2020 (3) TMI 225 - AT - Income Tax

TDS liability on payment made to, ICOM, a non-resident company for services rendered outside India - HELD THAT - ICOM is an entity based in USA and it offers services only to its members and these services are subject to only those members who have to get membership by becoming a member in the above said entity. These services are available to its 800 members spread over 60 countries and it offers a full range of integrated marketing and media communication services. Both AO and Ld. CIT(A) are of the opinion that just because of payment was made to ICOM, it means to utilization of services in India. The courts have held that TDS is to be deducted only in those income which are chargeable to tax in India. Both AO and Ld. CIT(A) have not brought on record any information by which the income of ICOM is chargeable to tax in India. Assessee has utilized the same services from international independent agency networks through which any of the members can utilize anywhere in the world. The question is whether such utilization of services is taxable in India. Particularly, when the origin and sources of such information are available outside India and merely utilizing such information in India, whether such utilization can be taxable in India. Therefore, in our considered view, the availing of net based services are outside the ambit of FTS provisions particularly when it cannot chargeable to tax in India and further as per the information submitted before us, the assessee has utilized these information outside India. Therefore, any income /payment for which such payments are not taxable in India, certainly such payments are outside the provision of TDS. See . INDUSIND BANK LTD. 2019 (4) TMI 1677 - BOMBAY HIGH COURT - Decided in favour of assessee. Addition towards entertainment expenses - AR submitted before us that entertainment expenses were paid to Gymkhana Club for which director utilized the same and he submitted that Ld. CIT(A) wrongly observed that it is the payment for Gym which is not to any club for its membership - HELD THAT - We notice that Ld. AR has not brought on any bill or copy of any voucher which clearly indicate whether this payment is actually to the Gymkhana or towards any payment on behalf of Gym as observed by the tax authorities. Since the payment involved is very small, we direct the AO to verify whether this payment is towards Gymkhana club, then the AO is directed to allow the above expenditure as entertainment expenses. Accordingly, ground raised by the assessee is allowed for statistical purposes. Difference between the sales declared in VAT and service tax return and sales declared in financial statement - CIT(A) acknowledged the method adopted by assessee, but however he observed that the assessee must have claimed the expenditure for the reimbursement and the reimbursement income was not declared by the assessee. - HELD THAT - We notice that the method adopted by assessee must have disclosed the turnover less the non-media turnover as their sales and at the same time, assessee must have claimed cost of services less non media expenditure as their expenditure. On record, assessee has submitted only the reconciliation of sales and not submitted any reconciliation of cost of services as per which it has reduced the corresponding cost of services in the expenditure charged to profit and loss account. Therefore, we are inclined to remit this issue back to AO to verify the cost of services rendered by assessee relevant for both media and non media services. If it is found that the assessee has excluded the cost of services relating to non media, in their profit and loss statement, the addition in turnover, may be deleted. It is needless to say that assessee may be given proper opportunity of being heard and at the same time, assessee is directed to file reconciliation of cost of services before AO. Accordingly, grounds raised by the assessee are allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of payment made to ICOM, a non-resident company.
2. Disallowance of entertainment expenses.
3. Addition of unaccounted sales due to discrepancy between VAT/Service Tax returns and financial statements.

Issue-wise Detailed Analysis:

1. Disallowance of Payment Made to ICOM, a Non-Resident Company:
The assessee argued that the payment of ?4,85,231 to ICOM, a non-resident company, was for services rendered outside India and hence, no TDS was required. The AO disallowed the expenditure under section 40(a)(ia) of the Income Tax Act, claiming the services were utilized in India and thus taxable. The CIT(A) upheld the AO's decision, treating the payment as fees for technical services or royalty under sections 9(1)(vi) and 9(1)(vii).

Upon review, the Tribunal noted that ICOM provides services to its members globally, and the income was not chargeable to tax in India. The Tribunal held that the utilization of net-based services from an international agency network does not fall under FTS provisions if the income is not taxable in India. Therefore, the Tribunal allowed the ground raised by the assessee, ruling that the payment to ICOM was not subject to TDS.

2. Disallowance of Entertainment Expenses:
The assessee contested the disallowance of ?5,640 towards entertainment expenses paid to Gymkhana Club, arguing it was for the benefit of the business. The AO and CIT(A) treated the payment as non-allowable, considering it was for gym services and not club membership.

The Tribunal directed the AO to verify whether the payment was indeed towards Gymkhana Club membership. If confirmed, the AO was instructed to allow the expenditure as entertainment expenses. Thus, this ground was allowed for statistical purposes.

3. Addition of Unaccounted Sales:
The AO added ?21.82 lakhs as unaccounted sales due to a discrepancy between sales reported in VAT/Service Tax returns and financial statements. The assessee explained that the difference was due to non-media billing, which is considered turnover for tax purposes but not for income tax as no commission is earned.

The Tribunal found that the assessee had provided a reconciliation statement for sales but not for the corresponding cost of services. The Tribunal remitted the issue back to the AO to verify the reconciliation of cost of services for both media and non-media services. If the cost of non-media services was excluded from the profit and loss statement, the addition should be deleted. The assessee was directed to provide the necessary reconciliation, and the AO was instructed to give the assessee a proper hearing. This ground was also allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, with directions for further verification and hearings on specific grounds. The Tribunal's decision emphasized the need for accurate reconciliation and proper application of tax provisions concerning international transactions and business expenses.