The Chennai bench of the Income Tax Appellate Tribunal (ITAT) held that the payment made to the non-resident doesn’t amount to deduction in tax under Section 195 of the Income Tax Act, 1961.
The assessee company filed its return of income declaring a loss of Rs.10,02,80,149/-. The case was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS) followed by issuing notices under Section 143(2) & 142(1) of the Income Tax Act required the assessee to submit various details.
The Assessing Officer observed in the assessment order that the assesse has debited an expenditure of Rs.4,95,20,000- under the head “HS Pure Power Programme” on which tax was not deducted at source.
He also observed that the payment was made to the non-resident involved in engineering design costs, product development costs, and engineering support. It was contended by the assessee that payments made are not for technical services but towards the cost of products manufactured by its sister concern.
The Assessing Officer was not satisfied and he invoked provisions of section 195 of the Income Tax Act holding that alleged payment is liable for deduction of tax at source and thus, disallowed expenditure under Section 40(a)(i) of the Income Tax Act.
The Departmental Representative submitted that it has to be presumed that the alleged payment is towards technical services and designing work, which calls for deduction tax at source under Section 195 of the Income Tax Act, and since the assessee has failed to deduct TDS, expenditure is disallowable under Section 40(a)(ia) of the Income Tax Act.
The counsel for the assessee submitted the product support agreement and also referred to the remand report extracted contending that designing and technical services were to be provided by the buyer and the assessee was only required to manufacture the products.
The Commissioner of Income Tax [CIT(A)] referred the judgment of the Supreme Court in the case of GE India Technologies Pvt. Ltd. and found that since the alleged payment made by the assessee to its sister concern in US does not include any income component, therefore, the assessee cannot be held to be in default for not deduction tax at source under Section 195 of the Income Tax Act.
The two-bench member comprising of V. Durga Rao (Judicial member) and Manish Borad (Accountant member) hold that the Commissioner of Income Tax (Appeal) was justified in deleting the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Income Tax Act.
Therefore, the order of the Commissioner of Income Tax (Appeal) was upheld and the appeal of the revenue is dismissed.
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