2021 (3) TMI 1011 - AT - Income Tax

Disallowance of expenses under Section 40(a)(i) of Income-tax Act

The case involved the disallowance of expenses under Section 40(a)(i) of the Income-tax Act due to non-deduction of tax at source. The Tribunal determined ... TDS u/s 195 - certain expenses paid to the Singapore HO without deducting tax at source - disallowance u/s. 40(a)(i) on account of non-deduction of tax - case of the assessee before the AO that expenses were in the nature of `reimbursement of expenses’ in the hands of the Singapore HO and hence, no deduction of tax at source was called for in its hands - HELD THAT:- Seminar expenses, Training expenses, Printing expenses and Staff welfare expenses are amounts paid by the Indian BO to the Singapore HO, which satisfy the twin conditions of `reimbursement’ viz., one-to-one direct correlation between the outgo and inflow of the Singapore HO; and the inflow of the identical amount without any profit element. Since the Singapore HO recovered the same amount from the Indian BO as was incurred by it to third parties without any profit element, the receipt cannot be construed as “other sum chargeable under the provisions of this Act” so as to warrant deduction of tax at source u/s.195 of the Act by the Indian BO. Once it is held that TDS was not necessary, there can be no question of disallowance u/s.40(a)(i). IT expenses paid are for availing IT services to be utilized in its activity of rendering technical services to the customers in Asia Pacific region, then the matter would come to stage two requiring further analysis for examining if the payment falls in the category of `fees for technical services’. On the other hand, if the IT services are utilised by the Indian BO towards business process outsourcing, payment for the same cannot be treated as fees for technical services. Again, it is relevant to note that deduction of tax at source u/s 195 is warranted not only if the payment is towards fees for technical services. In case the amount is chargeable to tax in the hands of non-resident in any other manner, deduction of tax at source is warranted and non-deduction would lead to the consequential effect of disallowance. In the given circumstances, when we do not have the benefit of the relevant Agreement and other attending details, we consider it expedient to set aside the impugned order pro tanto and send this issue back to the file of AO for examining the true nature of transaction under which the assessee paid IT expenses on monthly basis and thereafter determine whether or not tax is deductible at source u/s. 195 of the Act and consequential disallowance u/s.40(a)(i) - Decided partly in favour of assessee. Issues Involved:1. Disallowance of Rs. 1,22,43,873/- under Section 40(a)(i) due to non-deduction of tax at source under Section 195.2. Determination of whether various expenses constitute 'reimbursement of expenses' and thus are exempt from tax deduction at source.Detailed Analysis:Issue 1: Disallowance under Section 40(a)(i) for Non-Deduction of Tax at SourceThe primary issue in this appeal concerns the disallowance of Rs. 1,22,43,873/- under Section 40(a)(i) of the Income-tax Act, 1961, due to the non-deduction of tax at source under Section 195. The disallowed amount pertains to various expenses paid by the Indian Branch Office (BO) to the Singapore Head Office (HO), which include seminar expenses, IT expenses, training expenses, printing expenses, and staff welfare expenses.Issue 2: Determination of Reimbursement of ExpensesThe Tribunal examined whether the payments made by the Indian BO to the Singapore HO were in the nature of reimbursements, which would not require tax deduction at source under Section 195. The Tribunal analyzed each category of expenses individually to determine if they met the criteria for reimbursement.Seminar Expenses:The Tribunal found that the seminar expenses amounting to Rs. 83,85,562/- were incurred by the Singapore HO and subsequently charged to the Indian BO without any markup. The expenses were for seminars attended by customers of BYK Germany, and there was a direct correlation between the expenses incurred and the amounts recovered. Therefore, these expenses were deemed to be reimbursements and did not require tax deduction at source.Training Expenses:Training expenses of Rs. 1,45,780/- were also found to be reimbursements. The expenses were incurred by the Singapore HO for training attended by employees of the Indian BO and were recovered without any markup. The Tribunal concluded that these expenses met the criteria for reimbursement.Printing Expenses:The printing expenses amounting to Rs. 46,682/- were for printing visiting cards for employees of the Indian BO. The expenses were incurred by the Singapore HO and recovered from the Indian BO without any markup. The Tribunal held that these expenses were reimbursements and did not require tax deduction at source.Staff Welfare Expenses:Staff welfare expenses of Rs. 21,335/- were for gold coins given as rewards to employees of the Indian BO. The expenses were incurred by the Singapore HO and recovered from the Indian BO without any markup. The Tribunal concluded that these expenses were reimbursements.IT Expenses:The IT expenses amounting to Rs. 36,44,508/- were treated differently. The Tribunal noted that these expenses were monthly payments made by the Indian BO to the Singapore HO for IT support services. The Tribunal found that the nature of these expenses and their relation to the income-generating activities of the Indian BO needed further examination. The Tribunal remanded this issue back to the Assessing Officer (AO) to determine whether the IT expenses were for services utilized in the Indian BO's technical support activities and whether they constituted fees for technical services or business process outsourcing. The AO was directed to examine the relevant agreement and other details to make a determination.Conclusion:The Tribunal concluded that the seminar expenses, training expenses, printing expenses, and staff welfare expenses were reimbursements and did not require tax deduction at source. However, the IT expenses required further examination, and the issue was remanded back to the AO for a detailed analysis. The appeal was partly allowed, and the order was pronounced in the Open Court on 24th March 2021.