section 40(a)(i).

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the disallowances made under sections 40A(2) and 40(a)(i) of the Income Tax Act, 1961. The judgment emphasized the need for the AO to provide cogent evidence when making disallowances and recognized the distinction between professional and technical services under the Act.