2021 (4) TMI 454 - AT - Income Tax

TDS u/s 194C - surrogacy payments without deducting TDS - assessee company runs infertility clinic(s) - Addition u/s 40(a)(ia) - whether payments made to surrogate mothers attract chapter-XVII of the Act requiring TDS deduction? - HELD THAT - As per the assessee s sample surrogacy agreement in this regard the introductory portion thereof duly contains the clause that the same is by and among the genetic parents, surrogate mothers and the assessee in other words. Not only this, material breach clause 17.2 therein also suggests that it is the infertility centre/physician only who shall reimburse intended parents for all sums expended plus interest at the maximum allowable rate . All this sufficiently negates the assessee s stand that it is neither a party to the surrogacy agreement nor any right or liability flows thereof on its role as an infertility clinic. Revenue s able assistance and from a perusal of the case file at pg.35 that the NGO herein has proposed the assessee to arrange for surrogate mothers in lieu of the decided remuneration of ₹ 4 lakhs for single and ₹ 4.5 lakhs in case of twins pregnancies; respectively. This NGO further claimed itself as working for rehabilitation for poor destitute woman after they were neglected by their families facing poverty and other adverse circumstances. The assessee is fair enough in not disputing the fact that it had duly agreed to the said proposal only alongwith its undertaking to pay for the material breach of contract to the genetic parents on account of the surrogate mothers default. We make it clear that this payee had also failed to throw any light on payments made to surrogate mothers whose services had been utilized by the assessee/infertility centre for the purpose of surrogate pregnancy on behalf of the genetic parents. We therefore exercise our inherent jurisdiction vested u/s.254 of the Act as well to observe these parties have done nothing else but exploited the poor and destitute surrogate mothers without even paying the adequate compensation. Rather the payee NGO and its office bearer(s) have prima facie swindled the entire money. This conclusion flows from the entire surrogacy procedure adopted by the assessee with the so called NGO and its authorised person as it is evident from the perusal of the case file in the light of human probabilities after removing all blinkers as held in Sumati Dayal Vs. CIT 1995 (3) TMI 3 - SUPREME COURT and CIT Vs. Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT - We thus conclude that so far as the application of 194C r.w.s. 40(a)(ia) is concerned, the assessee s all other arguments regarding taxability of the surrogate mothers also deserve to be rejected since its payee himself had admitted that it had not maintained any accounts of the payments made to the surrogate mothers. We thus uphold the learned lower authorities action invoking Section 194C r.w.s. 40(a)(ia) disallowance Whether all these payments attract Section 194J so as to hold that the payee concerned had rendered any technical service in arranging poor and destitute women as surrogate mothers? - We do not find any technical service element involved in all this surrogacy process involving the recipient or the surrogate mothers attracting the clinching statutory expression(s) of managerial, professional and technical services u/s.194J r.w.s.9(i)(vii) Explanation (supra). We thus reverse both the lower authorities action invoking Section 194J in facts of the instant case(s). It is therefore concluded that our instant latter adjudication has no bearing on final outcome of the impugned 40(a)(ia) disallowance as the same already stands confirmed u/s.194C of the Act. TDS u/s 195 - section 40(a)(i) disallowance in case of the overseas payees - HELD THAT - It is not in dispute that the South Africa based payee Ms.Celeste Coetzee has not performed any services in India herself even if egg donation activity taken as a technical services. What all she has done is to arrange overseas egg donor s not on salary or contractual assignment but on free lancer basis only. There is further no indication before us that assessee s egg donor payments per head exceed the threshold limit u/s.194J(1) 1st proviso as well. All this makes it sufficiently clear these payments are not taxable in India so as to be held liable for TDS deduction going by M/s.GE India Technology Centre P. Ltd. 2010 (9) TMI 7 - SUPREME COURT ; CIT Vs. Faizan Shoes Pvt. Ltd. 2014 (8) TMI 170 - MADRAS HIGH COURT DCIT Vs. Welspun Corporation Ltd. 2017 (1) TMI 1084 - ITAT AHMEDABAD . We thus hold that the impugned 40(a)(i) disallowance in case of the overseas payees deserves to be deleted for this reason alone

Summary

Issues Involved:
1. Validity of re-opening of assessments for AYs 2010-11 to 2012-13.
2. Disallowance under Section 40(a)(ia) read with Section 194C and 194J for surrogacy payments.
3. Disallowance under Section 40(a)(i) read with Section 195 for payments to foreign egg donors.

Detailed Analysis:

1. Validity of Re-opening of Assessments:
The assessee's first substantive ground challenges the validity of re-opening assessments for AYs 2010-11 to 2012-13. This issue was not pressed during the hearing and thus stands rejected as not pressed.

2. Disallowance under Section 40(a)(ia) read with Section 194C and 194J for Surrogacy Payments:
The assessee's main grievance was the disallowance of surrogacy payments under Section 40(a)(ia) read with Section 194C and 194J. The lower authorities had invoked these sections, leading to disallowance of payments made to surrogate mothers and egg donors.

The Tribunal first addressed the Section 40(a)(ia) read with Section 194C and 194J issue. The CIT(A) had affirmed the Assessing Officer’s action, disallowing payments made to surrogate mothers due to non-deduction of TDS. The Assessing Officer had treated these payments as fee for technical services and contractual payments, requiring mandatory TDS deduction.

The assessee contended that it was merely a conduit for payments made by genetic parents to surrogate mothers and egg donors. However, the Tribunal noted that the assessee was indeed a party to the surrogacy agreement and had responsibilities under the agreement, including reimbursement obligations for material breaches. The Tribunal found that the payments to surrogate mothers were indeed in the nature of fees for technical services, as they involved the provision of services of surrogate mothers, fitting within the definition of "fees for technical services" under Section 194J.

The Tribunal upheld the lower authorities' action under Section 194C, stating that the payments made for surrogacy services attracted the provisions of Section 194C. The Tribunal rejected the assessee's arguments regarding the taxability of surrogate mothers, noting that the payee had not maintained proper accounts of payments made to surrogate mothers.

3. Disallowance under Section 40(a)(i) read with Section 195 for Payments to Foreign Egg Donors:
For AYs 2011-12 to 2013-14, the Tribunal addressed the disallowance under Section 40(a)(i) read with Section 195 for payments made to foreign egg donors. The Tribunal noted that the South Africa-based payee had not performed any services in India and that the payments did not exceed the threshold limit under Section 194J(1). Therefore, the payments were not taxable in India, and the disallowance under Section 40(a)(i) was deleted.

Conclusion:
The Tribunal dismissed the first appeal (ITA No.866/Hyd/2016) concerning the validity of re-opening assessments and upheld the disallowance under Section 40(a)(ia) read with Section 194C for surrogacy payments. However, it reversed the disallowance under Section 194J. The Tribunal also deleted the disallowance under Section 40(a)(i) for payments to foreign egg donors in the latter three appeals (ITA Nos.867/Hyd/2016, 868/Hyd/2016, and 1673/Hyd/2017), which were partly allowed. The Tribunal directed the CIT-DR to forward a copy of the order to the Ministry of Woman and Child Welfare to address the exploitation of surrogate mothers.