2021 (2) TMI 789 - AT - Income Tax

Tribunal grants appeal, removes disallowance under section 40(a)(i) and directs AO to verify tax credits

The Tribunal allowed the appeal in ITA No. 983/Del./2016, deleting the disallowance under section 40(a)(i) and related adjustments. In ITA No. ... TDS u/s 192 or 195 - Disallowance u/s 40(a)(ia) - expenditure towards salary and other allowances of expatriate employees - Whether the same are in nature of Fee for Technical Services and no tax was deducted at source by the assessee - HELD THAT:- As decided in assessee's own case[2020 (8) TMI 410 - ITAT DELHI] the secondees were, in fact, in employment of the appellant and as per the terms, the 'A' was paying salaries at the home country of the secondees and, therefore, there was reimbursement by the appellant. These facts clearly show that the assessee has been paying to its own employees. As perused the TDS certificates, Forms 15CA and 15CB, tax deducted by the assessee and all these documents are part of the paper book. There is no dispute that the assessee has deducted tax at source u/s 192 of the Act. On the given facts of the case, we are of the considered opinion that the provisions of Section 195 of the Act do not apply. Considering the facts of the case in totality, we do not find any merit in the disallowance made by the Assessing Officer/DRP. We, accordingly, direct for deletion of addition . Issues Involved:1. Addition under section 40(a)(i) of the Income Tax Act.2. Characterization of payments as Fees for Technical Services (FTS) under various tax treaties.3. Reimbursement of salary and other allowances to expatriate employees.4. Enhancement of income by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).5. Issuance and validity of notice under section 154 of the Income Tax Act.6. Short credit of taxes paid.7. Levy of consequential interest under section 234B.8. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Addition under section 40(a)(i) of the Income Tax Act:The primary issue was whether the addition of Rs. 25,10,56,019 under section 40(a)(i) by the Assessing Officer (AO) and DRP was justified. The AO treated the payments as Fees for Technical Services (FTS) under section 9(1)(vii) and relevant tax treaties, disallowing them due to the assessee's failure to deduct tax at source. The Tribunal found that the same issue was adjudicated in the assessee's favor in previous years (AY 2015-16), where it was held that the assessee had deducted tax under section 192, and thus, section 195 did not apply. Following this precedent, the Tribunal deleted the disallowance.2. Characterization of Payments as FTS:The AO and DRP characterized the payments as FTS under Article 12 of various tax treaties (India-US, India-UK, and India-Australia). The Tribunal noted that the expatriate employees were under the control of the assessee and were not providing services on behalf of the Associated Enterprises (AEs). Therefore, the payments did not qualify as FTS, and the Tribunal directed the deletion of the disallowance.3. Reimbursement of Salary and Other Allowances to Expatriate Employees:The assessee argued that the payments were reimbursements for salaries and allowances of expatriate employees who worked under its control. The Tribunal found that the assessee was the real employer, and the payments were reimbursements without any income element. Consequently, the Tribunal held that these reimbursements were not taxable as FTS and deleted the disallowance.4. Enhancement of Income by TPO and DRP:The DRP and TPO recharacterized the assessee as a technical consultancy service provider and made adjustments accordingly. The Tribunal found that the assessee was engaged in providing business development and support services, not technical consultancy. The Tribunal rejected the recharacterization and the associated adjustments, following the findings of previous years.5. Issuance and Validity of Notice under Section 154:The assessee challenged the issuance of notice under section 154 and the subsequent rectification order. The Tribunal found that the rectification order increased the disallowance under section 40(a)(i) from Rs. 25,10,56,019 to Rs. 31,73,75,430. Since the primary disallowance was deleted, the Tribunal also deleted the additional disallowance made in the rectification order.6. Short Credit of Taxes Paid:The assessee raised the issue of short credit of taxes paid amounting to Rs. 9,44,12,220 instead of Rs. 10,94,12,220. The Tribunal directed the AO to verify the amount of taxes paid and allow the correct credit in accordance with the law, allowing this ground for statistical purposes.7. Levy of Consequential Interest under Section 234B:The assessee contested the levy of interest under section 234B. Given the deletion of the primary disallowance, the consequential interest under section 234B was also impacted. The Tribunal's order implicitly addressed this by deleting the disallowance.8. Initiation of Penalty Proceedings under Section 271(1)(c):The AO initiated penalty proceedings under section 271(1)(c). The Tribunal's deletion of the primary disallowance under section 40(a)(i) would affect the basis for the penalty proceedings, although this specific issue was not separately adjudicated in the order.Conclusion:The Tribunal allowed the appeal in ITA No. 983/Del./2016, deleting the disallowance under section 40(a)(i) and related adjustments. In ITA No. 3695/Del./2018, the Tribunal deleted the additional disallowance made in the rectification order and directed the AO to verify the correct credit of taxes paid. The appeals were allowed, with the second appeal allowed for statistical purposes.