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2022 (3) TMI 1022 - AT - Income TaxDisallowance of Professional fees paid to non-residents - Non deduction of TDS u/s 195 - Amendment with retrospective effect - whether the payment made to the non-residents was a professional fee or a commission? - HELD THAT - We find that an identical issue has been considered by the Tribunal in the case of M/s. TVS Electronics Ltd. 2021 (10) TMI 210 - ITAT CHENNAI for wherein, on identical circumstances held that liability towards TDS cannot be fastened on the assessee on the basis of subsequent amendment to law with retrospective effect, because which was impossible on the part of the assessee to do the impossible things and deduct TDS on payment made to non-residents, because, the assessee cannot foresee the amendment and deduct TDS on said payment and consequently, payment made to non-residents, cannot be disallowed u/s. 40(a)(i) of the Act, for failure to deduct TDS u/s. 195. Thus the assessee cannot be expected to deduct TDS on payment made to non-residents on the basis of subsequent amendment to the law with retrospective effect from earlier date, because the assessee cannot foresee the amendment and deduct TDS and hence, we are of the considered view that the AO was erred in disallowing the payment made to non-residents u/s. 40(a)(i) of the Act, for failure to deduct TDS u/s. 195 of the Act. The Ld. CIT(A) without considering the relevant facts, simply sustained the additions made by the AO. Hence, we are reversed the findings of the Ld. CIT(A) and direct the AO to delete the additions made towards disallowance of payment made to non-residents u/s. 40(a)(i). Disallowance of compensation paid to employees' under 'Welfare Oriented VRS Scheme' - HELD THAT - In this case, the assessee has made payment directly to employees under 'Welfare Oriented VRS Scheme', but not to a Trust or Fund and thus, we are of the considered view that payment made by the assessee cannot be disallowed u/s. 40A(9) - VRS Scheme provided by the assessee to five employees is on welfare oriented basis by considering their health, which is not covered under Rule 2BA and thus, employee's cannot claim exemption u/s. 10(10C) - Once payment made to employees, is not exempted u/s. 10(10C) of the Act, then it partakes the nature of expenses incurred for the purpose of business and thus, assessee can claim deduction u/s. 37(1) of the Act. However, the facts with regard to the claim of deduction u/s. 10(10C) of the Act by the employees of the assessee, were not forthcoming from the records. Therefore, for the limited purpose to ascertain the facts with regard to claim of benefit u/s. 10(10C) by the employees to allow the deduction claimed by the assessee needs to be re-examined by the AO in light of claim of the assessee that employees did not avail the benefit of exemption u/s. 10(10C) of the Act. Disallowance of expenditure relatable to exempt income u/s. 14A - HELD THAT - We find that the assessee has not disputed the applicability of Rule 8D of Income Tax Rules, 1962, for computing disallowance of expenses u/s. 14A of the Act. We find that the AO has determined the disallowance u/s. 14A r.w.r. 8D of Income Tax Rules, 1962 @ 0.5% on average value of investments. In our considered view, disallowance determined by the AO is in accordance with law and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the assessee.
Issues Involved:
1. Disallowance of Professional Fees Paid to Non-residents for Non-deduction of Tax at Source. 2. Disallowance of Compensation Paid Under Welfare Oriented VRS Scheme. 3. Disallowance of Expenditure Relatable to Exempt Income under Section 14A. Detailed Analysis: 1. Disallowance of Professional Fees Paid to Non-residents for Non-deduction of Tax at Source: The assessee company made payments to non-residents for professional services without deducting TDS as required under Section 195 of the Income Tax Act. The Assessing Officer (AO) disallowed these payments under Section 40(a)(i) due to non-deduction of TDS. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, leading to the assessee's appeal. The Tribunal referenced the case of M/s. TVS Electronics Ltd. v. ACIT, where it was held that liability for TDS cannot be imposed retrospectively. The Tribunal noted that the law at the time of payment, as interpreted by the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. v. DIT, did not require TDS for services rendered outside India. Therefore, the Tribunal concluded that the assessee could not be expected to foresee future amendments and deduct TDS accordingly. Consequently, the Tribunal directed the AO to delete the disallowance of payments made to non-residents under Section 40(a)(i). 2. Disallowance of Compensation Paid Under Welfare Oriented VRS Scheme: The AO disallowed compensation paid to employees under a Welfare Oriented Voluntary Retirement Scheme (VRS) on the grounds that the payments were not eligible for exemption under Section 10(10C) and were made without following Rule 2BA. The CIT(A) sustained this disallowance. The Tribunal observed that the payments were made directly to employees, not to a fund or trust, and thus Section 40A(9) was not applicable. The Tribunal also noted that the VRS scheme was welfare-oriented, focusing on employees' health, and did not qualify under Rule 2BA. Since the payments were not exempt under Section 10(10C), they were considered business expenses deductible under Section 37(1). However, the Tribunal remanded the issue to the AO to verify if the employees claimed any exemption under Section 10(10C). If not, the AO was directed to allow the deduction under Section 37(1). 3. Disallowance of Expenditure Relatable to Exempt Income under Section 14A: The AO made a disallowance under Section 14A read with Rule 8D, which was upheld by the CIT(A). The assessee contested this, arguing that the opening and closing value of investments was nil, making Rule 8D inapplicable. The Tribunal found that the assessee did not dispute the applicability of Rule 8D for computing the disallowance. The AO had determined the disallowance at 0.5% of the average value of investments, which the Tribunal deemed in accordance with the law. Therefore, the Tribunal upheld the CIT(A)'s decision and rejected the assessee's ground on this issue. Conclusion: - The appeal for AY 2008-09 was allowed for statistical purposes, directing the AO to delete the disallowance of payments to non-residents and re-examine the VRS compensation issue. - The appeal for AY 2009-10 was allowed, directing the AO to delete the disallowance of payments to non-residents. - The appeal for AY 2010-11 was partly allowed, upholding the disallowance under Section 14A and directing the AO to delete the disallowance of payments to non-residents. Order Pronounced on March 09, 2022, in Chennai.
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