Tribunal rules in favor of assessee on overseas payments & exempts from tax deduction under Section 195

The Tribunal ruled in favor of the assessee regarding the addition made under Section 40(a)(ia) for payments to overseas entities without tax deduction under Section 195. The High Court held that such payments were not subject to tax deduction in India as they did not constitute "fees for technical services" and were performed outside India. Consequently, the additions for the relevant assessment years were deleted. Regarding the addition under Rule 14A read with Rule 8D(iii) for the assessment year 2010-11, the Tribunal remitted the matter back to the AO for proper computation of actual expenses towards earning exempt income. The appeals were partly allowed, and the Tribunal's order was pronounced in Chennai on July 23, 2018.

---

---

Issues Involved:
1. Addition made by invoking Section 40(a)(ia) of the Act for payments made to overseas entities without deduction of tax under Section 195.
2. Addition made by invoking Rule 14A read with Rule 8D(iii) for the assessment year 2010-11.

Issue-wise Detailed Analysis:

1. Addition under Section 40(a)(ia) for Payments to Overseas Entities Without Deduction of Tax under Section 195:

The core issue was whether the payments made by the assessee to foreign agents for marketing, procurement of orders, and systematic market research should be subjected to tax deduction at source under Section 195 of the Income Tax Act. The Assessing Officer (AO) deemed the income arising from such payments as taxable in India under Section 9(1)(vii), thus invoking Section 40(a)(ia) due to non-deduction of tax at source by the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, relying on a previous Tribunal order in the assessee's own case for the assessment year 2009-10.

However, the Hon’ble Jurisdiction Madras High Court, in a subsequent appeal for the assessment year 2009-10, ruled in favor of the assessee. The High Court clarified that the payments were for marketing and procuring orders, which do not constitute "fees for technical services" as defined under Explanation 2 of Section 9(1)(vii). The Court emphasized that such services are not managerial, technical, or consultancy services and are incidental to the job of procuring orders on a commission basis. The High Court also noted that the situs of rendering services was outside India, and there was no business connection or permanent establishment of the foreign agents in India.

The Tribunal, respecting the High Court's judgment, concluded that Section 195 does not apply to the payments made to foreign agents for the relevant assessment years 2010-11 and 2011-12. Consequently, the provisions of Section 40(a)(ia) could not be invoked. The Tribunal directed the AO to delete the additions of Rs. 4,42,30,697/- and Rs. 2,55,18,179/- for the assessment years 2010-11 and 2011-12, respectively.

2. Addition under Rule 14A read with Rule 8D(iii) for the Assessment Year 2010-11:

The second issue pertained to the disallowance of Rs. 68,512/- under Rule 14A read with Rule 8D(iii) for the assessment year 2010-11. The AO and CIT(A) had not thoroughly examined the actual expenditure incurred by the assessee towards earning dividend income, which is exempt from tax.

The Tribunal referred to its earlier decision in a similar case, emphasizing that the assessee must compute the actual expenses incurred for earning exempt income and disallow the same from taxable income. The Tribunal highlighted that the cost incurred for decision-making related to investments that generate exempt income cannot be claimed as a deduction.

Given that the assessee had not computed the actual expenditure, the Tribunal remitted the matter back to the AO. The AO was directed to allow the assessee an opportunity to compute the actual expenditure incurred towards investments earning exempt income and disallow the same. The AO was instructed to verify the computation and decide the matter in accordance with the law.

Conclusion:

The appeal for the assessment year 2010-11 was partly allowed for statistical purposes, and the appeal for the assessment year 2011-12 was allowed. The Tribunal’s order was pronounced on the 23rd of July, 2018, in Chennai.

---