2024 (9) TMI 1624 - AT - Income Tax

ITAT remands TDS section 195 and technology fees issues for fresh examination by AO

The ITAT Hyderabad remanded both TDS and technology fees issues to the AO for fresh examination. Regarding TDS u/s 195 on payments to secondment ... TDS u/s 195 - assessee has paid an amount to the secondment employees of the parent companies - DRP after perusing the contract of agreement between Assessee and Toshiba Japan vis-à-vis placement of employees in India, formed a view that there was no employer employee relationship between the assessee and secondment employees and the amount which has been paid was in the nature of Fee for Technical Services (FTS) and hence the assessee ought to have deducted the TDS u/s 195 - HELD THAT:- When we go through the agreement then we find that there are certain other clauses like clause No.3.8 which says that tools, equipment, infrastructure and other information necessary for the international assignees (secondment employees) to carry out their duty would be provided by the assessee. Similarly, clause 11 would show that the assessee has also agreed to indemnify the parent company with respect to all claims remedies arising out of the Acts of international assignees (secondment employees). Similarly other clauses of the agreement would show that the international assignees would have lien to their jobs in the parent company after the termination of the secondment employment agreement. All these clauses are required to be investigated by the AO to find out the true nature of the payments made to the secondment employee. We remit the entire issue to the file of AO for denovo examination considering additional evidences filed by the assessee before us. We also direct the AO to consider the alternative plea of the assessee. Disallowance of technology fees paid by the assessee to the parent company - As assessee could not be able to establish with cogent material that the AE had actually rendered services to the assessee and assessee has also failed to derive any benefits from these payments - So far as the benefits factor is concerned, the courts have time and again held that the TPO/DRP/A.O cannot disallow the genuine expenses on the ground that no benefits have been received by an assessee. A reference can be made to the judgment of case of Ekal Application [2012 (4) TMI 346 - DELHI HIGH COURT] So far as rendering of services from the parent company to the assessee is concerned, the assessee has simply filed some e-mail correspondence between the parent company and the assessee. In our view these e-mail correspondences are not enough to hold that the parent company had rendered technical services/assistance to the assessee. It is pertinent to observe that before us, the assessee has also filed an application dated 24.09.2021 praying to admit certain evidences to establish the receipt of services from the parent company - we remit this issue also to the file of A.O./TPO for deciding afresh in accordance with law after considering all the evidences filed before us. Appeal of the assessee is allowed for statistical purpose. Issues:1. Whether the payments made by the assessee to secondment employees are in the nature of Fee for Technical Services (FTS) or salaries.2. Disallowance of technology licensing fees paid by the assessee to the parent company.Analysis:Issue 1:The first issue in the appeal pertains to determining whether the payments made by the assessee to secondment employees constitute Fee for Technical Services (FTS) or salaries. The Transfer Pricing Officer (TPO) proposed an adjustment on international transactions, which was incorporated by the Assessing Officer (AO). The Dispute Resolution Panel (DRP) observed that the payments made to secondment employees were in the nature of FTS and should have attracted TDS under section 195 of the Act. The assessee contended that there was an employer-employee relationship and filed various documents to support its case. The DRP dismissed the objections, leading to the current appeal. The Tribunal found merit in the arguments of the assessee and remitted the issue back to the AO for fresh examination, considering additional evidence filed by the assessee.Issue 2:The second issue raised in the appeal concerns the disallowance of technology licensing fees paid by the assessee to the parent company. The TPO disallowed the expenses, citing a lack of proof regarding the benefits derived by the assessee. The DRP upheld the disallowance, noting insufficient evidence provided by the assessee. The Tribunal observed that the TPO's approach lacked conclusive proof of services rendered by the parent company and benefits derived by the assessee. The Tribunal remitted this issue back to the AO/TPO for reevaluation, directing them to consider all evidence submitted by the assessee. The Tribunal allowed the appeal for statistical purposes, emphasizing the need for a fresh examination of both issues.This judgment highlights the importance of substantiating transactions with relevant evidence and ensuring that the nature of payments and benefits derived are clearly established to avoid disallowances or adjustments. The Tribunal's decision to remit both issues back for fresh examination underscores the significance of thorough documentation and legal compliance in tax matters.