ITAT Remands ₹5.41 Cr TDS Disallowance on US Remittance for Reassessment Under India-US DTAA [Read Order]

The Income Tax Appellate Tribunal (ITAT) Bengaluru recently set aside a ₹5.41 crore TDS disallowance on payments made to a US-based entity for business development and marketing services and directed it to reassess according to the provisions of India-US Double Taxation Avoidance Agreement (India-US DTAA).

Sunku Satyanarayana Sanjay (assessee-appellant) was engaged in the export of software development and testing services through his proprietary concern, Versatiletech.

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During scrutiny proceedings, it was observed that the assessee had made payments totaling ₹5.4 crore to Tavelon LLC, USA. The Assessing Officer (AO) noted that no tax was deducted at source (TDS) u/s 195 of the Income-tax Act, 1961, on the said payment. Hence, the AO disallowed the payment under Section 40(a)(i) of the Act, holding that the amount qualified as Fees for Technical Services (FTS).

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The counsel, Sandeep Chalapathy, representing the assessee, argued that payments to Tavelon LLC were for business development, project management, and marketing.

He argued that the income belonged to Tavelon LLC as business profits, and since the company had no Permanent Establishment (PE) in India, it was taxable only in the US according to the India-US DTAA.

The counsel stressed that the services were not technical and did not constitute fees for included services. He argued the condition under Article 12(4) of the DTAA was thereby not met. Therefore, no TDS u/s 195 of the Income Tax Act, 1961, was required.

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He also pointed out that similar payments were accepted by the AO in the Annual Year (AY) 2017-18 without disallowance.

To support the claims, counsel submitted a legible service agreement, invoices, and a No PE certificate from Tavelon LLC, which had not been previously provided to the lower authorities.

Meanwhile, the counsel, Amrit Raj Singh, representing the revenue, pointed out that the AO had rightfully disallowed the amount under Section 40(a)(i) of the Income Tax Act, 1961, due to the illegibility of the original agreement. In the absence of clarity on the nature of services, the AO classified them as Fees for Technical Services (FTS) under domestic law.

The counsel further added that since FTS is chargeable to tax in India, TDS under Section 195 of the Income Tax Act, 1961, was mandatorily required. Therefore, the AO's disallowance was justified on the basis that tax should have been deducted at the source of the remittance.

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After hearing both sides, the bench, comprising Prashant Maharishi (Vice President) and Soundararajan K (Judicial Member), considered the new evidence presented by the assessee, including a legible service agreement, invoices, and a No PE certificate from Tavelon LLC.

The bench noted that the AO had initially relied on an illegible agreement to classify the services as technical. The bench restored the matter to the AO, directing him to reassess the issue in light of the new evidence

To Read the full text of the Order CLICK HERE

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