2012 (3) TMI 286 - AT - Income Tax

Tribunal upholds decision on tax deductions, citing bona fide belief and relevant case law

The Tribunal upheld the Commissioner's decision to delete the disallowances of payments made to CMS RDC, finding that the assessee had a bona fide belief ... Addition u/s.40(a)(ia) - non Deduction of TDS - 'Reimbursement of manpower cost' - assessee contented that the amounts paid were reimbursement of advances against salaries and was not a sum chargeable to tax u/s.195 - According to the assessee, its agreement to recruit the employees on behalf of the assessee on the condition that the assessee would be reimbursing the payments made to them - Held that :- If the bona fide belief of the payer is that no part of the payment has any portion chargeable to tax, he will not enter into any procedure under s.195. However, if the Department is of the view that the payer ought to have deducted tax at source, it will have recourse under Section 201 of the Act - the assessee could be justified in reaching a bona fide impression that payments effected by it to CMS RDC was not sums on which tax was chargeable in India and was not at default of Chapter XVII-B and therefore, could not have been fastened with the consequences of the nature specified in Sec.40(a)(i) of the Act- appeals of the Revenue stand dismissed. Issues Involved:1. Whether the payments made by the assessee to CMS RDC were fees for technical services.2. Whether the assessee was required to deduct tax at source under Section 195 of the Income-tax Act, 1961.3. Whether the disallowance under Section 40(a)(i) of the Income-tax Act, 1961 was justified.Detailed Analysis:Issue 1: Fees for Technical ServicesThe Assessing Officer (AO) determined that the payments made by the assessee to CMS RDC were fees for technical services. According to the AO, the amounts debited under 'Reimbursement of manpower cost' were payments made to CMS RDC for technical services. The AO concluded that the payments made by the assessee to CMS RDC and the payments by CMS RDC to the deputed employees were two separate transactions. The AO argued that the payments were business expenditures for the assessee and not salaries, as the employees were on the payroll of CMS RDC and not the assessee.Issue 2: Obligation to Deduct Tax at SourceThe AO required the assessee to explain why it did not deduct tax at source from the payments made to CMS RDC. The assessee contended that the payments were reimbursements of salaries to the employees deputed by CMS RDC and not fees for technical services. The assessee argued that the income of the recipient was chargeable under the head 'salaries' and thus did not fall within the term 'fees for technical services' as defined in Explanation 2 to Section 9(1)(vii) of the Act. The assessee also argued that since the payments were reimbursements, they were not sums chargeable to tax under Section 195 of the Act.Issue 3: Disallowance under Section 40(a)(i)The AO disallowed the entire expenditure claimed by the assessee for payments made to CMS RDC under Section 40(a)(i) of the Act, citing the failure to deduct tax at source as required under Section 195. The Commissioner of Income Tax (A) found that the agreement between the assessee and CMS RDC was a reimbursement agreement and not for technical know-how. The Commissioner concluded that the payments did not result in any income to CMS RDC in India and that there was no violation of Section 195 by the assessee. The Commissioner relied on the decision of the Hon'ble Apex Court in the case of GE India Technology Centre (P) Ltd. v. CIT, concluding that the assessee was not obliged to deduct tax at source.Conclusion:The Tribunal noted contradictions in the assessee's claims but ultimately found that the assessee had a bona fide reason to believe that tax was not deductible on the payments to CMS RDC. The Tribunal referred to the Special Bench decision in ITO v. Prasad Production Ltd. and concluded that the assessee could be justified in reaching a bona fide impression that the payments were not sums on which tax was chargeable in India. The Tribunal upheld the Commissioner of Income Tax (A)'s decision to delete the disallowances, finding no reason to interfere.Result:The appeals of the Revenue were dismissed.