2018 (6) TMI 400 - AT - Income Tax

TDS u/s 195 - advertisement expenditure and professional and consultancy fee u/s.40(a)(i) - services rendered outside India to non-residents - PE in India - Held that - Both these payments were made by the UK branch of the assessee which was separate balance sheet, P & L account and filed return of income in UK and thus these for services were rendered by the foreign residents outside India having no PE in India. In agreement with the CIT(A) on this issue that Section 9(1) is applicable. CIT(A) also noted that assessee has not made any application u/s.195(2) therefore, the tax must be deducted u/s.195(1) - on the perusal of Rule 37BB which in respect of furnishing of information for payments in foreign currency made to non-residents not being a company or to a foreign company the provisions of 195(6) are effective w.e.f. 01/07/2009. The form No.15 CA and 15CB were not required to be given in respect of payments to non-resident Indians for the current year. No TDS is required to be deducted on the payment of advertisement expenses and technical and professional charges to foreign national as these recipients were foreign residents having no PE in India and the services were also rendered by them outside India. Set aside the order of CIT(A) by holding that no tax at source is required to be deducted at source. The AO is directed accordingly. Disallowance u/s.14A - Held that - We direct the AO to delete the addition as the case of assessee is squarely covered by the case of Godrej & Boyce Manufacturing Co. Ltd., vs. Dy. Commissioner of Income Tax 2010 (8) TMI 77 - BOMBAY HIGH COURT in which it has been held that recording of satisfaction is mandatory requirement without which the provision Section 14A r.w.Rule 8D cannot be applied. We set aside the order of CIT(A) and we direct the AO to delete the disallowance. - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of disallowance of advertisement expenditure and consultancy fees under Section 40(a) of the Income Tax Act.
2. Confirmation of disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance of Advertisement Expenditure and Consultancy Fees under Section 40(a):

The assessee appealed against the disallowance of ?93,50,396/- for advertisement expenses and ?14,47,396/- for consultancy fees under Section 40(a)(i) of the Income Tax Act, arguing that these payments were made to non-residents for services rendered outside India. During the assessment proceedings, the AO observed that no tax was deducted at source for these expenses, which led to the issuance of a show-cause notice. The assessee contended that the recipients had no permanent establishment in India, and thus, no tax deduction was required.

The AO, however, did not agree with the assessee's contention, citing that the services were utilized in India, making them taxable under the retrospective amendment to Section 9 brought by the Finance Act 2010. Consequently, the AO added the said amounts to the assessee’s income under Section 40(a)(i).

The CIT(A) upheld the AO's decision, reasoning that the advertisements and professional services were accessible in India, thus invoking Section 9(1)(i) and Section 195 of the Act. The CIT(A) emphasized that the appellant should have approached the AO under Section 195(2) if there was any doubt regarding tax deduction.

Upon appeal, the ITAT observed that the payments were made by the UK branch of the assessee, which maintained separate financial statements and filed tax returns in the UK. The services were rendered by non-residents outside India, having no permanent establishment in India. The ITAT concluded that no TDS was required for these payments as per Rule 37BB, which was effective from 01/07/2009. It set aside the CIT(A)’s order, directing the AO to delete the disallowance.

2. Confirmation of Disallowance under Section 14A:

The second issue concerned the disallowance of ?5,90,654/- under Section 14A of the Income Tax Act. The AO noted that the assessee earned exempt dividend income of ?1,30,92,679/- and had suo moto disallowed ?2,58,373/-. However, the AO calculated a higher disallowance of ?8,49,027/- as per Rule 8D, leading to an additional disallowance of ?5,90,654/-.

The CIT(A) upheld the AO's decision, asserting that the assessee likely incurred expenses related to the exempt income. The assessee argued that the AO did not record any satisfaction regarding the correctness of the suo moto disallowance, which is a mandatory requirement under Section 14A.

The ITAT agreed with the assessee, noting that the AO failed to record any satisfaction before invoking Rule 8D, making the disallowance unsustainable. It cited the Supreme Court’s decision in Godrej & Boyce Manufacturing Co. Ltd., which mandates recording satisfaction as a prerequisite for applying Section 14A r.w. Rule 8D. Consequently, the ITAT directed the AO to delete the disallowance.

Conclusion:

The ITAT allowed the appeal, setting aside the CIT(A)’s orders on both issues. It directed the AO to delete the disallowances under Section 40(a) and Section 14A, emphasizing the lack of a permanent establishment in India for the recipients and the mandatory requirement of recording satisfaction, respectively.