Branch office salary reimbursements to head office don't require section 195 TDS when section 192 properly applied

The ITAT Delhi ruled in favor of the assessee regarding TDS provisions under section 195 and disallowance under section 40(a)(i). The case involved a branch office reimbursing salary costs to its head office for expatriate employees without markup. The revenue authorities treated this as fees for technical services and sought disallowance for failure to withhold tax under section 195. However, the tribunal found that TDS was properly deducted under section 192 on expatriate salaries and deposited timely. Following precedent from Serco India case, the tribunal held that section 40(a)(i) disallowance provisions cannot apply when taxes are properly withheld and deposited within prescribed timeframes. The assessee's appeal was allowed.

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Issues Involved:
1. Addition of Rs. 1,83,71,951/- and Rs. 2,53,00,714/- to the returned income for AY 2020-21 and AY 2021-22 respectively.
2. Application of Section 7(3) of DTAA between India and Spain.
3. Classification of services between head office and branch office as Fees for Technical Services (FTS).
4. Disallowance under Article 7(3) of DTAA.
5. Withholding tax under Section 192B vs. Section 195 of the Income Tax Act.
6. Change of opinion by the AO.
7. Principle of natural justice.

Summary:

Issue 1: Addition to Returned Income
The assessee contested the addition of Rs. 1,83,71,951/- for AY 2020-21 and Rs. 2,53,00,714/- for AY 2021-22 made by the AO. The Tribunal noted that the payments were reimbursements of salary expenses for expatriates, which were made on a cost-to-cost basis without any mark-up. The Tribunal found that the entire salary payments had already been subjected to TDS under Section 192 of the Act, and thus, the addition was unwarranted.

Issue 2: Application of Section 7(3) of DTAA
The AO applied Section 7(3) of the DTAA between India and Spain, treating the reimbursement as FTS. The Tribunal held that the payments were not for technical services rendered by the Head Office but were merely salary reimbursements. Thus, Section 7(3) was not applicable.

Issue 3: Classification as Fees for Technical Services
The AO considered the services between the head office and branch office as FTS. The Tribunal found that the expatriates were under the control of the Branch Office in India, and no technical services were rendered by the Head Office. Therefore, the payments could not be classified as FTS.

Issue 4: Disallowance under Article 7(3) of DTAA
The AO disallowed the payments under Article 7(3) of the India-Spain DTAA. The Tribunal noted that the payments were reimbursements and not income for the Head Office, thus disallowance under Article 7(3) was not justified.

Issue 5: Withholding Tax under Section 192B vs. Section 195
The AO argued that the payments should be subjected to withholding tax under Section 195 instead of Section 192B. The Tribunal held that since TDS was already deducted under Section 192B, disallowance under Section 40(a)(i) was not applicable, following the precedent set by the Delhi Tribunal in Serco India Pvt. Ltd. vs. DCIT.

Issue 6: Change of Opinion by the AO
The assessee argued that the AO's action led to a change of opinion. The Tribunal did not find it necessary to adjudicate on this issue in detail as the primary grounds for disallowance were found to be unjustified.

Issue 7: Principle of Natural Justice
The assessee claimed that the AO ignored part of their submission, violating the principle of natural justice. The Tribunal did not specifically address this issue as the primary grounds were sufficient to decide the appeal in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal, deleting the additions of Rs. 1,83,71,951/- and Rs. 2,53,00,714/- for AY 2020-21 and 2021-22 respectively, as TDS had been duly deducted and deposited. The other grounds raised were either academic or not pressed and hence, not adjudicated upon.

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