2022 (12) TMI 1081 - AT - Income Tax

TDS u/s 195 - disallowance u/s 40(a)(i) - payments were made to US and Australia based entities as commission towards procurement and solicitation of business - HELD THAT - The impugned payments made by the assessee are in the nature of selling commission for procurement of orders outside India for the assessee. Upon examination of contractual terms, these payments could not be termed as fees for technical services . Further, none of the payee is shown to have any PE in India. Therefore, the findings of Ld. CIT(A), in that regard, could not be faulted with. AO has invoked Explanation-2 to Sec.195(1) as inserted by Finance Act, 2012 w.r.e.f. 01.04.1962. However, the assessee could not be expected to deduct tax at source in this year by foreseeing such a future amendment to law. In the impugned year, there was no such obligation on the assessee to deduct TDS but such obligation has arisen out of subsequent amendment to law which assessee could never anticipate. As relying on M/S RANE ENGINE VALVES LTD. case 2022 (3) TMI 1022 - ITAT CHENNAI assessee could not be expected to deduct Tax at source on payment made to non-residents on the basis of subsequent amendment to the law with retrospective effect from earlier date because the assessee cannot foresee the amendment and deduct TDS. Therefore, the disallowance made u/s 40(a)(i) would be unwarranted. Similar is the situation before us. No contrary decision is on record. Therefore, following this decision, we confirm the stand of Ld. CIT(A). The corresponding grounds raised by the revenue stand dismissed. Disallowance u/s 14A - AOapplying Rule 8D(2)(iii), computed indirect expense disallowance - CIT(A) directed Ld. AO to consider those investments which actually yielded exempt income during the year - HELD THAT - We find that the directions of Ld. CIT(A) are in accordance with the decision of Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI - Therefore, the impugned order could not be faulted with. We order so. The corresponding grounds raised by revenue stand dismissed.

Summary

Issues:
1. Disallowance u/s 40(a)(i)
2. Disallowance u/s 14A

Issue 1: Disallowance u/s 40(a)(i)

The appeal by Revenue for AY 2009-10 concerns disallowance u/s 40(a)(i) due to non-deduction of tax at source on selling commission paid to non-resident entities. The Ld. AO disallowed the payment u/s 40(a)(i) as the assessee did not deduct tax at source as required u/s 195. However, the Ld. CIT(A) allowed relief to the assessee, considering the nature of the commission and absence of permanent establishment in India for the payees. The Ld. CIT(A) referred to judicial decisions supporting the non-taxability of such payments in India. The Tribunal concurred with the Ld. CIT(A) and held that the liability towards TDS cannot be imposed on the assessee based on subsequent amendments to the law with retrospective effect. The Tribunal cited precedents where it was held that the assessee cannot be expected to foresee amendments and deduct TDS, thus disallowance u/s 40(a)(i) was unwarranted.

Issue 2: Disallowance u/s 14A

The second issue pertains to disallowance u/s 14A concerning exempt dividend income earned by the assessee. The Ld. AO made a disallowance under Rule 8D(2)(iii), which was contested by the assessee. The Ld. CIT(A) directed the Ld. AO to consider investments that actually yielded exempt income during the year. The Tribunal found the Ld. CIT(A)'s directions in line with the decision of the Special Bench of ITAT in ACIT vs. Vireet Investment (P.) Ltd. Consequently, the impugned order was upheld, and the corresponding grounds raised by the revenue were dismissed.

In conclusion, the Tribunal dismissed the appeal of the revenue, upholding the decisions of the Ld. CIT(A) on both issues. The judgment emphasizes the importance of considering the nature of payments and the applicability of tax deduction at source provisions in international transactions to determine the tax liability of the assessee accurately.