2021 (3) TMI 832 - AT - Income Tax

TDS u/s 195 - payments u/s.40(a)(i) of the Act for non-deduction of tax on professional charges - HELD THAT - Professional services rendered by an individual or a firm of individuals other than a company who is a resident of one of the Contracting States is taxable only in that State unless individual or firm has a fixed base in India. In this case, on perusal of details filed by the assessee, we find that M/s. KL Gates has rendered professional services in connection with dispute with Tranzact Financial Services and such services are in the nature of independent professional services as defined under Article 14 and hence are outside the scope of definition of royalties as defined u/s.9(1)(vi) of the Act, and thus, outside the scope of provision of section 195 - We are of the considered view that the assessee is not liable to deduct tax at source u/s.195 of the Act, when payment is made to offshore entity for rendering independent professional services which covered under Article 14 of DTAA between India and Australia, consequently not liable for withholding tax. Therefore, the same cannot be disallowed u/s.40(a)(i) of the Act. Professional charges paid to M/s. TWB Pty Ltd., a company of Chartered Accounts - In this case, evidences filed by the assessee clearly proves that M/s. TWB CA does not have any permanent establishment in India and services are rendered outside India in connection with filing of statutory returns and liaison with statutory authorities. Therefore, said payment is outside the scope of provisions of section 195 of the Act, because it is neither in the nature of royalties as defined u/s.9(1)(vi) of the Act nor in the nature of fess for technical services because the nature of services rendered by the company of accountants does not make available technical knowledge, expertise, skill, know-how or processes to the assessee. Therefore, said payment is also outside the scope of provisions of section 195 of the Act and thus, the assessee is not liable to deduct tax at source u/s.195 of the Act. Therefore, we are of the considered view that the AO as well as the CIT(A) has erred in disallowing professional charges paid to offshore entities for non-deduction of tax at source u/s.195 of the Act. Hence, we direct the AO to delete additions made towards legal and professional charges paid to M/s. TWB CA and M/s. KL Gates. TDS u/s 194J - disallowance of internet charges and professional charges u/s.40(a)(ia) of the Act for non-deduction of tax at source - HELD THAT - Admittedly if any payment is made without deduction of tax at source, then said payment cannot be allowed as deduction u/s.40(a)(ia) of the Act. Further, if the assessee does not deduct tax at source within the due dates specified in respective provisions of the Act, but tax deducted at source has been deducted on or before furnishing return of income u/s.139(1) of the Act, then such payment cannot be disallowed u/s.40(a)(ia) of the Act. In this case, the AO has disallowed provision for expenses like internet charges and professional charges on the ground that the assessee has failed to deduct tax at source u/s.194J of the Act. It is a case of the assessee that it has deducted TDS on impugned payments in subsequent financial year, but before the due dates specified in sub-section (1) of section 139 of the Act. If the claim of the assessee is correct, then the impugned payments cannot be disallowed u/s.40(a)(ia) of the Act. Therefore, to verify the facts the issue has been set aside to the file of the AO for the limited purpose of verification with regard to ascertaining the fact of deduction of TDS on or before the due date of furnishing return of income u/s.139(1) of the Act. In case, the assessee files necessary evidences to prove that it had deducted TDS on or before due date specified u/s.139(1) of the Act, then the AO is directed to delete disallowance of expenses u/s.40(a)(ia) of the Act.

Summary

Issues:
1. Disallowance of legal and consultancy charges paid to offshore entities for non-deduction of tax at source u/s.195 of the Act.
2. Disallowance of internet charges and professional charges for non-deduction of tax at source u/s.194J of the Act.

Analysis:
1. The first issue pertains to the disallowance of legal and consultancy charges paid to offshore entities due to non-deduction of tax at source u/s.195 of the Act. The assessee argued that payments made to these entities were not taxable in India as services were rendered outside India, citing provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Australia. The tribunal found that the services provided were independent professional services and not subject to withholding tax under section 195 of the Act. The payments were deemed not liable for tax deduction at source, thus directing the AO to delete the disallowances.

2. The second issue involves the disallowance of internet charges and professional charges for non-deduction of tax at source u/s.194J of the Act. The assessee contended that TDS was deducted in the subsequent year before the due date specified in the Act. The tribunal noted that if TDS is deducted before the due date of furnishing the return of income u/s.139(1) of the Act, the disallowance cannot be upheld. Therefore, the matter was remanded to the AO for verification of TDS deduction. If the assessee provides evidence of timely TDS deduction, the disallowance of expenses u/s.40(a)(ia) of the Act is directed to be deleted.

In conclusion, the appeal filed by the assessee was allowed for statistical purposes, with the tribunal ruling in favor of the assessee on both issues.