2023 (2) TMI 25 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid the disputed amount to a Malaysian entity for incorporation of a company in Malaysia - HELD THAT - Admittedly the Malaysian entity does not have any PE in India. Therefore the payment made which is in the nature of business profit is not taxable in India. That being the factual position there was no obligation on the assessee to withhold tax at source u/s 195 of the Act while making such payment. At this stage we must observe AO while disallowing the payment under section 40(a)(i) of the Act has made a general observation that payments are covered under Article 12 of the DTAA without specifying which particular DTAA he is referring to Article 12 of India-Malaysia DTAA is in relation to income in the nature of royalty. Payment made by the assessee to the Malaysian entity certainly cannot be considered to be in the nature of royalty under Article 12 of the DTAA. Having held so it is necessary to examine whether the payment made would qualify as Fees for Technical Services (FTS) under Article 13 of the India-Malaysia DTAA. On a reading of Article 13 it is evident the source country has the power to tax the income in the nature of FTS at beneficial rate of 10%. The service rendered must be managerial technical or consultancy services. In the facts of the present appeal the departmental authorities have failed to demonstrate that the payment made was towards rendering of managerial technical or consultancy services. Withholding of tax u/s 195 - Disallowance u/s 40(a)(i) - payment was made to an entity in Bangladesh for rendering legal services of the Act - HELD THAT - In the facts of the present appeal admittedly the Bangladesh entity has no PE in India. Therefore income if considered to be business profit is not taxable in India. As per Article 13 of the DTAA the payment made by the assessee cannot be treated as royalty. If at all the payment can be considered to be towards rendering of independent professional services as per Article 15 of the DTAA. However the payment made towards independent professional services is taxable in the country of residence of recipient unless the recipient has a faxed base regularly available to him in the source country for the purpose of performing his activity. In the facts of the present appeal there is nothing on record to demonstrate that the Bangladesh entity had any fixed base in India from which it is carrying on its activities in India. Thus in our view the departmental authorities have failed to establish on record that the payment made by the assessee is taxable at the hands Bangladesh entity in India. That being the case there was no requirement for withholding tax u/s 195 of the Act. Accordingly we delete the disallowance made under section 40(a)(i). Disallowance claimed as deduction u/s 35D - expenditure under consideration towards issue of IPO - only reasoning on which assessee s claim has been rejected is the expenditure does not fall within the ambit of Section 35D - HELD THAT - Before us the assessee has made an alternative claim that since the expenditure has been incurred for expansion of its business it is allowable under section 37 of the Act. Having taken note of the factual position and the nature of expenses we are of the view that the expenditure is allowable u/s. 35D of the Act as it is for the purpose of expansion of its business. The ratio laid down in the decision cited Dhanaklakshmi Bank Ltd 2018 (12) TMI 836 - KERALA HIGH COURT by the assessee supports this view. Therefore we allow the deduction. This ground is allowed. Disallowance of ESOP expenses - HELD THAT - As observed that the assessee offered the ESOP to the employees at discounted value and the difference between the actual value and the discounted value was debited to the profit and loss account. It is also observed the assessee has reversed a part of the expenses booked on ESOP and offered the same for tax in subsequent Assessment Years. Thus in our view the deduction claimed by the assessee is allowable. Accordingly we delete the disallowance. Disallowance of write off of sundry balances - Swachh Bharat Cess receivable written off - HELD THAT - As could be seen the amount written off represents Swachh Bharat Cess receivable by the assessee. Assessee has failed to demonstrate that the amount was actually paid during the year in terms of section 43B(a) of the Act. Therefore we uphold the disallowance. This ground is dismissed.

Summary

Issues:
1. Disallowance under section 40(a)(i) of the Income Tax Act, 1961 for payments made to overseas entities without withholding tax.
2. Disallowance under section 40(a)(i) for payments made to an entity in Bangladesh for legal services.
3. Disallowance of deduction claimed under section 35D of the Act.
4. Disallowance of ESOP expenses.
5. Disallowance of write-off of sundry balances.

Issue 1 - Disallowance under section 40(a)(i) for payments to overseas entities:
The assessee challenged the disallowance of payments made to a Malaysian entity for the incorporation of a company in Malaysia. The Assessing Officer disallowed the payment under section 40(a)(i) for not withholding tax under section 195 of the Act. The tribunal held that the Malaysian entity did not have a Permanent Establishment in India, making the payment not taxable in India. The tribunal also noted that the payment did not qualify as Fees for Technical Services under the India-Malaysia DTAA. Consequently, the disallowance was deleted.

Issue 2 - Disallowance under section 40(a)(i) for payments to entity in Bangladesh:
The assessee contested the disallowance of payments made to an entity in Bangladesh for legal services. The tribunal found that the Bangladesh entity did not have a Permanent Establishment in India, and the payment did not fall under royalty or independent professional services as per the India-Bangladesh DTAA. Thus, the tribunal deleted the disallowance under section 40(a)(i) of the Act.

Issue 3 - Disallowance of deduction claimed under section 35D of the Act:
The assessee claimed a deduction under section 35D for expenses related to an Initial Public Offering (IPO), which was disallowed by the Assessing Officer. The tribunal allowed the deduction, considering the expenses as incurred for the expansion of the business, in line with a decision cited from the Kerala High Court.

Issue 4 - Disallowance of ESOP expenses:
The Assessing Officer disallowed ESOP expenses as unascertained liability, which was upheld by the Commissioner (Appeals). The tribunal observed that the expenses were booked by the assessee and considered them allowable, leading to the deletion of the disallowance.

Issue 5 - Disallowance of write-off of sundry balances:
The tribunal upheld the disallowance of write-off of sundry balances representing Swachh Bharat Cess receivable by the assessee, as the assessee failed to demonstrate actual payment during the year as required by section 43B(a) of the Act.

In conclusion, the tribunal partly allowed the appeal, deleting certain disallowances while upholding others based on the specific provisions of the Income Tax Act and relevant Double Taxation Avoidance Agreements.