2017 (11) TMI 1968 - AT - Income Tax

Tribunal upholds tax disallowance for non-resident payments

Growing Opportunity Finance (India) Pvt. Ltd. Versus Asst. Commissioner of Income Tax (OSD), Corporate Circle-2, Chennai

The Tribunal upheld the disallowance under section 40(a)(i) for non-deduction of tax at source on payments to a non-resident non-profit organization, ... TDS u/s 195 - Disallowance u/s. 40(a)(i) - non deduction of tax at source on the following payments to Opportunity International, USA (OI) a non-resident non-profit organization - assessee is in second appeal - HELD THAT:- Payments is in respect of services utilized in India and in the nature of FTS. The collateral support is, as explained during hearing, either by way of undertaking or provision of security, enforceable in India, to enable the assessee, a micro finance company, to borrow funds from banks and financial institutions for the purpose of its business. OI Membership is again to enable the assessee to secure the membership of an entity, representing a framework of organizations, i.e., to secure its membership and, thus, the various services and benefits for the conduct of its business in India under its aegis. MIS Emerge fee is again for reporting systems (for micro finance organization and finding solutions), perhaps to be followed as a member. These are clearly in the nature of managerial and technical services falling within the purview of FTS covered u/s. 9(1)(vii). The decision in G.E India Technology Pvt. Ltd. [2010 (9) TMI 7 - SUPREME COURT] is, in ratio, clearly applicable in the facts of the case, albeit in favour of tax deduction tax at source and, consequently, applicability of s. 40(a)(i), which stands thus rightly invoked. The same, it can be appreciated, does not provide for absolute disallowance, and the assessee could, by remitting the withholding tax, grossing it up, claim deduction for the year of payment. - Decided against assessee. Issues:1. Maintainability of disallowance u/s. 40(a)(i) for non-deduction of tax at source on payments to a non-resident non-profit organization.Analysis:The appeal before the Appellate Tribunal ITAT Chennai concerned the disallowance u/s. 40(a)(i) in the sum of Rs. 27,01,189/- for non-deduction of tax at source on payments to a non-resident non-profit organization. The Assessing Officer disallowed the amount due to the failure of the assessee to deduct tax at source. The appellant contended that the payments were not subject to tax in India as they did not involve transfer of technical services and the non-resident had no permanent establishment in India. However, the CIT(A) held that the payments were for technical services covered u/s. 9(1)(vii) of the Income Tax Act and thus, disallowance u/s. 40(a)(i) was justified.The Tribunal observed that the total amount subject to deduction of tax at source was Rs. 43.09 lacs, but the disallowance was restricted to Rs. 27.01 lacs without a clear finding on tax deduction for the remaining amount. The Tribunal directed the Assessing Officer to verify this discrepancy to ensure consistency in the order. Referring to legal precedents, the Tribunal emphasized the duty to address all issues arising from the appeal and provide appropriate directions to the lower authority for a fair decision-making process.Regarding the nature of payments, the Tribunal found that the services for which payments were made were managerial and technical in nature, falling within the definition of fee for technical services under section 9(1)(vii) of the Act. Citing the decision in G.E India Technology Pvt. Ltd., the Tribunal upheld the applicability of tax deduction at source and disallowance u/s. 40(a)(i). The Tribunal clarified that the disallowance did not preclude the assessee from claiming deduction upon remitting the withholding tax.In conclusion, the Tribunal dismissed the assessee's appeal, affirming the disallowance u/s. 40(a)(i) for non-deduction of tax at source on payments to the non-resident non-profit organization.This comprehensive analysis covers the key legal issues and the Tribunal's reasoning in the judgment delivered by the Appellate Tribunal ITAT Chennai.