2014 (1) TMI 895 - AT - Income Tax

Disallowance on outsourcing expenses u/s 40(a)(ia) of the Act Held that - From the agreement it is clear that DEOs and the Cos had to perform particular functions as per the requirements of the asssessee -They had to scan the documents besides carrying out the job of Bar Coding of the papers - As per the agreement, minimum qualification to do the job of Scanning/Bar Coding was diploma course after passing 12th standard - work done by these operators(DEOs/Cos) cannot termed as labour work - For Bar Coding and other related activities a minimum professional qualification and proficiency is required Thus, work done by the operators has to be treated as technical service and provision of section 194J would be attracted to the payment made to them by the assessee company. The decision Deputy Commissioner of Income-tax - 11(2) Versus Chandabhoy & Jassobhoy 2011 (7) TMI 956 - ITAT MUMBAI and in APOLLO TYRES LTD Versus DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-1(1), ERNAKULAM 2013 (11) TMI 209 - ITAT COCHIN followed - short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee thus, the disallowance of the entire expenditure, whose genuineness was not doubted by the assessing officer is not justified - in case of short/lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO, could not be disallowed - Matter remitted back to the AO for fresh adjudication Decided partly in favour of Assessee.

Summary

Issues:
1. Disallowance of outsourcing expenses under section 40(a)(ia)
2. Violation of TDS obligation under section 194H
3. Adequate opportunity not given to the appellant during assessment proceedings

Issue 1: Disallowance of Outsourcing Expenses under Section 40(a)(ia):
The appellant, a hoteliering and catering company, challenged the disallowance of outsourcing expenses under section 40(a)(ia) in the appeal before the CIT(A). The Assessing Officer (AO) found that the appellant made payments without deducting TDS as required under section 194H. The AO disallowed Rs. 69,09,863 as the appellant failed to deduct TDS on commission payments to certain banks. The CIT(A) upheld the disallowance, stating that the payments were for technical services falling under section 194J, not section 194C as argued by the appellant. The CIT(A) found that the appellant had only deducted TDS on a part of the payments made, leading to the disallowance of Rs. 1.82 crores. The ITAT Mumbai partially allowed the appeal, remitting the matter back to the AO for fresh adjudication based on precedents regarding short deduction of TDS and disallowance under section 40(a)(ia).

Issue 2: Violation of TDS Obligation under Section 194H:
The AO determined that the appellant violated TDS obligations under section 194H by not deducting tax on commission payments to banks. The CIT(A) affirmed this finding, emphasizing that the payments constituted fees for technical services falling under section 194J. The appellant argued that the agreement with the contractor was for labor services under section 194C, not technical services. However, the ITAT Mumbai agreed with the CIT(A) that the payments were indeed for technical services, warranting TDS deduction under section 194J. The ITAT Mumbai directed the AO to re-examine the issue in light of relevant precedents, indicating a potential misapplication of disallowance provisions under section 40(a)(ia).

Issue 3: Adequate Opportunity Not Given to the Appellant:
The appellant contended that the AO did not provide sufficient opportunity during the assessment proceedings, violating principles of natural justice. While the CIT(A) did not address this grievance directly, the ITAT Mumbai's decision to remit the matter back to the AO for fresh adjudication indirectly acknowledges the need for a fair hearing and proper consideration of the appellant's arguments. By ordering a reevaluation of the disallowance in line with legal precedents, the ITAT Mumbai aimed to ensure a just and comprehensive assessment process for the appellant.

In conclusion, the ITAT Mumbai's judgment in this case addressed the disallowance of outsourcing expenses, the violation of TDS obligations, and the issue of adequate opportunity during assessment proceedings. The decision highlighted the importance of correctly applying TDS provisions and ensuring a fair assessment process for taxpayers. The remittance of the matter back to the AO for fresh adjudication reflects a commitment to upholding legal principles and precedents in tax matters.