2019 (8) TMI 641 - AT - Income Tax

Disallowance u/s.40(a)(i) - India USA DTAA - based on proceedings u/s.201(1)/(1A) for default in non-deduction of tax at source - HELD THAT - It is a matter of record that the assessee preferred an appeal against the order passed by the ld. CIT(A) in relation to section 201(1)/(1A) before the Tribunal, which has since been decided by Tribunal 2019 (3) TMI 458 - ITAT PUNE in favour of assessee. Payments made for leased line charges - Tribunal (supra) held that assessee did not default in non-deduction of tax at source out of the payments made for leased line charges and further the said leased line charges were in the nature of reimbursement of expenses. Purchase of software license is concerned, the Tribunal (supra) has discussed by holding that it was a case of purchase of copyrighted article which could not be considered as Royalty. Payment of I.T. Support service charges , the Tribunal (supra) held that the payment of I.T. Support charges, i.e. Internet charges, use of e-mail charges and backup support services etc. could not be considered as Royalty as no technology was made available to the assessee and it was only a service provided to the assessee by its USA Associated Enterprise. Enhancement made by the ld. CIT(A) on Reimbursement of salary paid to expatriates - Tribunal (supra) came to the conclusion that such an amount was not in the nature of fees for technical services as the assessee had deducted tax at source from such salary payments u/s.192. Enhancement on Payment made on account of web based training , the Tribunal (supra) discussed that no technical knowledge was imparted by the service provider and hence, there was no liability upon the assessee to deduct tax at source on the aforesaid payments. Crux of the matter is that all the items of disallowance u/s.40(a)(i) in the instant proceedings, including the enhancement made by the ld. CIT(A) on two scores, have emanated from the order passed by the authorities u/s.201(1)/201(1A) . Since the Tribunal(supra) in its aforenoted order has held that the assessee is not liable for deduction of tax at source, the sequitur is that there cannot be any disallowance u/s.40(a)(i) as the same can be made only when a person responsible for paying any sum including royalty and fees for technical services etc., outside India or in India to a non-resident, not being a company or a foreign company, fails to deduct tax at source, on which tax is deductible. As the disallowance u/s.40(a)(i) is a corollary of liability of the assessee to deduct tax at source, no disallowance under this section can stand once the assessee has been held to be not responsible for deduction of tax at source on such amounts. In view of the foregoing discussion, we are satisfied that the disallowance made by the AO and as further enhanced by the ld. CIT(A), has no legal legs to stand on. The same is, therefore, deleted.

Summary

Issues:
Assessment of disallowance under section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source on payments made to Associated Enterprise (AE).

Analysis:
The appeal was against the order of the Commissioner of Income-tax (Appeals) regarding the assessment year 2007-08. The assessee declared a loss of ?76,890, and the assessment was completed under section 143(3) r.w.s. 144C. The issue arose when payments totaling ?5,19,28,969 were made to an Associated Enterprise (AE) without deduction of tax at source. The Assessing Officer (AO) initiated reassessment proceedings under section 148, resulting in an addition of ?6,10,92,905 under section 40(a)(i) of the Act. The Commissioner upheld the disallowance and further enhanced it by including two more payments totaling ?5,22,59,060. The assessee challenged this order.

The Tribunal analyzed the case and found that the reassessment proceedings were based on orders passed under section 201(1)/(1A) of the Act for the same year. The Tribunal had previously decided on the liability of the assessee for tax deduction at source in a related appeal. The Tribunal concluded that the assessee did not default in non-deduction of tax at source for leased line charges, software license purchase, and I.T. support service charges. The Tribunal held that the leased line charges were reimbursement of expenses, software license purchase was not royalty, and I.T. support service charges did not constitute royalty as no technology was transferred.

Regarding the enhancements made by the Commissioner, the Tribunal found that reimbursement of expatriate salary and payment for web-based training did not qualify as fees for technical services. The Tribunal concluded that tax deduction at source was not required for these payments. As the liability for tax deduction at source was negated by the Tribunal's earlier decision, the disallowance under section 40(a)(i) had no legal basis and was deleted. The appeal was partly allowed, and the ground challenging the initiation of reassessment proceedings was dismissed.