2023 (4) TMI 840 - AT - Income Tax

Deduction of TDS and credit to the Central Government - taxes deducted by the assessee and paid to the department pertaining to M/s. Gintek Eswation, South Africa with respect to payments - HELD THAT - The matter is remanded back to the file of Assessing Officer for verification and grant relief if the assessee has deducted the tax at source and deposited the same with the Central Government with respect to M/s. Gintek Eswation, South Africa. TDS u/s 195 - payments made by the assessee to BAE Systems, USA for site testing charges - HELD THAT - From the nature of charges paid by the assessee to the BAE Systems, USA, it is clear that charges were essentially in the nature of the ancillary and subsidiary services as the main focus of agreement was only purchase and installation of Long Range Position and Velocity Tracking Doppler Radar System. The incidental services which were referred to in invoice cannot be independently or stand alone basis be provided to the assessee by BAE Systems, as the purchase and installation of such instrument is sine qua non. In our view, the services which can independently or on stand alone basis, be provided, coupled with the fulfillment of the other requirement of Para 4(b) of the DTAA would only attract the Fee for included services'. In the present case, testing and on-site training in India cannot be provided on its own, unless it is coupled with purchase of equipment and therefore, these services did not fall within the purview of Fee for incidental services . In the present case, the services, which are the subject matter of the dispute, do not fall under Fee for incidental services , hence, would not fall under Royalty and as such, not chargeable in India as per Clause 12 of DTAA, read with sections of Income Tax Act and therefore, the charges paid by the assessee to BAE Systems would not be subject to deduction of TDS. Thus, the action of lower authorities that the assessee was liable to deduct TDS while making the payment to BAE Systems is unsustainable and therefore, the same is dismissed. With respect to payment made to Syscom Instruments, Switzerland, the disallowance had been upheld being not pressed and thirdly with respect to payment made to Grintek Eswation, South Africa, the issue is remitted back to the file of Assessing Officer for verification whether taxes were deducted at source or not ? In the light of the above, ground nos. 3 and 4 are partly allowed for statistical purposes. Disallowance of Prior Period Expenses - HELD THAT - Undoubtedly, during the year under consideration, the assessee has claimed prior period expenses and had also shown the prior period income during the year under consideration - allow the claim of the assessee. Undoubtedly, the assessee is a large organization and this kind of inadvertent pitfall, is bound to occur on account of the size and spread of the assessee. Since the assessee has shown not only the prior period expenses but also shown the prior period income, therefore, both are required to be considered for the purposes of computing the income of the assessee.

Summary

Issues Involved:
1. Disallowance of payments due to non-deduction of tax under Section 195.
2. Disallowance of prior period expenses.

Detailed Analysis:

Issue 1: Disallowance of Payments Due to Non-Deduction of Tax Under Section 195

The primary contention of the assessee was against the disallowance of payments made to various foreign entities without deducting tax at source under Section 195 of the Income Tax Act, 1961. The payments in question were:

1. Rs.2,31,24,998/- to BAE Systems, USA for site testing charges.
2. Rs.26,09,609/- to Syscom Instruments SA, Switzerland for factory acceptance test, final commissioning, and training.
3. Rs.14,77,500/- and Rs.27,75,000/- to Grintek Eswation, South Africa for operation, maintenance, and training charges.

The assessee argued that the payments to BAE Systems, USA, were part of a composite contract for the purchase and installation of equipment, and thus, should not be treated as "Fee for Technical Services" under the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The tribunal agreed with the assessee, noting that the services provided were ancillary and subsidiary to the sale of equipment and thus fell under the exception in Paragraph 5(a) of Article 12 of the DTAA. Consequently, the tribunal held that these payments were not subject to deduction of TDS.

For the payments made to Syscom Instruments SA, Switzerland, the assessee admitted that the MFN clause was not applicable and did not press for the deletion of disallowance. Therefore, the tribunal upheld the disallowance made by the authorities.

Regarding the payments to Grintek Eswation, South Africa, the tribunal remanded the matter back to the Assessing Officer for verification of whether taxes were deducted at source and deposited with the Central Government. If verified, relief should be granted to the assessee.

Issue 2: Disallowance of Prior Period Expenses

The assessee also contested the disallowance of Rs.59,23,000/- as prior period expenses. The assessee argued that these expenses were in the nature of sales reversals, expenditure on raw materials, administrative expenses, depreciation, and other receipts, and were accounted for in accordance with accepted accounting principles. The tribunal noted that the assessee had also accounted for prior period income during the same year and relied on a previous decision by the Hyderabad bench of the Tribunal in the case of Deccan Cements Limited vs. DCIT, which allowed the claim of prior period expenses. The tribunal allowed the assessee's claim, emphasizing that both prior period expenses and income should be considered for computing the income of the assessee.

Conclusion:

The tribunal partly allowed the appeal of the assessee for statistical purposes. The disallowance related to payments made to BAE Systems, USA, was overturned, while the disallowance related to Syscom Instruments SA, Switzerland, was upheld. The issue concerning payments to Grintek Eswation, South Africa, was remanded for verification. Additionally, the tribunal allowed the claim for prior period expenses.