TDS on payments to non-residents for installation and testing held not deductible; bad debt and provision rules clarified thereafter.

Payments to non-resident service providers for installation and testing were characterised as income not taxable in India under the source-of-income principles, so no TDS under the domestic withholding provision was required and corresponding disallowance under disallowance provisions did not arise. Bad debts written off qualify for deduction where the related income from those debts was offered to tax in earlier years and reflected in profit and loss, so conditions for bad debt deduction are satisfied and disallowance was inappropriate. Provisions for unquantified contingent expenses are not deductible as unascertained liabilities. Belated employer contributions to employee funds are not deductible.

---

---

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act.
2. Disallowance of bad debts.
3. Disallowance of provision for expenses.
4. Disallowance of employees' contribution to PF & ESI.

Summary:

Disallowance under Section 40(a)(i) of the Income Tax Act:
The primary issue was whether payments made by the assessee to non-resident service providers for rendering installation and testing services constituted 'fees for technical services' (FTS) under Section 9(1)(vii) and were subject to TDS under Section 195 of the IT Act. The Assessing Officer (AO) disallowed these payments for non-deduction of TDS, arguing that the services rendered fell within the ambit of FTS and were taxable in India. However, the CIT(A) deleted the disallowance, holding that the payments fell under the exception to Section 9(1)(vii)(b) as the services were utilized in a business carried on outside India or for earning income from a source outside India. The Tribunal upheld the CIT(A)'s decision, stating that the payments did not qualify as FTS under the India-USA DTAA's 'make available' clause and were not taxable in India.

Disallowance of Bad Debts:
For the assessment year 2010-11, the AO disallowed the assessee's claim for bad debts written off, arguing that the income pertaining to these bad debts was not offered in the computation of total income for previous years. The CIT(A) directed the AO to verify if the amounts claimed as bad debts were included in the income for earlier years. The Tribunal upheld the CIT(A)'s decision, noting that the conditions prescribed under Section 36(2) were satisfied as the income had been offered to tax in earlier years.

Disallowance of Provision for Expenses:
For the assessment years 2012-13 and 2013-14, the AO disallowed provisions made for expenses under professional charges, considering them contingent liabilities. The CIT(A) upheld the AO's decision. The Tribunal also upheld the disallowance, stating that the assessee failed to provide evidence that the liability had arisen in the relevant assessment year and that the provision was unascertained and not crystallized.

Disallowance of Employees' Contribution to PF & ESI:
For the assessment year 2017-18, the AO disallowed belated payments of employees' contributions to PF & ESI under Section 36(1)(va) r.w.s. 2(24)(x) and 43B. The CIT(A) deleted the disallowance. However, the Tribunal reversed the CIT(A)'s decision, relying on the Supreme Court's ruling in Checkmate Services P. Ltd., which held that belated payments of employees' contributions to PF & ESI are not deductible.

Conclusion:
- Appeals filed by the revenue for assessment years 2010-11, 2012-13, 2013-14, and 2016-17 were dismissed.
- The appeal filed by the revenue for assessment year 2017-18 was partly allowed.
- Appeals filed by the assessee for assessment years 2012-13 and 2013-14 were dismissed.

---