2022 (10) TMI 712 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - No exempt income earned - HELD THAT - On perusal of the statement of computation of income it is noticed that for the AYs 2013-14 2014-15 the assessee does not have any exempt income and therefore applying the ratio laid down in the case of PCIT v. Era Infrastructure India Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT we delete the addition made by the AO u/s. 14A for both the assessment years. TDS u/s 195 - Onsite project expenses without TDS disallowed u/s. 40(a)(i) - Scope of made available clause - HELD THAT - TDS provisions are applicable to the payment made by the assessee to the vendors is that the manpower employed are doing highly technical job whereby the technical knowledge is made available to the assessee. The payments made by the assessee to Datamatics Solutions Inc., USA need to be analysed from the applicability of article 12 of the Double Taxation Avoidance Agreement with US, which states that the provisions of fees for technical service would be attracted if services rendered make available technical knowledge, experience, skill, know-how, or processes or consists of the development and transfer of a technical plan or technical design. With regard to payments made by the assessee to Link List Ltd., UAE., we notice that as per the DTAA between India and UAE, there is no specific clause with regard to the taxability of fees for technical services, and therefore in our considered view the nature of income would take the character of Business Income which can be taxed only when there is a permanent establishment (PE) for the recipient of the payment. Considering the nature of service rendered by the vendors to the assessee, there is no use of technology in the services provided. The vendor is not employing any technology but is providing manpower service to the assessee in order to enable the assessee to meet the project commitments given to the customers. Though the deployed employees may possess the technical knowledge to carry out the services to the customers, no technology is made available to the assessee. Following the ratio laid down in the case of CIT v. De Beers India Minerals (P.) Ltd 2012 (5) TMI 191 - KARNATAKA HIGH COURT we hold that the assessee is not liable to deduct tax at source for the reimbursement of the salary cost made to the vendor Datamatics Solutions Inc., USA for deployment of manpower. Further the vendor Link List Ltd., UAE does not have a permanent establishment in India and therefor the impugned payments cannot be taxed in India and thereby no tax is deductible at source on these payments. In view of these discussions as per the DTAA between India and USA / UAE, the impugned payments are not fees for technical services and not business income taxable in India. Therefore no disallowance is warranted u/s. 40(a)(i) for non-deduction of tax at source by the assessee. Payments made by the assessee to the third party vendors - We hold that the assessee was not liable to deduct tax at source and therefore no disallowance is warranted. Appeals of the revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition made u/s. 14A of the Act
2. Deletion of addition made u/s. 40(a)(i)

Detailed Analysis:

Deletion of Addition Made u/s. 14A of the Act:

The AO observed that the assessee made investments generating exempt income but did not compute any disallowance for such income. The assessee claimed no exempt income for the relevant years, arguing no disallowance was warranted under section 14A. The AO disagreed, invoking section 14A r.w. Rule 8D, supported by CBDT Circular No. 5/2014 and ITAT Kolkata's decision in M/s. Champion Commercial Co. Ltd. The CIT(A) sided with the assessee, noting investments were made from IPO proceeds and equity capital, with no interest expenses incurred. The CIT(A) referenced the Tribunal's decision in J P Distilleries P. Ltd. v. ITO, asserting no disallowance under section 14A is required without exempt income. The Tribunal, referencing the Delhi High Court's decision in PCIT v. Era Infrastructure India Ltd., affirmed the CIT(A)'s decision, emphasizing the prospective nature of the amendment to section 14A effective from April 1, 2022, and thus not applicable to the assessment years in question.

Deletion of Addition Made u/s. 40(a)(i):

The AO disallowed expenses for onsite projects amounting to Rs. 56,41,12,597, paid to Datamatics Solutions Inc. and Link List Ltd., without TDS deduction, arguing these payments constituted fees for technical services (FTS). The assessee contended these were reimbursements for salaries of employees deployed overseas, not FTS or royalty, and hence not subject to TDS. The CIT(A) found the payments were for hiring local professionals to complete projects due to internal crises, with no technology transfer involved. The Tribunal agreed, referencing the Karnataka High Court's decision in CIT v. De Beers India Minerals (P.) Ltd., which clarified that for FTS to be applicable, technical knowledge must be made available to the recipient. The Tribunal concluded that the services rendered were payroll services, not involving technology transfer, and thus not subject to TDS under section 9(1)(vii). Additionally, for payments to Link List Ltd., UAE, the DTAA between India and UAE exempts such payments from tax in India due to the absence of a permanent establishment. Consequently, no disallowance under section 40(a)(i) was warranted.

For AY 2014-15, similar payments were made and disallowed by the AO. The Tribunal, applying the same reasoning, held no TDS was required, thus no disallowance was warranted.

Conclusion:

The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decisions to delete the additions made under sections 14A and 40(a)(i).