2016 (8) TMI 57 - AT - Income Tax

TDS u/s 195 - disallowance u/s. 40(a)(ia) - Held that - We find that the income and expenses recorded in the books of Subex Ltd. in the intervening period between 1.9.2007 and 31.3.2008 were recorded in the assessee s books by way of journal entry. We have perused the relevant ledger account extracts of the expenses of ₹ 624,983,348 by virtue of such journal entry. We are of the opinion that the impugned payment of ₹ 624,983,348 to STI is merely a journal entry and hence the need for tax deduction at source u/s. 195 of the Act does not arise and the lower authorities have erred in disallowing the impugned amount u/s. 40(a)(ia) of the Act.

Summary

Issues involved:
1. Disallowance under section 40(a)(i) of the Income-tax Act, 1961
2. Interest under section 234B of the Act
3. Interest under section 234D of the Act

Detailed Analysis:
1. Disallowance under section 40(a)(i) of the Income-tax Act, 1961:
The issue revolved around the disallowance of sub-contracting charges of INR 62,49,85,438 payable by the assessee to its Associated Enterprise (AE), Subex Technologies Inc. (STI), under the provisions of section 40(a)(i) for non-deduction of tax at source. The Assessing Officer disallowed the amount as it was paid for technical services without tax deduction at source. The CIT(Appeals) upheld the disallowance, stating that the sum was paid for software development by STI, falling under "fees for included services" under the Indo-US Double Tax Avoidance Agreement. The CIT(A) rejected the argument that the payment was reimbursement and upheld the disallowance under section 40(a)(ia) of the Act.

2. Interest under section 234B of the Act:
The Assessing Officer levied interest under section 234B of the Act amounting to INR 95,259,645. The CIT(A) upheld this levy, which was challenged by the assessee. However, the Tribunal did not find the need for tax deduction at source under section 195 of the Act for the impugned payment to STI, as it was considered a journal entry. Consequently, the disallowance under section 40(a)(ia) was deemed unwarranted, leading to the allowance of the appeal.

3. Interest under section 234D of the Act:
The Assessing Officer also levied interest under section 234D of the Act amounting to INR 93,865. The CIT(A) upheld this levy, which was challenged by the assessee. However, the Tribunal's decision to allow the appeal on the disallowance issue also impacted the interest levied under section 234D, as the impugned payment was considered a journal entry, eliminating the need for tax deduction at source.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the payment to STI was a journal entry and not subject to tax deduction at source under section 195 of the Act. The disallowance under section 40(a)(ia) was set aside, leading to the dismissal of the interest levied under sections 234B and 234D of the Act.