Payments made as expense onsite project to the third party vendors not liable to deduct tax at source, disallowance made u/s 40(a)(i) not permissible, the Bangalore the Income Tax Appellate Tribunal (ITAT)has held as above.
M/s. Acropetal Technologies Pvt. Ltd., the assessee is in the business of manufacturing and export of software. The assessee filed the return of income for AY 2013-14 on 17.3.2014 by declaring an income of Rs.8,67,63,830 and the return for AY 2014-15 on 12.9.2014 declaring an income of NIL.
On verification of the financial statements of the assessee, the AO noticed that the assessee has made payments towards certain onsite project expenses amounting to Rs.56,41,12,597towards reimbursement of salary expenses incurred outside India for the projects. The AO noted that these payments are made to Datamatics Solutions Inc. and Link List Ltd., where no TDS has been deducted at the source.
The AO held that withholding of tax within the meaning of section 9(1)(vii) would be applicable and disallowed the entire amount u/s. 40(a)(i). The CIT(Appeals) gave partial relief to the assessee by deleting the disallowances made u/s. 14A and section 40(a)(i). The revenue is in an appeal against the order of the CIT(Appeals).
As per the DTAA between India and UAE, there is no specific clause about the taxability of fees for technical services, and the nature of income would take the character of Business Income which can be taxed only when there is a permanent establishment (PE) for the recipient of the payment.
A Coram of Shri N V Vasudevan, vice president and Ms Padmavathy S, accountant member observed that the assessee is not liable to deduct tax at source for the reimbursement of the salary cost made to the vendor Datamatics Solutions Inc., USA for the deployment of manpower. Further the vendor Link List Ltd., UAE does not have a permanent establishment in India and the impugned payments cannot be taxed in India, thereby no tax is deductible at source on these payments.
It was held by the Tribunal that the impugned payments are not fees for technical services and not business income taxable in India. There is no disallowance warranted u/s. 40(a)(i) for non-deduction of tax at source by the assessee. The appeal filed by the revenue got dismissed.
The appellant was represented by Ms Sunaina Bhatia, Advocate and the respondent was represented by Shri V S Chakrapani.
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