Appeal outcome on income tax disallowance: Partial win for one payment, rejection for another.

The Tribunal partly allowed the appeal concerning disallowance under Section 40(a)(ia) of the Income Tax Act for a payment to the Central Power Research Institute, remitting the issue to the Assessing Officer for verification. However, the appeal was rejected regarding disallowance under Section 40(a)(i) for a payment to Korea Electro Technology Research Institute, as the Tribunal upheld the CIT(A)'s decision based on the Delhi High Court judgment. The order was pronounced on 06th May, 2016, at Chennai.

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Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act on payment made to Central Power Research Institute.
2. Disallowance under Section 40(a)(i) of the Income Tax Act on payment made to Korea Electro Technology Research Institute.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The first issue pertains to the disallowance under Section 40(a)(ia) of the Income Tax Act on the payment made to the Central Power Research Institute of Bangalore. The main contention of the appellant's representative (A.R) was that nothing was payable at the end of the financial year, and thus, the issue is covered by the Special Bench decision in Merilyn Shipping and Transports v. Addl. CIT [2012] 16 ITR (Trib) 1 (Visakhapatnam) [SB]. The Tribunal acknowledged the argument and noted that the Special Bench had decided the issue in favor of the assessee. Additionally, the Co-ordinate Bench in Shri N. Palanivelu Vs. ITO [2015] 40 ITR (Trib) 325 [Chennai] held that Section 40(a)(ia) is not applicable when there is no outstanding balance at the end of the financial year. However, the assessee did not provide records of outstanding expenses or a schedule of sundry creditors. Therefore, the Tribunal remitted the issue back to the Assessing Officer (AO) to verify the claim, directing that if the impugned amount is not outstanding at the end of the financial year, the amount cannot be disallowed. The ground raised by the assessee under Section 40(a)(ia) was partly allowed for statistical purposes.

2. Disallowance under Section 40(a)(i) of the Income Tax Act:
The second issue involves the disallowance under Section 40(a)(i) on payment made to Korea Electro Technology Research Institute. The appellant's representative argued that the certifying work was done by machines without human intervention, and thus, it should not be considered as "Technical Services" under Section 9(1)(vii) of the Income Tax Act. The representative cited judgments from Siemens Limited Vs. CIT(A) and ITO Vs. Right Florists Pvt. Ltd., and also referred to CBDT’s Instruction No.2/2014, suggesting that the AO should determine the income component involved for withholding tax. The representative requested the issue to be remitted back to the AO for fresh consideration in light of the Double Taxation Avoidance Agreement (DTAA).

On the other hand, the Department's representative (D.R) contended that the services availed were technical services, and the assessee was liable for TDS deduction under Section 195. The D.R relied on the Delhi High Court judgment in M/s. Havells (India) Ltd., which held that fees paid for testing and certification services are taxable in India, and the assessee was liable to deduct tax at source.

The Tribunal found the issue covered by the Delhi High Court judgment in M/s. Havells (India) Ltd., which elaborated that the source of income was located in India due to the fulfillment of export activities in India. Consequently, the Tribunal rejected the appellant's request to remit the issue back to the AO, as the CIT(A) had correctly followed the Delhi High Court's judgment. Thus, the ground raised by the assessee was rejected.

Conclusion:
The appeal was partly allowed for statistical purposes regarding the first issue and rejected regarding the second issue. The Tribunal directed the AO to reassess the first issue based on the provided guidelines and upheld the CIT(A)'s decision on the second issue. The order was pronounced in the open court on 06th May, 2016, at Chennai.

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