2022 (6) TMI 1489 - AT - Income Tax

TDS required on software payments to Mauritius entities under section 195 as fees for technical services

The ITAT Chennai upheld lower authorities' orders regarding TDS liability under section 195 for software development payments to Mauritius entities, ... TDS u/s 195 - expenses in respect of software development expenses paid to two entities in Mauritius for non- deduction of TDS - HELD THAT:- We noted that the assessee failed to prove the nature of payments and assessee did not file any evidence neither before AO nor before CIT(A). Even now, the assessee is reluctant to file these details and hence, we presume that the payment made abroad for software consultancy charges are in the nature of fee for technical service as per section 9(1)(vii) of the Act and the assessee’s case squarely falls under the provisions of section 195. The assessee is subject to TDS but failed to deduct the same. We confirm the orders of lower authorities on this issue and dismiss this ground of assessee’s appeal. Similar are the facts for the assessment year 2012-13. Hence, taking a consistent view, we confirm the orders of lower authorities on this issue and dismiss this ground of assessee’s appeal. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A r.w.rule 8D - HELD THAT:- Assessee stated that the assessee has received dividend income in regard to investment in shares of two foreign subsidiaries and this is admitted fact. We noted that the assessee has made investment in overseas subsidiaries i.e., in Num TV Ltd E &Softcom, which are foreign companies whose dividend income is not exempt from tax. The ld.counsel for the assessee filed copy of Tribunal’s order in assessee’s own case for the assessment years 2007-08 & 2009-10 [2020 (5) TMI 310 - ITAT CHENNAI], wherein the investment in foreign companies, the disallowance made u/s.14A r.w.rule 8D of the Rules is deleted. We noted that even otherwise the issue is very simple that the dividend received from foreign subsidiaries is always taxable and it is not exempt. Once this is the position, addition cannot be made. Hence, this issue on both the appeals is allowed. Depreciation claimed on digital content - @ 25% OR @ 60% treating the same as intangible asset - HELD THAT:- This issue is covered by Tribunal’s decision in assessee’s own case [2020 (5) TMI 310 - ITAT CHENNAI], wherein the Tribunal for the assessment years 2007-08 & 2009-10 held that the assessee is eligible for depreciation @ 25%. Issues:1. Disallowance of expenses for non-deduction of TDS under section 195 of the Income Tax Act.2. Disallowance of expenses relatable to exempt income under section 14A r.w.rule 8D of the Rules.3. Restriction of depreciation claimed on digital content at 25% instead of 60%.Issue 1: Disallowance of Expenses for Non-Deduction of TDS under Section 195:The appeals by the assessee challenged the disallowance of expenses in respect of software development paid to entities in Mauritius for non-deduction of TDS under section 195 of the Income Tax Act. The Commissioner of Income Tax (Appeals) confirmed the disallowance, stating that the payments constituted 'fee for technical service' falling under section 9(1)(vii) of the Act. The CIT(A) noted that the assessee failed to provide essential details despite requests, leading to the confirmation of the AO's disallowance under section 40(a)(i) of the Act. The Tribunal upheld the lower authorities' decision, as the assessee did not furnish evidence to prove the nature of payments, resulting in the presumption that the expenses were subject to TDS under section 195.Issue 2: Disallowance of Expenses Relatable to Exempt Income under Section 14A r.w.Rule 8D:The appeals contested the disallowance of expenses related to exempt income by invoking section 14A r.w.rule 8D of the Rules. The assessee argued that the dividend income from foreign subsidiaries was taxable and not exempt, thus falling outside the purview of section 14A. The Tribunal agreed with the assessee, citing that dividend income from foreign subsidiaries is always taxable and not exempt. Referring to a previous Tribunal decision, the Tribunal allowed the issue in favor of the assessee, emphasizing that when the dividend received from foreign subsidiaries is taxable, no addition can be made under section 14A.Issue 3: Restriction of Depreciation Claimed on Digital Content at 25% Instead of 60%:The final issue concerned the CIT(A)'s decision to restrict the depreciation claimed on digital content at 25% instead of 60%, treating it as an intangible asset. The Tribunal noted that this issue was covered by a prior Tribunal decision in the assessee's own case, where it was held that the assessee was eligible for depreciation at 25% for copyrighted material developed as 'Digital Content.' The Tribunal affirmed the CIT(A)'s order and dismissed the appeal on this issue, stating that the digital content, although manipulated for use in films, retained the character of copyrighted material and was eligible for depreciation at 25%.In conclusion, the Tribunal partly allowed both appeals by the assessee, upholding the disallowance of expenses for non-deduction of TDS under section 195, allowing the issue of disallowance of expenses relatable to exempt income under section 14A, and dismissing the appeal regarding the restriction of depreciation claimed on digital content at 25% instead of 60%.