2005 (5) TMI 259 - AT - Income Tax

Deduction of tax at source - Subcontracting expenses as well as travelling expenses - Payment so made to the sub-contractors - HELD THAT - At the time of hearing before us, the learned counsel for the assessee has not been able to establish that the findings recorded by the learned CIT(A) to come to this conclusion are factually incorrect. Even the attempt made by him to plead that the services rendered by the sub-contractors were not the technical services as defined in the relevant DTAA, i.e, India-US Tax Treaty is not supported by any cogent evidence and the learned CIT(A) having arrived at a conclusion that the said services rendered by the sub-contractors were absolutely technical in nature on the examination of the relevant vouchers as well as other documentary evidence, we find no merit in this plea raised by the learned counsel for the assessee. Moreover, the fact that no application was made by the assessee under sub-section (2) of section 195 to the Assessing Officer also goes against the assessee because as held by Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT 1999 (8) TMI 2 - SUPREME COURT , if no such application is filed, income-tax on the sum chargeable under the Income-tax Act, 1961 payable to a non resident is required to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. Thus, we are of the view that there was nothing on record to conclusively establish that the income of the concerned sub-contractor was not chargeable to tax in India and that the payments made to them were not covered by the provisions of section 195(1). In that view of the matter, we hold that the assessee-company was under an obligation to deduct tax at source from the payments made to the sub-contractors in terms of section 195(1) and having failed to do so, the Assessing Officer was fully justified in disallowing the same by invoking the provisions of section 40(a)(i). As such considering all the facts of the case, we are of the view that there was no infirmity in the impugned order of the learned CIT(A) confirming the said disallowance made by the Assessing Officer and upholding the same, we dismiss ground No. 1 of the assessee's appeal. Travelling expenses of the sub-contractors - In our opinion, the payment made by the assessee to the concerned sub-contractors on account of travelling expenses was not covered by the provisions of section 195 for the simple reason that the amount so paid was on account of reimbursement of actual expenses incurred by the sub-contractors and the same, therefore, could not be treated as income of the concerned subcontractors much less income chargeable to tax in India so as to attract the provisions of section 195. However, it is observed that the disallowance on this count was made also for the reason that a copy of agreement with the sub-contractors could not be produced by the assessee before the authorities below to support and substantiate its contention that there was an obligation on its part to bear the travelling expenses incurred by the sub-contractors. Even before us, copy of such agreement has not been produced by the assessee and we, therefore, find it difficult to accept that the substantial expenses on the travelling of concerned sub-contractors were borne by the assessee-company without there being any agreement in writing casting such obligation on it. In these circumstances, we are of the view that the travelling expenses of the sub-contractors claimed to have been borne by the assessee company could not be allowed as deduction in computing its income from business. In that view of the matter, we uphold the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on this issue and dismiss Ground No. 2 of the assessee's appeal. In the result, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of sub-contracting expenses.
2. Disallowance of travelling expenses of sub-contractors.

Detailed Analysis:

1. Disallowance of Sub-Contracting Expenses:
The primary issue in this appeal is the disallowance of sub-contracting expenses amounting to Rs. 58,72,144/- by the Assessing Officer (AO) under section 40(a)(i) of the Income-tax Act, 1961 due to the failure of the assessee to deduct tax at source as required by section 195.

Arguments by the Assessee:
The assessee contended that the sub-contractors were not liable to tax in India as they had no business connection or territorial presence in India. The services were rendered outside India, and hence, the provisions of section 195 were not applicable. The assessee also argued that the services rendered were not technical services as defined in the Double Tax Avoidance Agreement (DTAA) between India and the US.

Findings by the AO and CIT(A):
The AO noted that the services of the sub-contractors were availed for a project in India and were attributable to Indian operations. The AO disallowed the expenses due to the non-deduction of tax at source. The CIT(A) upheld the AO's decision, stating that the services provided were technical in nature and rendered in India. The CIT(A) also noted the absence of a written agreement between the assessee and the sub-contractors.

Tribunal's Decision:
The Tribunal observed that the services rendered by the sub-contractors were technical and provided on a continuing basis in India. The Tribunal found that the assessee failed to produce any evidence to support the claim that the income of the sub-contractors was not chargeable to tax in India. The Tribunal also noted that the assessee did not apply for a certificate under section 195(2). Consequently, the Tribunal upheld the disallowance of sub-contracting expenses, affirming that the assessee was obligated to deduct tax at source under section 195.

2. Disallowance of Travelling Expenses of Sub-Contractors:
The second issue pertains to the disallowance of travelling expenses amounting to Rs. 22,90,926/- incurred by the assessee on behalf of the sub-contractors.

Arguments by the Assessee:
The assessee argued that the travelling expenses were reimbursements of actual expenses incurred by the sub-contractors and should not be treated as income chargeable to tax in India. Therefore, the provisions of section 195 were not applicable.

Findings by the AO and CIT(A):
The AO disallowed the travelling expenses on the grounds that they were part of the technical services provided by the sub-contractors, and thus, tax should have been deducted at source. The CIT(A) upheld the disallowance, emphasizing that the assessee failed to produce a written agreement substantiating the obligation to bear the travelling expenses.

Tribunal's Decision:
The Tribunal agreed with the assessee that the reimbursement of actual expenses should not be treated as income and thus not subject to tax deduction at source under section 195. However, the Tribunal upheld the disallowance on the grounds that the assessee failed to produce a written agreement to substantiate the obligation to bear the travelling expenses. The Tribunal concluded that without such an agreement, the expenses could not be allowed as a deduction.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the disallowance of both sub-contracting expenses and travelling expenses due to the failure to deduct tax at source and the absence of supporting agreements, respectively.