2017 (4) TMI 49 - AT - Income Tax

TDS u/s 195 - reimbursement of payroll costs and reimbursement of related professional and legal fees to Burt Hill Inc USA - Held that - Assessee did not have any tax withholding obligations so far as these reimbursements are concerned. As the assessee did not have any tax withholding obligations, the very foundation of impugned disallowance under section 40(a)(i), which get triggered by the lapses in discharging such obligations, ceases to hold good in law. We, therefore, uphold the grievance of the assessee, and direct the Assessing Officer to delete the impugned disallowance. Disallowance of medical insurance premium paid for the employees placed at the disposal of the assessee under secondment agreement with Burt Hill Inc USA - Held that - The seconded employees, in respect of which the impugned insurance premium was paid, were not only de facto employees of the assessee at the relevant point of time, the assessee had the obligation, under secondment agreement, to bear these costs. The expenses so incurred are in the nature of employee benefits, though paid under secondment agreement, in respect of persons working for the assessee. It was in the furtherance of legitimate business interests of the assessee that these payments were made, and, therefore, the deduction was indeed admissible under section 37(1) of the Act. We uphold the grievance of the assessee.

Summary

Issues Involved:
1. Disallowance under section 40(a)(i) for reimbursement of payroll costs and legal fees.
2. Disallowance of medical insurance premium paid for seconded employees.
3. Disallowance of house rent paid to the Managing Director.
4. Eligibility for deduction under section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under section 40(a)(i) for reimbursement of payroll costs and legal fees:
The assessee challenged the correctness of the disallowance of ?4,54,28,424 for payroll costs and ?16,86,463 for legal and professional fees reimbursed to Burt Hill Inc USA. The CIT(A) upheld the disallowance, treating the payments as fees for technical services chargeable to tax in India under section 9(1)(vii) of the Act. The assessee contended that these reimbursements do not amount to fees for included services under the Double Taxation Avoidance Treaty between India and the USA and thus are not chargeable to tax in India. The Tribunal found that the payments made to Burt Hill Inc USA consisted of income chargeable under the head 'Income from Salaries,' and hence, there were no tax withholding obligations under section 195. The Tribunal directed the Assessing Officer to delete the impugned disallowance, as the foundation of the disallowance under section 40(a)(i) ceased to hold good in law.

2. Disallowance of medical insurance premium paid for seconded employees:
The assessee contested the disallowance of ?12,77,927 paid as medical insurance premium for employees seconded from Burt Hill Inc USA. The Assessing Officer disallowed the expenses, considering them personal expenses and not related to the assessee's business. The Tribunal, however, noted that the seconded employees were de facto employees of the assessee, and the expenses incurred were in furtherance of the business interests of the assessee. The Tribunal directed the Assessing Officer to grant the deduction of the impugned amount under section 37(1) of the Act.

3. Disallowance of house rent paid to the Managing Director:
The assessee did not press the disallowance of ?1,50,000 incurred on guest house expenses for the smallness of the amount. Consequently, the Tribunal dismissed this ground as not pressed.

4. Eligibility for deduction under section 10A of the Income Tax Act:
The assessee claimed eligibility for deduction under section 10A, contending that it was a unit registered with the Software Technology Park of India (STPI) and engaged in providing Information Technology Enabled Services (ITES). The CIT(A) had confirmed the action of the Assessing Officer in ignoring the assessee's claim for deduction under section 10A. However, since the assessee succeeded in its substantive grounds of appeal, this issue was rendered academic and not pressed.

Conclusion:
The appeal was partly allowed. The Tribunal directed the deletion of disallowances related to payroll costs and legal fees, as well as the medical insurance premium. The disallowance of house rent was not pressed, and the issue of deduction under section 10A was rendered academic.