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2015 (7) TMI 737 - ITAT CHENNAI

2015 (7) TMI 737 - ITAT CHENNAI - TMI - Dis allowances u/s.40(a)(i) and u/s.40(a)(ia) - assessee had incurred operation cost towards connectivity services - Held that:- Taking a consistent view, we are inclined to hold that the assessee is liable to deduct TDS for payment made to foreign service provider. However, if there is short deduction of TDS then the payment cannot be disallowed as short deduction is different from no deduction of TDS. Accordingly, the Assessing Officer is directed to seg .....

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Sreekanth, IRS, JCIT. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER The appeal of the assessee for the assessment year 2007- 2008 is directed against the order of the Commissioner of Income Tax (Appeals)-II, Chennai dated 20.11.2013, whereas the appeal for the assessment year 2009-2010 is directed against the order of the Assessing Officer dated 17.12.2014 consequent to the direction of the Dispute Resolution Panel (DRP), Chennai. 2. First we take up ITA No.484/Mds/2014. In this appeal, the first .....

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ds connectivity services. The Assessing Officer disallowed a sum of D33,91,949/- and D1,46,48,969/- by invoking provisions of Section 40(a)(i) and u/s.40(a)(ia) of the Act respectively. Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) confirmed the disallowances. Against this, the assessee is in appeal before us. 4. The ld. Authorised Representative for assessee submitted that the amount paid to foreign service .....

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onics Company Ltd 320 ITR 209, wherein held that that in the absence of an application u/s.195(2) or 195(3) by the assessee, it was liable to deduct tax u/s.195. The assessee has failed to apply and get exemption under these sections and hence has violated the provisions of section 195. The ld. Authorised Representative for assessee contends that the objective of section 195 is to ensure that tax liability on the income element of the amount paid should be subjected to tax. It stated that paymen .....

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skay Designs in ITA No.1951/Mds/2012, dt 9.12.2013. (iv) ITO vs. Theekathir Press in ITA No.2076/Mds/2012,dt. 18.9.2013 5. On the other hand, the ld. Departmental Representative submitted that unlike standardized services provided by a telecom company where user makes the payment on actual use, in the instant case, there is a instant case, there is a implied contract between the assessee and the service provider for offering certain specialized facilities including a toll free number. The paymen .....

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ource of income earning activity is outside India i.e. in the country of the customer. Source is referable to the starting point or the origin or the spot where something springs into existence . The corollary of this finding is also true and therefore the non-resident certainly has income arisen in India and in the case of Cargo Community Network Pvt. Ltd. 289 ITR 355, the authority for advance rulings had held that payment made by an Indian subscriber to the Cargo community network pvt. Ltd at .....

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ve heard both the parties and perused the material on record. A similar issue was considered by the Tribunal in the case of Frontier Offshore Exploration (India) Ltd. vs. DCIT, 118 ITD 494 (Chennai) wherein held that The provisions of section 195 clearly show that any person responsible for Making payment to a non-resident in respect of any interest or any other sum chargeable under the provisions of this Act has to deduct tax at the rates in force. Obviously 'any other sum chargeable under .....

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rticular portion is chargeable, then obviously he has been given a right in terms of sub-section (2), which the assessee has called a beneficial section. There was no dispute in whether that section is called a beneficial section or a machinery provision because for working out the amount of tax to be deducted on a particular portion of sum chargeable, that provision is absolutely necessary. As per sub-section (2), whenever a person responsible for paying any sum chargeable to tax considers that .....

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ecial order' and the 'appropriate proportion' in this sub-section are key words to understand the meaning in the sense that there may be situations where only one particular portion of such sum is taxable in case of a similar assessee and the income- tax authorities may make a general "order that in the case of such type of assessees a particular proportion of the sum has to be considered as income chargeable to tax and tax can be deducted accordingly. It seems that the Central .....

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rtion" of the same on which tax is to be deducted, determined and accordingly deduct tax. Therefore, wherever a general situation exists a general order is passed by the Department in the form of circular etc. No such circular has been issued by the CBDT, which means such parties must apply under section 195(2) for special order so as to get the "appropriate proportion" determined. Also the word "appropriate proportion" is significant. If the payer of such sum was to dec .....

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particular proportion is chargeable and the appropriateness of the same is to be decided by the Assessing Officer and only after that, such sum is to be determined. This clearly shows the requirement of application of mind by the taxing authorities and, therefore, this sum cannot be decided by the payer of such sum, whatever may be the circumstances. If such appropriate proportion was to be decided by the payer or the assessee, then section 195(2) will become redundant. It has been observed that .....

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195(2). Even the recipient of such payment can make an application to the Assessing Officer that he may be allowed to receive the payment without any deduction of tax. We would again reiterate that though sub-section (2) of section 195 is of beneficial nature definitely and is an optional one, but it does not mean that if the assessee chooses not to take the benefit, then he should be allowed to get away without deduction of tax at source, because the assessee has some other logic. How income ha .....

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ave already clarified in the initial portion of the order that the provisions regarding computation of income and tax cannot be mixed up and confused with the provisions regarding deduction of tax at source. We fail to understand, what prevented the assessee from making an application under section 195(2) and claim the so-called benefits under section 44BB. We are at a loss to understand how the assessee sitting in his own office can take such a decision that whatever payments it was making to t .....

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the payment cannot be disallowed as short deduction is different from no deduction of TDS. Accordingly, the Assessing Officer is directed to segregate the short deduction and no deduction of TDS on the payments made to foreign provider and he has disallowed only payment where there is no deduction of TDS. Accordingly, this ground is partly allowed. 7. The next ground is with regard to disallowance of D.1,46,48,969/- made u/s.40(a)(ia) of the Act. This issue is squarely covered by the order of t .....

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.122 of 2013 dated 09.7.2013 by holding that sec 40(a)(ia) is not applicable when there is no outstanding balance at the end of the close of the year relevant to the assessment year and SLP filed by the Revenue in Supreme Court of India in CC No.8068/2014 dated 02.07.2014 is also dismissed. Being so, in our opinion an amount outstanding at the end of the close of the assessment year is not to be allowed as business expenditure in view of provisions of section 40(a)(ia) of the Act. Further, we ma .....

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ical purposes. 8. Now, we take up ITA No.1057/Mds/2014 for the assessment year 2009-2010. In this appeal, the first ground is with regard to disallowance u/s.40(a)(i) of the Act. The facts of the case are that during the year under consideration, the assessee company had paid management fees to its group companies InterCall Inc, InterCall Singapore Pvt. Ltd. and InterCall Australia Pvt. Ltd. The assessee claims that such services ere not taxable under the relevant tax treaty as the same had not .....

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siness for its benefit and without the recourse to the service provider in future. In other word the recipient of the services can independently provide it to others. The assessee claims to be only utilising the services of the service provider and not in a position to provide similar service to third parties independently. The assessee is not learning or gaining knowledge, skill set while receiving the said services. Thus, the 'made available' test of the tax treaty has not been satisfi .....

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except to a person outside India for the purpose of making or earning any income from any source outside India. In the present case, the payment is made by a resident for the purpose of services utilized in the business or profession carried on by a person in India and for earning an income from such source in India. Further, as per Explanation(2) to Section 9(1)(vii) fee for technical services means any consideration for rendering of any managerial, technical or consultancy services including .....

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isallowance u/s.40(a)(i) of the Act. The submission of the assessee that the relevant tax treaty between the countries provides that fee for technical services would constitute only if it fails within the makeavailable test is not acceptable. Section 90 provides for relief to an assessee as per the DTAA entered into by India with other countries. As per the provisions of the Income Tax Act, if an income is taxable in India as well as in the taxes paid in other country, then to that extent the re .....

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l services . Therefore, the claim of the assessee was not accepted. 9. The Dispute Resolution Panel ( DRP ) observed that it was apparent that the services in question are managerial services. The make available clause should apply differently in the case of managerial services than the way it was applied to purely technical services. Managerial consultancy is basically aimed at increasing the productivity of the business by improving skill set or efficiency of the employees or by improving the .....

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