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2024 (4) TMI 389 - AT - Income TaxTDS u/s 195 - disallowance u/s 40(a)(i) - failure to withhold tax on salary cost reimbursement to Head Office by the Branch Office treating such receipt of Head Office as FTS - impugned payments made by Branch Office to Head Office are the reimbursement of salary cost of the expats working in the Branch Office in India on cost to cost basis without any mark-up. The entire salary payments made to the expats in India as well as outside India have been subject to TDS under section 192 of the Act which fact has been corroborated by Form 16 issued to the expats Whether provisions of section 40(a)(i) of the Act can be invoked to disallow an expense in respect of which due taxes have been withheld and deposited into the Govt. Account within the prescribed time period? - HELD THAT - We have perused the decision of the Co-ordinate Bench of Delhi Tribunal in the case of Serco India Pvt. Ltd. 2023 (11) TMI 275 - ITAT DELHI wherein the ITAT on similar set of facts held that where the assessee has deducted the tax at source under section 192 of the Act and deposited the same into the Govt. Account within specified time as prescribed under the Act, provisions of section 40(a)(i) of the Act are not applicable. Thus disallowance of salary cost reimbursement by Branch Office to the assessee by the Ld. AO under section 40(a)(i) is not justified as TDS has been duly deducted on entire salary payments to the expats and deposited into the Govt. Account within the prescribed time limit. Appeal of the assessee is allowed.
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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