2022 (12) TMI 1081 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on disallowance rulings for AY 2009-10

The Tribunal dismissed the revenue's appeal for AY 2009-10, upholding the Ld. CIT(A)'s decisions on disallowance u/s 40(a)(i) and u/s 14A. Regarding ... Disallowance under section 40(a)(i) for failure to deduct tax at source - obligation to deduct tax under section 195 - retrospective statutory amendment cannot fasten past TDS liability which was impossible to comply with - payments to foreign agents for procuring business outside India not taxable as fees for technical services where services rendered outside India and no permanent establishment in India - disallowance under section 14A and computation under Rule 8D(2)(iii) - only investments which actually yielded exempt income to be considered for disallowance under section 14ADisallowance under section 40(a)(i) for failure to deduct tax at source - obligation to deduct tax under section 195 - retrospective statutory amendment cannot fasten past TDS liability which was impossible to comply with - payments to foreign agents for procuring business outside India not taxable as fees for technical services where services rendered outside India and no permanent establishment in India - Whether payment of selling commission to non-resident agents for procurement of orders outside India could be disallowed under section 40(a)(i) for non-deduction of tax at source. - HELD THAT: - The Tribunal accepted the factual finding that the payments were selling commissions to US and Australia based entities for procuring business outside India and that the payees had no permanent establishment in India. At the relevant time there was no obligation on the assessee to deduct tax under section 195 in view of judicial precedents treating such overseas procurement commissions as not constituting fees for technical services where services were rendered outside India. The AO relied upon a subsequently inserted Explanation to section 195 (by later Finance Act) with retrospective effect; the Tribunal held that liability to deduct TDS could not be fastened on the assessee on the basis of a later retrospective amendment which the assessee could not reasonably have foreseen or complied with at the time of payment. The Tribunal followed coordinate bench decisions to the same effect and thereby upheld the CIT(A)'s allowance of the ground in favour of the assessee and set aside the disallowance under section 40(a)(i). [Paras 2]Disallowance under section 40(a)(i) on account of non-deduction of TDS on selling commission paid to non-resident agents is not sustainable and is deleted.Disallowance under section 14A and computation under Rule 8D(2)(iii) - only investments which actually yielded exempt income to be considered for disallowance under section 14A - Whether the AO's disallowance under section 14A by applying Rule 8D(2)(iii) was correct and whether the CIT(A)'s direction to confine computation to investments which actually yielded exempt income was proper. - HELD THAT: - The Tribunal found that the CIT(A)'s direction to restrict the section 14A disallowance to those investments which actually yielded exempt dividend income in the year accords with the Special Bench decision in ACIT vs. Vireet Investment (P.) Ltd. and is therefore correct. The AO's application of Rule 8D(2)(iii) without limiting the computation to exempt-yielding investments was set aside and the CIT(A)'s approach was confirmed. [Paras 3]Direction of the CIT(A) to compute section 14A disallowance by considering only investments that actually yielded exempt income is upheld; the AO's disallowance is not sustained.Final Conclusion: Both grounds of the revenue appeal are dismissed: the disallowance under section 40(a)(i) is deleted as TDS liability could not be imposed retrospectively where payments were for procurement of business outside India and payees had no PE in India; the CIT(A)'s direction on section 14A computation is confirmed in line with Vireet Investment (P.) Ltd. Issues:1. Disallowance u/s 40(a)(i)2. Disallowance u/s 14AIssue 1: Disallowance u/s 40(a)(i)The appeal by Revenue for AY 2009-10 concerns disallowance u/s 40(a)(i) due to non-deduction of tax at source on selling commission paid to non-resident entities. The Ld. AO disallowed the payment u/s 40(a)(i) as the assessee did not deduct tax at source as required u/s 195. However, the Ld. CIT(A) allowed relief to the assessee, considering the nature of the commission and absence of permanent establishment in India for the payees. The Ld. CIT(A) referred to judicial decisions supporting the non-taxability of such payments in India. The Tribunal concurred with the Ld. CIT(A) and held that the liability towards TDS cannot be imposed on the assessee based on subsequent amendments to the law with retrospective effect. The Tribunal cited precedents where it was held that the assessee cannot be expected to foresee amendments and deduct TDS, thus disallowance u/s 40(a)(i) was unwarranted.Issue 2: Disallowance u/s 14AThe second issue pertains to disallowance u/s 14A concerning exempt dividend income earned by the assessee. The Ld. AO made a disallowance under Rule 8D(2)(iii), which was contested by the assessee. The Ld. CIT(A) directed the Ld. AO to consider investments that actually yielded exempt income during the year. The Tribunal found the Ld. CIT(A)'s directions in line with the decision of the Special Bench of ITAT in ACIT vs. Vireet Investment (P.) Ltd. Consequently, the impugned order was upheld, and the corresponding grounds raised by the revenue were dismissed.In conclusion, the Tribunal dismissed the appeal of the revenue, upholding the decisions of the Ld. CIT(A) on both issues. The judgment emphasizes the importance of considering the nature of payments and the applicability of tax deduction at source provisions in international transactions to determine the tax liability of the assessee accurately.