2024 (8) TMI 1477 - AT - Income Tax

TDS u/s 195 - disallowance of software maintenance charges - non deduction of TDS - disallowance u/s.40(a)(i) - HELD THAT - Co-ordinate Bench of the Tribunal in the case of assessee itself for the assessment year 2012-13 2020 (1) TMI 1641 - ITAT PUNE decided appeal in favour of the assessee held that held payment for use of software made by the assessee to CMA CGM, France does not satisfy the requirement of use of, or the right to use, any copyright of software . Once it is held that para 3 of Article 12 is not attracted, as a sequitur, the application of clause (a) of para 4 of Article 12 of the DTAA with Portuguese would automatically be ousted, thereby making the amount paid by the assessee to CMA CGM, France for use of LARA, DIVA and Ocean software as immune from taxation in India. Going by the beneficial provision in the DTAA vis- -vis the Act, it is held that there was no requirement on the part of the assessee to deduct tax at source which should have called for any disallowance u/s. 40(a)(i) of the Act - Decided against revenue. Disallowance of leased line/data link charges - This issue is no more res integra as the same is settled in favour of the assessee by the Hon ble Supreme Court in the case of CIT Vs. Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT wherein it was held that the charges paid towards leased line are not in the nature of Technical services within the meaning of section 9(1)(vii) of the Act.The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression technical services appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) regarding software maintenance charges as royalty or fees for technical services.
2. Disallowance under Section 40(a)(i) concerning leased line charges under Section 194J.
3. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Disallowance under Section 40(a)(ia) - Software Maintenance Charges:

The primary issue was whether the payment of Rs. 4,86,77,518/- for software maintenance charges should be classified as royalty or fees for technical services under Section 9(1)(vi) or 9(1)(vii) of the Income Tax Act, thereby necessitating tax deduction at source (TDS). The appellant argued that the payment did not fall under the definition of fees for technical services (FTS) as per the Act or the Double Taxation Avoidance Agreement (DTAA) with Portugal. The Tribunal referred to its earlier decision in the appellant's case for the assessment year 2012-13, where it was held that such payments did not constitute FTS or royalty. The Tribunal observed that the CIT(A) had admitted that no technical knowledge or skill was made available to the assessee, which is a requirement under clause (b) of Article 12(4) of the DTAA. Consequently, the Tribunal concluded that there was no requirement for TDS, and thus, the disallowance under Section 40(a)(ia) was deleted.

2. Disallowance under Section 40(a)(i) - Leased Line Charges:

The second issue involved the disallowance of Rs. 41,34,292/- related to leased line charges, which the Assessing Officer categorized under Section 194J, asserting that TDS was necessary. The appellant contended that these charges did not qualify as fees for technical services. The Tribunal referenced its decisions for the assessment years 2015-16 and 2017-18, where it was determined that leased line charges did not constitute technical services as defined under Section 9(1)(vii). The Tribunal further cited the Supreme Court's ruling in CIT Vs. Kotak Securities Ltd., which clarified that such charges are not technical services. Hence, the Tribunal ruled that no TDS was required, and the disallowance was reversed.

3. Initiation of Penalty Proceedings under Section 271(1)(c):

The Tribunal addressed the initiation of penalty proceedings under Section 271(1)(c), which was based on the disallowances discussed above. Since the Tribunal had already deleted these disallowances, the basis for the penalty proceedings was nullified. Consequently, the Tribunal dismissed the ground related to the penalty proceedings as infructuous.

Conclusion:

The Tribunal allowed the appeal partly, favoring the appellant by deleting the disallowances under Sections 40(a)(ia) and 40(a)(i) and dismissing the penalty proceedings under Section 271(1)(c). The decision was pronounced on August 22, 2024.