2022 (4) TMI 1498 - AT - Income Tax

Tribunal remands issues for de novo verification, stresses treaty benefits & payment nature

The Tribunal allowed the appeals for statistical purposes, remanding several issues back to the AO for de novo verification, emphasizing the need to ... Fee for technical services - make available - royalty - permanent establishment - section 40(a)(ia) disallowance for non-deduction of TDS - depreciation not covered by section 40(a)(ia) - capital v. revenue expenditure - provisions (uncrystallised liability) and mercantile accounting - treaty benefits prevail over domestic lawFee for technical services - make available - royalty - permanent establishment - section 40(a)(ia) disallowance for non-deduction of TDS - treaty benefits prevail over domestic law - Characterisation of web hosting payments to non resident vendors and correctness of disallowance under section 40(a)(ia). - HELD THAT: - The Tribunal observed that web hosting/digital service payments may be susceptible of different characterisations under DTAAs (FTS, royalty or business income if PE exists) and that domestic law cannot override treaty benefits. The Tribunal held that the question of correct characterisation depends on the agreements, factual matrix and application of DTAA principles and Supreme Court guidance in Engineering Analysis Centre of Excellence. Consequently the Tribunal remanded the issue to the Assessing Officer for de novo verification and correct characterisation having regard to the relevant agreements, DTAAs and opportunity to the assessee; treaty benefits, if available, cannot be denied without proper consideration. [Paras 17]Issue remanded to the Assessing Officer for de novo examination and determination of characterisation and tax liability; Ground No.1 (A.Y. 2012 13) and Ground No.2 (A.Y. 2013 14) allowed for statistical purposes.Fee for technical services - make available - section 40(a)(ia) disallowance for non-deduction of TDS - treaty benefits prevail over domestic law - Taxability and deductibility of consultancy fees paid to various non residents and correctness of disallowance under section 40(a)(ia). - HELD THAT: - The Tribunal noted that the Assessing Officer did not examine the underlying agreements and treaty provisions to ascertain the real character of consultancy/recruitment payments across multiple jurisdictions. In the interest of justice and having regard to DTAA considerations and attendant facts, the Tribunal remanded the matter to the Assessing Officer to consider the agreements, available treaty provisions and evidence after giving the assessee opportunity to be heard; the Assessing Officer is to apply relevant Tribunal, High Court and Supreme Court authorities in making the determination. [Paras 18]Issue remanded to the Assessing Officer for de novo consideration; Ground No.4 (A.Y. 2012 13) and Ground No.3 (A.Y. 2013 14) allowed for statistical purposes.Depreciation not covered by section 40(a)(ia) - section 40(a)(ia) disallowance for non-deduction of TDS - Whether disallowance under section 40(a)(ia) applies to depreciation claimed on capitalised computer software acquired without TDS. - HELD THAT: - The Tribunal accepted the assessee's submission that depreciation is a statutory deduction under section 32 on an asset and is not an outgoing in the sense attracted by section 40(a)(ia). The Tribunal relied on its coordinate bench authority to hold that where software cost has been capitalised and depreciation claimed, the provisions of section 40(a)(ia) are not attracted merely because tax was not deducted on the purchase. Accordingly the Assessing Officer was directed to delete the addition. [Paras 19]Addition/disallowance in respect of software cost for A.Y. 2013 14 deleted; ground allowed.Provisions (uncrystallised liability) and mercantile accounting - section 40(a)(ia) disallowance for non-deduction of TDS - Allowability of year end provision for advertisement charges (reversed on the first day of the next year) and correctness of disallowance under section 40(a)(ia). - HELD THAT: - The Tribunal found that the provision related to contingent liability for which invoices were not received as at year end and was reversed on the first day of the next accounting year. Applying the ratio of the Karnataka High Court and coordinate bench decisions, and noting the mercantile system of accounting, the Tribunal held there was no accrual of income in the hands of the payee and therefore section 40(a)(ia) did not apply; the Assessing Officer was directed to delete the disallowance. [Paras 20]Disallowance of the provision for A.Y. 2012 13 deleted; ground allowed.Capital v. revenue expenditure - Whether professional fees incurred for establishing a subsidiary in Australia are capital or revenue in nature. - HELD THAT: - The Tribunal examined the nature of the expenditure and the factual position and observed that the fees were incurred in establishing a subsidiary and for expansion of business. Distinguishing the cited precedents relied on by the assessee, the Tribunal upheld the view of the revenue that the expenditure is capital in nature and noted the assessee had accepted the factual position at the assessment stage. [Paras 21]Disallowance treating the expense as capital sustained; ground dismissed.Final Conclusion: The Tribunal remanded the contentious characterisation of web hosting and consultancy/recruitment payments to the Assessing Officer for de novo examination in light of the relevant agreements and applicable DTAAs (statistical allowance of those grounds). It deleted the disallowance relating to capitalised software depreciation for A.Y. 2013 14 and deleted the year end provision disallowance for A.Y. 2012 13. The disallowance of subsidiary establishment expenses for A.Y. 2012 13 was upheld. Overall, the appeal for A.Y. 2012 13 is partly allowed for statistical purposes and the appeal for A.Y. 2013 14 is allowed for statistical purposes. Issues Involved:1. Disallowance of web hosting charges2. Disallowance of provisions3. Disallowance of subsidiary establishment expenses4. Disallowance of consultancy fee5. Disallowance of software payment6. Disallowance of recruitment chargesIssue-wise Detailed Analysis:1. Disallowance of Web Hosting Charges:- Assessment Year 2012-13: The assessee made payments to various non-resident vendors for web hosting services without deducting TDS, arguing that the services were rendered outside India. The AO disallowed these payments under Section 40(a)(ia) of the Act, treating them as fees for technical services. The CIT(A) upheld the disallowance, stating that the services made available technical knowledge to the assessee.- Assessment Year 2013-14: Similar disallowance was made for payments to non-resident vendors. The Tribunal noted that the payments could either be categorized as fees for technical services or royalties, but not both. The Tribunal remanded the issue back to the AO for de novo verification, emphasizing that treaty benefits cannot be ignored.2. Disallowance of Provisions:- Assessment Year 2012-13: The assessee created a provision for advertisement charges, which was reversed at the beginning of the next year. The AO disallowed the provision, considering it an uncrystallized liability. The CIT(A) upheld the disallowance. The Tribunal, relying on precedents, directed the AO to delete the disallowance, as the provision was reversed before any income accrued to the payee.3. Disallowance of Subsidiary Establishment Expenses:- Assessment Year 2012-13: The AO disallowed professional charges incurred for establishing a subsidiary in Australia, treating them as capital expenditure. The CIT(A) upheld the disallowance, noting that the assessee had agreed to it during the assessment proceedings. The Tribunal found no infirmity in the CIT(A)'s view and dismissed the ground.4. Disallowance of Consultancy Fee:- Assessment Year 2012-13: The AO disallowed consultancy fees paid to non-residents, treating them as fees for technical services under Section 40(a)(ia) of the Act. The CIT(A) upheld the disallowance. The Tribunal remanded the issue back to the AO for de novo verification, directing the AO to consider the agreements and treaty benefits.- Assessment Year 2013-14: Similar disallowance was made for consultancy fees paid to non-residents. The Tribunal remanded the issue back to the AO for de novo verification.5. Disallowance of Software Payment:- Assessment Year 2013-14: The AO disallowed depreciation on software purchases for non-deduction of TDS, treating the purchase as revenue expenditure. The CIT(A) upheld the disallowance. The Tribunal directed the AO to delete the addition, noting that depreciation is a statutory deduction and not an outgoing expenditure, thus not attracting Section 40(a)(i)/(ia).6. Disallowance of Recruitment Charges:- Assessment Year 2013-14: The AO disallowed recruitment charges paid to non-residents for non-deduction of TDS. The CIT(A) upheld the disallowance. The Tribunal remanded the issue back to the AO for de novo verification, directing the AO to consider the agreements and treaty benefits.Conclusion:The Tribunal allowed the appeals for statistical purposes, remanding several issues back to the AO for de novo verification, emphasizing the need to consider treaty benefits and the nature of payments made. The Tribunal directed the AO to delete the disallowance of software payment and provision for advertisement charges, while upholding the disallowance of subsidiary establishment expenses.