2025 (1) TMI 967 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid software service charges to a foreign entity in Italy but did not deduct tax at source on the ground that such software payments do not require withholding tax u/s 195 - HELD THAT - Upon perusal of order of Hon ble High Court of Madras 2021 (12) TMI 1447 - MADRAS HIGH COURT we find that the substantial question of law as raised by the revenue has been answered against the revenue as relying on ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT held in assessee s case that the assessee is not liable to deduct tax at source on payments made to non-resident towards software support charges and consequently expenses could not be disallowed u/s. 40(a)(i) of the Act Application of Arm s Length interest rate - assessee had outstanding trade receivables from its AE - TPO proposed to benchmark the same. The assessee stated that the said transaction would not be an international transaction - CIT(A) substantially confirming the stand of TPO held that average LIBOR rate would be the most appropriate rate of interest in the international market - HELD THAT - We find that the adjudication of Ld. CIT(A) is in accordance with cited decision of this Tribunal in M/S. PLINTRON GLOBAL TECHNOLOGY SOLUTIONS PRIVATE 2018 (3) TMI 1901 - ITAT CHENNAI wherein held that while working out deemed notional interest on delay in repatriation of overdue receivables from foreign AEs LIBOR rate will be most appropriate. Therefore the adjudication of Ld. CIT(A) could not be faulted with. We order so. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment from the Appellate Tribunal ITAT Chennai addressed the following core legal issues:

Whether the disallowance of Rs. 32,64,15,896/- under Section 40(a)(i) of the Income Tax Act was justified, given the non-deduction of tax at source on software service charges paid to a foreign entity.
Whether the method adopted by the Assessing Officer (AO) for computing the Arm's Length Price (ALP) of outstanding receivables using the SBI PLR rate was appropriate, or if the average LIBOR rate should be applied instead.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 40(a)(i)

Relevant legal framework and precedents: The primary legal framework involves Section 40(a)(i) of the Income Tax Act, which pertains to disallowance of certain expenses if tax is not deducted at source. The case also references the Supreme Court decision in M/s. Engineering Analysis Centre of Excellence Pvt. Ltd vs. CIT, which influenced the interpretation of software payments and tax deduction requirements.
Court's interpretation and reasoning: The Tribunal observed that the CIT(A) had relied on the decision of the Hon'ble Supreme Court and the High Court of Madras, which had previously ruled in favor of the assessee, stating that payments for software services to non-residents did not require tax deduction at source.
Key evidence and findings: The Tribunal noted that the CIT(A) had found that similar issues in previous assessment years (2009-10 to 2015-16) were resolved in favor of the assessee, and these decisions were upheld by the High Court of Madras.
Application of law to facts: The Tribunal applied the precedent set by the Supreme Court and the High Court of Madras, concluding that the payments did not constitute royalty and thus did not require tax deduction at source. Consequently, the disallowance under Section 40(a)(i) was not justified.
Treatment of competing arguments: The Tribunal considered the revenue's argument based on a previous ITAT decision in the assessee's own case but found that the High Court's decision took precedence, as it had directly addressed the substantial question of law in favor of the assessee.
Conclusions: The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance under Section 40(a)(i).

Issue 2: ALP Adjustment of Outstanding Receivables

Relevant legal framework and precedents: The issue involves the determination of the appropriate interest rate for benchmarking outstanding trade receivables from associated enterprises (AEs). The Tribunal referenced its own decision in Plintron Global Technology Solutions, which advocated for the use of the LIBOR rate.
Court's interpretation and reasoning: The Tribunal agreed with the CIT(A) that the average LIBOR rate was the most suitable rate for international transactions involving overdue receivables from foreign AEs.
Key evidence and findings: The CIT(A) had substantially confirmed the TPO's approach but adjusted the interest rate to the average LIBOR rate, aligning with the Tribunal's prior decisions.
Application of law to facts: The Tribunal found that the CIT(A)'s decision was consistent with the legal precedent, as the LIBOR rate is generally accepted for international financial transactions.
Treatment of competing arguments: The Tribunal dismissed the revenue's preference for the SBI PLR rate, emphasizing the appropriateness of the LIBOR rate for international contexts.
Conclusions: The Tribunal upheld the CIT(A)'s decision to use the LIBOR rate, dismissing the revenue's appeal on this ground.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The Hon'ble Court has referred to its earlier decision...which has followed the decision of Hon'ble Supreme Court in the case of M/s. Engineering Analysis Centre of Excellence P. Ltd vs. CIT...It has finally been held in assessee's case that the assessee is not liable to deduct tax at source on payments made to non-resident towards software support charges and consequently, expenses could not be disallowed u/s. 40(a)(i) of the Act."
Core principles established: The judgment reinforced the principle that payments for software services to non-residents, under certain conditions, do not require tax deduction at source, based on the Supreme Court's interpretation. Additionally, it established the appropriateness of using the average LIBOR rate for international transactions involving overdue receivables.
Final determinations on each issue: The Tribunal dismissed both appeals by the revenue, upholding the CIT(A)'s decisions on both the disallowance under Section 40(a)(i) and the application of the LIBOR rate for ALP adjustments.

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