2016 (6) TMI 94 - AT - Income Tax

Disallowance u/s.40(a)(ia) - payment made to Central Power Research Institute of Bangalore, Ministry of Power, Government of India - main contention of the ld.A.R is that nothing is payable at the end of the close of the Financial year, as such the issue is squarely covered by the order of the Special Bench of the Tribunal in the case of Merilyn Shipping and Transports v. Addl. CIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM - Held that - There is a force in the argument of the ld.A.R and the Special Bench cited supra considered this issue and decided the issue in favour of the assessee. As decided in Shri N.Palanivelu Vs. ITO reported in 2015 (10) TMI 1415 - ITAT CHENNAI if the impugned amount is not outstanding at the end of the close of the assessment year in respect of the expenses either as outstanding expenses or as sundry creditors, this amount cannot be disallowed.In view of the order of the Tribunal, we are inclined to remit this issue to the file of the ld. Assessing Officer with similar direction. These grounds raised by the assessee u/s.40(a)(ia) of the Act is partly allowed for statistical purposes TDS u/s 195 - Disallowance u/s.40(a)(i) on payment made to M/s.Korea Electro Technology Research Institute - withholding tax liability - Held that - The services availed by the assessee is nothing but technical services and the fees paid for technical services only and the assessee is liable for deduction of TDS u/s.195 of the Act. As decided in the case of M/s.Havells (India) Ltd., 2012 (5) TMI 449 - DELHI HIGH COURT wherein held that the fees paid by the assessee to the US Company on account of testing and certification services is taxable in the hands of the US Company in India and assessee was liable to deduct tax at source while making payment thereof, since the export activities have been fulfilled in India, source of income was located in India and not outside India, and the mere fact that export proceeds emanated from persons situated outside India did not constitute them as source of income. - Decided against assessee

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act on payment made to Central Power Research Institute.
2. Disallowance under Section 40(a)(i) of the Income Tax Act on payment made to Korea Electro Technology Research Institute.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The first issue pertains to the disallowance under Section 40(a)(ia) of the Income Tax Act on the payment made to the Central Power Research Institute of Bangalore. The main contention of the appellant's representative (A.R) was that nothing was payable at the end of the financial year, and thus, the issue is covered by the Special Bench decision in Merilyn Shipping and Transports v. Addl. CIT [2012] 16 ITR (Trib) 1 (Visakhapatnam) [SB]. The Tribunal acknowledged the argument and noted that the Special Bench had decided the issue in favor of the assessee. Additionally, the Co-ordinate Bench in Shri N. Palanivelu Vs. ITO [2015] 40 ITR (Trib) 325 [Chennai] held that Section 40(a)(ia) is not applicable when there is no outstanding balance at the end of the financial year. However, the assessee did not provide records of outstanding expenses or a schedule of sundry creditors. Therefore, the Tribunal remitted the issue back to the Assessing Officer (AO) to verify the claim, directing that if the impugned amount is not outstanding at the end of the financial year, the amount cannot be disallowed. The ground raised by the assessee under Section 40(a)(ia) was partly allowed for statistical purposes.

2. Disallowance under Section 40(a)(i) of the Income Tax Act:
The second issue involves the disallowance under Section 40(a)(i) on payment made to Korea Electro Technology Research Institute. The appellant's representative argued that the certifying work was done by machines without human intervention, and thus, it should not be considered as "Technical Services" under Section 9(1)(vii) of the Income Tax Act. The representative cited judgments from Siemens Limited Vs. CIT(A) and ITO Vs. Right Florists Pvt. Ltd., and also referred to CBDT’s Instruction No.2/2014, suggesting that the AO should determine the income component involved for withholding tax. The representative requested the issue to be remitted back to the AO for fresh consideration in light of the Double Taxation Avoidance Agreement (DTAA).

On the other hand, the Department's representative (D.R) contended that the services availed were technical services, and the assessee was liable for TDS deduction under Section 195. The D.R relied on the Delhi High Court judgment in M/s. Havells (India) Ltd., which held that fees paid for testing and certification services are taxable in India, and the assessee was liable to deduct tax at source.

The Tribunal found the issue covered by the Delhi High Court judgment in M/s. Havells (India) Ltd., which elaborated that the source of income was located in India due to the fulfillment of export activities in India. Consequently, the Tribunal rejected the appellant's request to remit the issue back to the AO, as the CIT(A) had correctly followed the Delhi High Court's judgment. Thus, the ground raised by the assessee was rejected.

Conclusion:
The appeal was partly allowed for statistical purposes regarding the first issue and rejected regarding the second issue. The Tribunal directed the AO to reassess the first issue based on the provided guidelines and upheld the CIT(A)'s decision on the second issue. The order was pronounced in the open court on 06th May, 2016, at Chennai.

← Previous Next →