2020 (12) TMI 81 - AT - Income Tax

TDS u/s 195 - addition u/s 40(a)(i) - non-deduction of taxes from payment made to Facebook Ireland Limited - HELD THAT - The assessee before us is an advertisement agency, and, as such, advertisements are placed by the assessee on behalf of its clients. There is thus ordinarily no occasion to claim the costs of advertisements as deduction in computation of its business income, and, so far as the advertisement agencies are concerned, their revenues consist of only the commission received in respect of the advertisements so placed. Section 40(a)(i) acts as a restriction on the deductibility of expenses under section 30 to 38, and, as a corollary to this legal position, when the related expenditure is not claimed as deduction under section 30 to 38, this disallowance cannot be pressed into service at all. To that extent, we uphold the plea of the assessee in principle- subject to factual verification about no such claim having been made in the computation of business income i.e. in the profit and loss account filed by the assessee alongwith computation of business income. In case the assessee has indeed accounted for the agency commission on these advertisement revenues, rather than taking entire billing revenues as billing revenues of the assessee and claiming deduction for the advertisement paid to Facebook Ireland Limited in its profit and loss account, the assessee will succeed in its claim on this point. For this limited purpose, the matter is remitted to the file of the Assessing Officer. Ordered, accordingly. As we remit the matter back to the file of the Assessing Officer in the terms indicated above, we make it clear, as learned senior counsel has also fairly accepted, that is without any prejudice to the assessee being visited with other consequences for non-deduction of tax at source from payments made to non-residents. Appeal is allowed for statistical purposes.

Summary

Issues:
1. Correctness of order by Commissioner (Appeals) under section 143(3) of the Income Tax Act, 1961 for assessment year 2015-16.
2. Disallowance under section 40(a)(i) for non-deduction of taxes from payment made to Facebook Ireland Limited.

Analysis:
Issue 1: Correctness of Commissioner (Appeals) Order
The appeal questions the order passed by the Commissioner (Appeals) regarding the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2015-16. The appellant, an internet advertising agency, made payments to Facebook Ireland Limited for advertisements placed on behalf of its clients. The Assessing Officer disallowed these payments under section 40(a)(i) for non-deduction of taxes at source. The appellant appealed to the Commissioner (Appeals) and further to the ITAT Mumbai.

Issue 2: Disallowance under Section 40(a)(i)
The ITAT Mumbai analyzed the provision of section 40(a)(i) which restricts the deductibility of expenses under sections 30 to 38. The disallowance under this section can only be invoked when the related expenditure is claimed as a deduction. The appellant, being an advertisement agency, did not claim a deduction for the payments made to Facebook Ireland Limited. The agency commission of 15% of the net billing amount was accounted for in the books of accounts, indicating no claim for deduction of the payment to Facebook Ireland Limited. The ITAT Mumbai upheld the appellant's plea, subject to factual verification, and remitted the matter to the Assessing Officer for further examination.

The ITAT Mumbai clarified that the remittance to the Assessing Officer does not prejudice the appellant from facing consequences for non-deduction of tax at source from payments made to non-residents. The revenue authorities may recover the tax along with interest and penalty as per the provisions of sections 201(1), 201(1A), and 271C. The ITAT Mumbai refrained from addressing the broader issue of tax deduction from payments to Facebook Ireland Limited and left it open for determination in an appropriate case.

In conclusion, the ITAT Mumbai allowed the appeal for statistical purposes based on the directions provided, emphasizing the need for factual verification and potential consequences for non-deduction of tax at source.