2023 (3) TMI 1024 - AT - Income Tax

Appeal allowed on payments to parent company as technical fees not subject to disallowance

The Tribunal allowed the appeal filed by the assessee concerning the treatment of payments made to its parent company as fees for technical services. It ... TDS u/s 195 - Disallowance u/s. 40(a)(ib) - payment made to parent company as fees for technical services - report from chartered accountant to be furnished u/s. 92E relating to international transactions wherein it has been confirmed that payment under consideration is reimbursement of actual expenses and allocated expenses to parent company - HELD THAT:- As the assessee rendered 'International services' outside India which required the payment in question. If this is the position, which has not even been disputed by the revenue, then there can be no question of roping such income within the ken of section 9(1)(i). It is, therefore, patent that the payment remitted by the assessee neither falls under section 9(1)(i) nor under section 9(1)(vii). Since the income cannot be described as deemed to accrue or arise in India and there is no doubt about such income having not been received or deemed to be received or accruing or arising in India, the taxability of such income fails. Therefore, the impugned order has to be set aside and it has to be held that the amount in question cannot be charged to tax. As reasonably concluded that payments remitted by the assessee to its parent company do not attract the provisions of sec 5 and sec 9. Even if it is assumed for the time being that assessee’s remittances falls in sec. 9 still revenue is not able to establish the basic condition of sec 195 i.e. income element. In view of this payments made by assessee without TDS will not attract disallowance u/s. 40(a) (ib) r.w.s.195 and 9. Appeal filed by the assessee is allowed. Issues Involved:1. Treatment of payment made to parent company as fees for technical services and disallowance under section 40(a)(i) of the Income Tax Act, 1961 for non-deduction of tax at source.2. Denial of benefit under the Indo-UAE Double Taxation Avoidance Agreement (DTAA).3. Levy of interest under sections 234B and 234C of the Income Tax Act.4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Treatment of Payment as Fees for Technical Services:The primary issue was whether the payment of Rs. 1,65,31,810/- made by the assessee to its parent company should be treated as fees for technical services and thus be disallowed under section 40(a)(i) for non-deduction of tax at source. The assessee argued that these payments were reimbursements of actual expenses incurred by the parent company and not fees for technical services. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] had classified the services provided by the parent company into various categories such as Accounts, Management Accounting, Human Resource Services, Information Technology Services, Production Services (design), and Production Services (coordination), and held that these were managerial, technical, and consultancy services.Upon review, the Tribunal found that the services provided under the general and administrative service agreement were support services without any cost-plus markup. The Tribunal emphasized that the revenue failed to clearly establish the category of income under sections 5 and 9 of the Act. It was noted that the transaction did not involve any element of markup or profit, and thus section 195 relating to TDS for payments outside India was not applicable. The Tribunal relied on various judicial pronouncements, including those from the Supreme Court, to support its conclusion that the payments were not for managerial or technical services and did not fall within the ambit of section 9(1)(vii). The Tribunal allowed the assessee's appeal on this ground.2. Denial of Benefit under Indo-UAE DTAA:Since the substantive ground regarding the treatment of payment as fees for technical services was decided in favor of the assessee, the issue of the benefit under the Indo-UAE DTAA became academic. Therefore, no further adjudication was required on this ground.3. Levy of Interest under Sections 234B and 234C:The Tribunal noted that the grounds related to the levy of interest under sections 234B and 234C were consequential to the primary ground. Since the primary ground was decided in favor of the assessee, these grounds did not require separate adjudication.4. Initiation of Penalty Proceedings under Section 271(1)(c):Similarly, the ground related to the initiation of penalty proceedings under section 271(1)(c) was also consequential. Given the decision on the primary ground, no separate adjudication was required for this ground.Conclusion:The Tribunal concluded that the payments remitted by the assessee to its parent company did not attract the provisions of sections 5 and 9 of the Income Tax Act. Even if it was assumed that the remittances fell under section 9, the revenue failed to establish the basic condition of section 195, i.e., the income element. Therefore, the payments made by the assessee without TDS did not attract disallowance under section 40(a)(i) read with sections 195 and 9. Consequently, the appeal filed by the assessee was allowed.Order:The appeal filed by the assessee was allowed, and the order was pronounced in the open court on the 13th day of January, 2023.