2012 (9) TMI 133 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on installation charges & incidental expenses.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions. The disallowance of installation charges under section 40(a)(i) was ... Non deduction of TDS on Installation and commissioning charges - CIT(A) deleted disallowance - Held that:- The amount in question paid by the assessee company to M/s Mesto Automation SCADA Solutions Ltd. towards installation and commissioning charges was for services that were ancillary and subsidiary as well as inextricable and essentially linked to the sale/supply of SCADA system and the same, therefore, was not chargeable to tax in India in the hands of M/s Mesto Automation SCADA Solutions Ltd. as fees for included services by virtue of article 12(5)(a) of the DTAA between India and Canada being favorable to the assessee - The assessee, therefore, was not liable to deduct tax at source from the said payment and the disallowance u/s 40(a)(i) was not sustainable - in favour of assessee. Restricting the disallowance of incidental expenses to the extent of 25% - revenue appeal - Held that:- As the Tribunal in assessee’s own case for assessment year 2001- 02 upheld the order of the CIT(A) restricting the disallowance made on account of incidental expenses to the extent of 25%, thus respectively following the same judgment revenue appeal is dismissed - in favour of assessee. Issues Involved:1. Deletion of disallowance made by the AO under section 40(a)(i) for installation charges paid to M/s Mesto Automation SCADA Solutions Ltd.2. Restriction of disallowance of incidental expenses to 25%.Issue-wise Detailed Analysis:1. Deletion of Disallowance under Section 40(a)(i):The primary issue in this appeal is the deletion of disallowance of Rs. 2,69,42,412/- made by the Assessing Officer (AO) under section 40(a)(i) of the Income Tax Act. The AO disallowed the amount on the grounds that the installation charges paid to M/s Mesto Automation SCADA Solutions Ltd. were not subject to tax in India and the assessee failed to deduct tax at source.The assessee, engaged in engineering and general contracting, initially disallowed the amount in its original return but later revised the return, claiming the amount as allowable. The assessee argued that the installation charges were not chargeable to tax in India as per Explanation 2 to section 9(1)(vii) and thus, no tax was required to be deducted at source.The AO, however, held that there were separate contracts for supply and installation, making it clear that the installation work was not inextricably linked to the supply of the plant. Consequently, the AO disallowed the amount under section 40(a)(i).Upon appeal, the CIT(Appeals) found merit in the assessee's submission that the installation charges were part of a single transaction arising from a common letter of intent and offer. The CIT(A) referred to Explanation 2 to section 9(1)(vii) and Article 12(5)(a) of the DTAA between India and Canada, concluding that the installation charges were ancillary and subsidiary, as well as inextricably and essentially linked to the sale of SCADA systems. Thus, the CIT(A) deleted the disallowance.The Tribunal upheld the CIT(A)'s decision, agreeing that the installation and commissioning services were ancillary and subsidiary to the sale of SCADA systems and not chargeable to tax in India as fees for included services under Article 12(5)(a) of the DTAA between India and Canada. The Tribunal dismissed the Revenue's appeal on this ground.2. Restriction of Disallowance of Incidental Expenses:The second issue pertains to the restriction of disallowance of incidental expenses amounting to Rs. 7,25,000/- and Rs. 29,600/-. The AO disallowed these expenses on the basis that they were not fully vouched and verifiable. On appeal, the CIT(A) restricted the disallowance to 25%, following the precedent set in the assessee's own case for the assessment year 2001-02.The Tribunal, upon review, upheld the CIT(A)'s decision, noting that a similar issue had been decided in favor of the assessee in the previous assessment year. The Tribunal found no reason to deviate from the earlier decision and dismissed the Revenue's appeal on this ground as well.Conclusion:The Tribunal dismissed the Revenue's appeal in its entirety, upholding the CIT(A)'s decisions on both issues. The disallowance of installation charges under section 40(a)(i) was deleted, and the disallowance of incidental expenses was restricted to 25%.