TDS not applicable to professional and consultancy services neither "availed" nor "rendered" and even not "utilised" in India: ITAT upholds deletion of disallowance u/s 40(a)(ia) of Income Tax Act

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has upheld the deletion of disallowance under Section 40(a)(ia) of Income Tax Act 1961 holding that Tax Deducted at Source (TDS) would not be applicable to professional and consultancy services which were neither availed nor rendered and even not utilised in India.

During the course of assessment, the Assessing Officer observed that the UK branch of the assessee, Mastek Ltd had made payment on certain professional and consultancy services to U.K. resident companies on which no tax was deducted. During the course of assessment proceedings, the assessee submitted that the U.K. branch of the assessee was a separate legal entity formed under the U.K. regulations. It was submitted that the services availed by the U.K. branch, non-residents had been rendered and utilised outside India.

The services provided by them did not make available any technical knowledge, skill, know-how etc. in the nature of transfer of technical plan or design. However the Assessing Officer made disallowance under Section. 40(a)(ia) of the Income Tax Act.

S.N. Soparkar, who appeared on behalf of the assessee submitted that in view of the exception provided in sub-clause “C” of section 9(1)(vii) of the Income Tax Act, no tax was required to be deducted on such payment. Further,it was submitted that the Commissioner of Income Tax Appeals (CIT(A)) for assessment year 2005-06 had deleted the disallowance of expenses under Section 40(a)(ia) of the Income Tax Act on similar payments.

He also placed reliance upon the decision of the Supreme Court in CIT vs. Hyundai Heavy Industries in which it was observed that a branch of a foreign company for the purposes of taxation, was a separate and distinct taxable entity from its foreign parent. Further, it was submitted that the non-resident entities to whom payments were made by the U.K. branch had no business connection/permanent establishment in India. Accordingly, in absence of PE/business connection of the non-resident entities, there was no requirement to deduct tax at source

The two-member Bench of Waseem Ahmed, (Accountant Member) and Siddhartha Nautiyal, (Judicial Member) dismissed the appeal filed by the assessee following the decision rendered by ITAT for assessment year 2006-07 in assessee’s own case, which held since the services in question were neither "availed" nor "rendered" and even not "utilised" in India, therefore no tax was required to be deducted at source.

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