2024 (9) TMI 1129 - HC - Income Tax

TDS u/s 195 - Addition u/s 40(a)(i) - reimbursement of expenses to the non-resident association enterprises - whether nature of functions which have been performed by the foreign principals in favour of assessee would clearly amount to and fall with in the ambit of Section 9(1)(vii) and thus constitute fee for technical services ? - HELD THAT - Undisputedly, the additions came to be made pursuant to the provisions made in Section 40(a)(i). The appellants in that respect had tried to source the obligation of the respondent/ assessee to deduct tax at source by virtue of Section 195. The obligation to deduct tax in terms of that provision would arise provided it were established that the reimbursement of remittances made would fall within the scope of Section 9 and to the extent that it introduces legal fictions in respect of income which could be said to have accrued in India. It was, therefore, incumbent upon the appellants to establish that the fee or amounts which were remitted would fall within the ambit of any technical, managerial or consultative service that had been rendered. Having perused the relevant clauses of the Agreement, we find ourselves unable to sustain that submission. No substantial question of law arises.

Issues Involved:
1. Whether the Tribunal erred in deleting the disallowance of Rs. 21,58,139/- made under Section 40(a)(i) of the Act by the AO on account of reimbursement of expenses made under section 195 of the Act, to the non-resident association enterprises.
2. Whether the Tribunal erred in upholding the direction of CIT(A) deleting the disallowance of Rs. 21,05,07,858/- made under Section 40(a)(i) of the Act by the AO on account of payment made to non-resident association enterprises for freight and forwarding services.

Issue-Wise Detailed Analysis:

Issue 1: Disallowance of Rs. 21,58,139/- for Reimbursement of Expenses
Background:
The AO disallowed Rs. 21,58,139/- under Section 40(a)(i) of the Act, arguing that the reimbursement of expenses to non-resident associated enterprises (NRAE) should be classified as "fee for technical services" under Section 9(1)(vii) of the Income Tax Act, 1961, and thus subject to tax deduction at source (TDS) under Section 195.

AO's Position:
The AO contended that the payments were taxable in India as fees for technical services and should have been subject to TDS. The AO referenced various judicial precedents to support the view that reimbursement of expenses can be considered as fees for technical services and thus subject to tax.

CIT(A)'s Findings:
The CIT(A) disagreed with the AO, stating that the expenses did not fall within the ambit of "fee for technical services" under Section 9(1)(vii). However, the CIT(A) noted that in the absence of evidence from the assessee, the expenses could be disallowed under Section 37 of the Act.

ITAT's Observations:
The ITAT found that the nature of the expenses, which included server maintenance costs, netting charges, management expenses, and traveling costs, were integral to the day-to-day business activities of the assessee. The ITAT noted that the AO and CIT(A) had not doubted the genuineness of the expenses and concluded that these were regular business expenses, thus allowing the appeal filed by the assessee.

High Court's Conclusion:
The High Court upheld the ITAT's decision, noting that the appellants failed to establish that the reimbursements fell within the ambit of technical, managerial, or consultative services as defined under Section 9(1)(vii). Consequently, no substantial question of law arose, and the appeal was dismissed.

Issue 2: Disallowance of Rs. 21,05,07,858/- for Freight and Forwarding Services
Background:
The AO disallowed Rs. 21,05,07,858/- under Section 40(a)(i) of the Act, arguing that the payments made to non-resident associated enterprises for freight and forwarding services should be subject to TDS under Section 195.

AO's Position:
The AO argued that the payments for freight and forwarding services were subject to tax in India and should have been subject to TDS. The AO relied on the provisions of Section 9(1)(vii) to classify these payments as fees for technical services.

CIT(A)'s Findings:
The CIT(A) upheld the direction to delete the disallowance, stating that the payments did not fall within the purview of "fee for technical services" under Section 9(1)(vii). The CIT(A) noted that the AO had not provided any specific findings to support the classification of these payments as fees for technical services.

ITAT's Observations:
The ITAT concurred with the CIT(A), noting that the nature of the payments was for regular business expenses related to freight and forwarding services. The ITAT found that the AO had not doubted the genuineness of the expenses and concluded that these were regular business expenses, thus allowing the appeal filed by the assessee.

High Court's Conclusion:
The High Court upheld the ITAT's decision, noting that the appellants failed to establish that the payments for freight and forwarding services fell within the ambit of technical, managerial, or consultative services as defined under Section 9(1)(vii). Consequently, no substantial question of law arose, and the appeal was dismissed.

Final Judgment:
The High Court dismissed the appeals, affirming the ITAT's decision to delete the disallowances made under Section 40(a)(i) of the Act for both reimbursement of expenses and payments for freight and forwarding services. The court found no substantial question of law in the appellants' contentions.

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