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2023 (2) TMI 25 - AT - Income TaxTDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid the disputed amount to a Malaysian entity for incorporation of a company in Malaysia - HELD THAT:- Admittedly, the Malaysian entity does not have any PE in India. Therefore, the payment made, which is in the nature of business profit is not taxable in India. That being the factual position, there was no obligation on the assessee to withhold tax at source u/s 195 of the Act while making such payment. At this stage, we must observe, AO while disallowing the payment under section 40(a)(i) of the Act has made a general observation that payments are covered under Article 12 of the DTAA, without specifying which particular DTAA he is referring to Article 12 of India-Malaysia DTAA is in relation to income in the nature of royalty. Payment made by the assessee to the Malaysian entity certainly cannot be considered to be in the nature of royalty under Article 12 of the DTAA. Having held so, it is necessary to examine whether the payment made would qualify as Fees for Technical Services (FTS) under Article 13 of the India-Malaysia DTAA. On a reading of Article 13, it is evident, the source country has the power to tax the income in the nature of FTS at beneficial rate of 10%. The service rendered must be managerial, technical or consultancy services. In the facts of the present appeal, the departmental authorities have failed to demonstrate that the payment made was towards rendering of managerial, technical or consultancy services. Withholding of tax u/s 195 - Disallowance u/s 40(a)(i) - payment was made to an entity in Bangladesh for rendering legal services of the Act - HELD THAT:- In the facts of the present appeal, admittedly, the Bangladesh entity has no PE in India. Therefore, income, if considered to be business profit is not taxable in India. As per Article 13 of the DTAA, the payment made by the assessee cannot be treated as royalty. If at all, the payment can be considered to be towards rendering of independent professional services as per Article 15 of the DTAA. However, the payment made towards independent professional services is taxable in the country of residence of recipient, unless, the recipient has a faxed base regularly available to him in the source country for the purpose of performing his activity. In the facts of the present appeal, there is nothing on record to demonstrate that the Bangladesh entity had any fixed base in India from which it is carrying on its activities in India. Thus, in our view, the departmental authorities have failed to establish on record that the payment made by the assessee is taxable at the hands Bangladesh entity in India. That being the case, there was no requirement for withholding tax u/s 195 of the Act. Accordingly, we delete the disallowance made under section 40(a)(i). Disallowance claimed as deduction u/s 35D - expenditure under consideration towards issue of IPO - only reasoning on which assessee's claim has been rejected is, the expenditure does not fall within the ambit of Section 35D - HELD THAT:- Before us, the assessee has made an alternative claim that since the expenditure has been incurred for expansion of its business, it is allowable under section 37 of the Act. Having taken note of the factual position and the nature of expenses, we are of the view that the expenditure is allowable u/s. 35D of the Act as it is for the purpose of expansion of its business. The ratio laid down in the decision cited Dhanaklakshmi Bank Ltd 2018 (12) TMI 836 - KERALA HIGH COURT] by the assessee supports this view. Therefore, we allow the deduction. This ground is allowed. Disallowance of ESOP expenses - HELD THAT:- As observed that the assessee offered the ESOP to the employees at discounted value and the difference between the actual value and the discounted value was debited to the profit and loss account. It is also observed, the assessee has reversed a part of the expenses booked on ESOP and offered the same for tax in subsequent Assessment Years. Thus, in our view, the deduction claimed by the assessee is allowable. Accordingly, we delete the disallowance. Disallowance of write off of sundry balances - Swachh Bharat Cess receivable written off - HELD THAT:- As could be seen, the amount written off represents Swachh Bharat Cess receivable by the assessee. Assessee has failed to demonstrate that the amount was actually paid during the year in terms of section 43B(a) of the Act. Therefore we uphold the disallowance. This ground is dismissed.
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