2025 (12) TMI 71 - AT - Income Tax

No Section 14A disallowance or TDS under Sections 195 and 40(a)(ia) on overseas services under DTAA

ITAT Delhi-AT dismissed the Revenue's appeal. It upheld CIT(A)'s finding that Section 14A r.w. Rule 8D could not be invoked as no exempt income actually ... Disallowance u/s 14A r.w. Rule 8D - AO noted that the assessee had earned dividend income and had suo motu disallowed u/s 14A - HELD THAT:- Now admittedly no exempt income exists hence Section 14A of the Act could not have been invoked. Ld. CIT(A) has dully appreciated this aspect coupled with the fact that assessee had made suo motto disallowance but no reasons are cited to not accept it. There is force in the contention of ld. DR that reasons need not be elaborate but should certainly be illustrative of the fact that financial were examined and there exited reasonable nexus in holding that assessee had to devote significant time, energy and infrastructural resources to earn the exempt income. No interference is needed. The corresponding ground has no substance. TDS u/s 195 - addition u/s 40(a)(ia) - payments to foreign vendors - HELD THAT:- What is material is that payments for services used outside India are not taxable and factually the CIT(A) found that expenditures of the nature conference charges, sponsorships, fees and subscriptions and staff training were for services utilized outside India and not taxable under Section 9 of the Act and payments did not qualify as royalty or FIS under DTAA. These facts remain uncontroverted. Then reimbursements contain no income element so reimbursements (e.g., travel, hotel) paid abroad or to Indian residents contained no income element and hence fell outside Section 195. Revenue appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Disallowance under Section 14A read with Rule 8D in absence of exempt income and without proper satisfaction regarding the correctness of the assessee's suo motu disallowance. 1.2 Disallowance under Section 40(a)(i) for payments to foreign vendors on the ground of non-deduction of tax at source under Section 195, including characterization of such payments under Section 9 of the Act and the applicable DTAA, and the taxability of reimbursements. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Disallowance under Section 14A read with Rule 8D Legal framework (as discussed) 2.1 The Court examined the applicability of Section 14A of the Act and Rule 8D, particularly the requirement under Section 14A(2) that the Assessing Officer record satisfaction, based on examination of the assessee's accounts, that the claim of expenditure relating to exempt income is incorrect before invoking Rule 8D. Interpretation and reasoning 2.2 The assessee had earned dividend income and made a suo motu disallowance under Section 14A. The Assessing Officer, being 'not satisfied' with this, invoked Rule 8D and recomputed a higher disallowance, asserting that significant time, energy and infrastructural resources were devoted to investments. 2.3 The First Appellate Authority held that the Assessing Officer failed to record proper satisfaction under Section 14A(2), as there was no examination of the accounts demonstrating incorrectness of the assessee's suo motu disallowance; the dissatisfaction was characterized as 'casual'. Reliance was placed on precedents holding that Rule 8D can be applied only after recording such satisfaction based on accounts. 2.4 The Court noted that, on facts, there was admittedly no exempt income for the year and therefore Section 14A itself could not have been invoked. It endorsed the First Appellate Authority's view that, in addition, no specific reasons were cited for rejecting the assessee's suo motu disallowance. 2.5 While accepting that the reasons recorded by the Assessing Officer 'need not be elaborate', the Court emphasized that they must at least be illustrative of examination of financials and existence of reasonable nexus in concluding that resources were devoted to earning exempt income. That standard was not met in the present case. Conclusions 2.6 In absence of exempt income, Section 14A could not be invoked. Further, the statutory requirement of recorded satisfaction under Section 14A(2) before applying Rule 8D was not complied with. The deletion of the disallowance by the First Appellate Authority was upheld and the ground of the Revenue was rejected. Issue 2: Disallowance under Section 40(a)(i) for payments to foreign vendors and applicability of Section 195 Legal framework (as discussed) 2.7 The Court considered Section 40(a)(i), which disallows certain payments to non-residents where tax is deductible under Section 195 but not deducted, read with Section 9 of the Act (income deemed to accrue or arise in India) and the relevant Double Taxation Avoidance Agreements, particularly in relation to 'royalty' and 'fees for included/technical services'. Section 195 was treated as applicable only where the sum paid is 'chargeable to tax in India'. Interpretation and reasoning 2.8 The Assessing Officer disallowed payments made to foreign vendors under Section 40(a)(i) on the footing that tax was deductible under Section 195. The First Appellate Authority held that none of the payments were chargeable to tax in India and hence Section 195 was not attracted. 2.9 The Court highlighted the factual findings of the First Appellate Authority that the impugned payments-comprising conference charges, sponsorships, fees, subscriptions and staff training-were for services utilized outside India. It was found that such payments were not taxable in India under Section 9 and did not qualify as 'royalty' or 'fees for included services' under the applicable DTAA. 2.10 The Court further noted the finding that reimbursements, such as travel and hotel expenses, whether paid abroad or to Indian residents, contained no income element and therefore fell outside the scope of Section 195 and, correspondingly, Section 40(a)(i). 2.11 The factual findings of the First Appellate Authority regarding the non-taxable nature of the payments and reimbursements remained uncontroverted by the Revenue. Conclusions 2.12 Since the payments to foreign vendors and the reimbursements were not chargeable to tax in India under Section 9 or the DTAA, no obligation to deduct tax under Section 195 arose. Consequently, disallowance under Section 40(a)(i) was unwarranted. The deletion of the disallowance by the First Appellate Authority was upheld and the Revenue's grounds were dismissed. 2.13 With all grounds of the Revenue failing on both issues, the appeal was dismissed.