2020 (12) TMI 120 - AT - Income Tax

Disallowance u/s 40(a)(i) - amount was erroneously shown under miscellaneous income - assessee has reversed a sum during the current year itself - HELD THAT - Details of miscellaneous income that a sum of ₹ 32,93,513/- has been shown as reversal of the amount payable to M/s Gartner. If the said reversal was made out of the expenditure of ₹ 68,05,703/- originally booked by the assessee during the year under consideration, then there is merit in the claim of the assessee, i.e., what is payable to M/s Gartner for the year under consideration would be the net amount - as submitted by Ld D.R, it is not clear as to whether the above said reversal was related to the expenditure originally booked or it related to any other liability. Accordingly, we are of the view the above said claim of assessee requires examination with reference to the books of accounts and profit loss account of the assessee. If the reversal pertains an expenditure booked/included - the disallowance requires to be restricted to the net amount of expenditure claimed by the assessee. Accordingly, we restore this claim of the assessee to the file of AO for examining it properly. Payment made towards subscription charges in respect of business carried on by the assessee in USA - as submitted that the above said payment is not liable for deduction of tax at source in view of section 9(1)(vi)(b) - HELD THAT - We notice that the exception provided under sec.9(1)(vi)(b) would apply only if the royalty is paid by a resident assessee for the purposes of business or profession carried on by such person outside India. We notice that the assessee has, for the first time, made the claim before Ld CIT(A) that its USA branch is carrying on business separately and subscription services are exclusively used by it. As noticed earlier that the Ld CIT(A) has rejected the said claim for the reason that the assessee has failed to substantiate its claim; that the assessee has failed to show that the impugned services were used by its foreign branch only and that certain bills have been found at the Indian address of the assessee. A.R prayed that the assessee may be provided with one more opportunity to prove all its claims. Hence, in the interest of natural justice, we are of the view that the assessee may be provided with an opportunity to substantiate its claim. We have noticed that the Ld CIT(A) has raised very valid points on the claim of the assessee, which is also required to be addressed by the assessee - Accordingly, we restore this issue also to the file of the AO for examining it afresh .

Summary

Issues Involved:
1. Disallowance of ?68,05,703/- under section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source.
2. Claim of reversal of ?32,93,513/- during the current year.
3. Applicability of section 9(1)(vi)(b) of the Act for payments made to foreign entities.

Issue-wise Detailed Analysis:

1. Disallowance of ?68,05,703/- under section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source:
The assessee company, engaged in Global Technical, implementation and Service opportunities in Identity and Access Management Solutions, claimed business promotion expenses of ?94,37,335/- in its profit & loss account. The Assessing Officer (A.O.) identified that these expenses included payments towards membership and subscription charges to entities like Gartner and D&B, which were considered as royalty. Since the assessee did not deduct tax at source on these payments, the A.O. disallowed ?68,05,703/- under section 40(a)(i) of the Act.

2. Claim of reversal of ?32,93,513/- during the current year:
The assessee submitted an additional ground claiming that out of the disallowed amount, ?32,93,513/- was reversed during the same year and erroneously shown under "miscellaneous income." The assessee argued that only the net amount of ?35,12,190/- should be considered for disallowance. However, the Departmental Representative (D.R.) contended that this was a new claim and it was unclear whether the reversal related to the disallowed amount. The Tribunal found merit in the D.R.'s submission and noted that the claim required examination with reference to the books of accounts. Therefore, the Tribunal restored this claim to the A.O. for proper verification.

3. Applicability of section 9(1)(vi)(b) of the Act for payments made to foreign entities:
The assessee argued that the payments made to foreign entities, particularly ?35,12,190/-, were for subscription charges related to business carried on in the USA and thus fell under the exception provided in section 9(1)(vi)(b) of the Act, which exempts such payments from tax deduction at source. The D.R. countered that the assessee had not substantiated that the payments were exclusively for the USA branch and that the Indian business did not benefit from them. The Tribunal noted that the assessee had failed to prove its claims before the Commissioner of Income Tax (Appeals) [CIT(A)] and agreed to provide another opportunity for the assessee to substantiate its claims.

The Tribunal referred to a similar case involving M/s Wipro Ltd, where the payments to M/s Gartner Group were considered royalty and subject to tax deduction at source under section 195 of the Act. The Tribunal highlighted that the Karnataka High Court and the Delhi High Court had ruled that the source of income from export contracts concluded in India is situated in India, and thus, the payments made to Gartner Group were taxable in India. Consequently, the Tribunal restored the issue to the A.O. for fresh examination in light of these judicial precedents.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the A.O. to re-examine the claims regarding the reversal of ?32,93,513/- and the applicability of section 9(1)(vi)(b) for the remaining amount of ?35,12,190/- after providing the assessee with an adequate opportunity to substantiate its claims. The decision emphasized the need for thorough verification of the assessee's claims and adherence to legal precedents regarding the taxability of payments made to foreign entities.