2022 (9) TMI 1251 - AT - Income Tax

TDS u/s 195 - disallowance of extended warranted expenses paid by the assessee - profit attributable to the PE in India - disallowance u/s 40(a)(i) due to non-deduction of tax at source - dependent agent PE - HELD THAT - The extended warranty is an additional feature provided to the customers at their option. There is no compulsion on the customers to buy extended warranty. If some customers agree for extended warranty, the assessee purchases such warranty from CCPL, a Bentley recommended company, the consideration received from the customers towards the extended warranty is remitted to CCPL after retaining a part of it Extended warranties are in the nature of security and assurance to customers against any kind of defect/repair after lapse of original warranty and purely optional in nature. Material on record reveal, while entering into contracts for extended warranty, though, the assessee purchases such warranty from CCPL at a particular price, however, it independently negotiates price with the customers. Commissioner (Appeals) has referred to specific instances of invoices raised by the assessee to indicate that the price at which the extended warranty is sold to the customers is different from the warranty claimed to CCPL - there is no compulsion on the assessee to buy extended warranty only from CCPL or any other Bentley recommended party. Technically, assessee can buy extended warranty from anyone, subject to availability of original Bentley spares and accessories - the sales invoices raised by assessee to the Indian customers towards extended warranty are in its own name and does not mention the name of CCPL. Therefore, the privity of contract is between the assessee and Indian customers, wherein, CCPL has no role to play. The aforesaid factual position emerging on record could not be effectively controverted by the Revenue through proper evidence. Thus, in our view, the factual finding recorded by Commissioner (Appeals), to the effect that the assessee cannot be construed as a dependent agent PE of CCPL, deserves to be affirmed in absence of any contrary material brought on record by Revenue. Accordingly, we do so. Ground raised is dismissed.

Summary

Issues:
1. Disallowance of extended warranted expenses due to non-deduction of TDS under Section 195 of the Income Tax Act, 1961.

Analysis:
The appeal pertains to the assessment year 2016-17 and revolves around the disallowance of Rs. 3,75,68,310 made by the Assessing Officer on account of extended warranty expenses paid by the assessee without deducting TDS under Section 195 of the Income Tax Act, 1961. The assessing officer contended that the assessee, a resident corporate entity and exclusive dealer of Bentley Cars in India, acted as a dependent agent of a UK-based entity, CCPL, for providing extended warranty services. The AO concluded that the amount remitted to CCPL towards extended warranty is taxable in India through a Permanent Establishment (PE) and hence, tax should have been deducted at source. The Commissioner (Appeals), however, held that the assessee is not a dependent agent of CCPL and CCPL does not have any business connection or PE in India, leading to the deletion of the disallowance under Section 40(a)(i) of the Act.

Upon considering the submissions and material on record, the Tribunal noted that the extended warranty offered by the assessee to customers was optional and not compulsory. The customers had the choice to purchase extended warranty, and the assessee negotiated prices independently with customers. The Tribunal observed that the sales invoices for extended warranty were in the name of the assessee and did not mention CCPL, indicating a direct contractual relationship between the assessee and customers. The Tribunal found no evidence to support the AO's claim that the assessee acted as a dependent agent PE of CCPL. Consequently, the Tribunal affirmed the factual finding of the Commissioner (Appeals) and dismissed the appeal, upholding the deletion of the disallowance.

In conclusion, the Tribunal dismissed the appeal, emphasizing that the assessee's independent status and lack of a dependent agent relationship with CCPL led to the deletion of the disallowance under Section 40(a)(i) of the Act. The judgment highlights the importance of analyzing the contractual relationships, obligations, and factual circumstances to determine the tax implications of transactions involving non-resident entities and the applicability of TDS provisions under the Income Tax Act, 1961.