ITAT Deletes TDS Disallowance as Corresponding Income Was Settled Under VSVS

IQVARDS (India) Private Limited Vs DCIT (ITAT Bangalore)

The appeal before the ITAT Bangalore arose from an assessment order passed under Sections 143(3), 144C and 92CA of the Income Tax Act for Assessment Year 2013-14. The Assessing Officer determined the assessee’s total income at ₹8.59 crore as against the returned income of ₹1.26 crore after making transfer pricing adjustment of ₹6.61 crore, disallowance under Section 36(1)(va) of ₹34.13 lakh, and disallowance under Section 40(a)(i) of ₹37.74 lakh.

During the hearing, the assessee sought withdrawal of transfer pricing grounds following resolution of the transfer pricing adjustment under the Mutual Agreement Procedure (MAP) dated 11.02.2022. Consequently, the transfer pricing dispute did not survive. The assessee also did not press the ground relating to delayed payment of PF under Section 36(1)(va) in view of the Supreme Court decision in Checkmate Services Pvt. Ltd. v. CIT.

The remaining issue concerned disallowance under Section 40(a)(i) for non-deduction of tax at source on computer license fees of ₹6.80 lakh and recruitment expenses of ₹30.93 lakh. The Assessing Officer treated the payments as fees for technical services. The assessee submitted that the issue had already been settled by the recipient of the income under the Direct Taxes Vivad se Vishwas Scheme, 2024 (VSVS). Reliance was placed on FAQ No.58 of CBDT Circular No.19/2024, which clarified that where the deductee settles liability under VSVS, consequential relief would also be available to the deductor.

The Department agreed with the position. The Tribunal held that since the non-resident recipient had settled the issue under VSVS, the corresponding disallowance in the hands of the assessee could not survive. The Assessing Officer was directed to delete the disallowance of ₹37.74 lakh. The appeal was partly allowed.

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ITAT Deletes TDS Disallowance as Corresponding Income Was Settled Under VSVS
The ITAT Bangalore held that disallowance under Section 40(a)(i) could not survive once the recipient of the income settled the tax dispute under the Vivad se Vishwas Scheme, 2024. The ruling relied on CBDT Circular No.19/2024 and FAQ No.58 granting consequential relief to the deductor.

Disallowance Under Section 40(a)(i) Cannot Continue After VSVS Settlement by Deductee: ITAT Bangalore
The Tribunal ruled that once the non-resident recipient settled the income under VSVS, corresponding expenditure disallowance in the hands of the payer had to be deleted. The Assessing Officer was directed to remove the addition of ₹37.74 lakh.

ITAT Grants Relief on TDS Disallowance Due to CBDT Clarification Under VSVS Scheme
The assessee argued that the recipient had already settled the dispute under the Direct Taxes Vivad se Vishwas Scheme, 2024. Accepting the CBDT clarification, the Tribunal held that consequential relief must also be granted to the deductor.

Section 40(a)(i) Addition Deleted Because Recipient Resolved Tax Liability Under VSVS
The ITAT Bangalore observed that the basis of disallowance ceased to exist after settlement of the corresponding income by the deductee under VSVS. The ruling followed FAQ No.58 of CBDT Circular No.19/2024.

ITAT Holds Consequential Relief Must Follow VSVS Settlement of Non-Resident Tax Dispute
The Tribunal held that where a non-resident recipient settles its liability under the Vivad se Vishwas Scheme, related TDS disallowance against the payer cannot be sustained. The decision resulted in deletion of the expenditure disallowance.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal is filed by IQVA RDS (INDIA) PRIVATE LIMITED [formerly QUINTILES RESEARCH (INDIA) PVT. Ltd.], (the assessee / appellant) against the assessment order passed u/s. 143(3) r.w.s. 144C r.w.s. 92CA of the Income Tax Act, 1961 [the Act] dated 18-SEPT-2017 for the Assessment Year 2013-14 by the DCIT, Circle 3(1)(2), Ahmedabad [ld. AO] wherein the total income of the assessee was determined at Rs.8,59,49,680 compared to the total income as per return of income filed of Rs.1,26,22,520 wherein the ld. AO has made upward adjustment of arm’s length price [ALP] of international transaction of Rs.6,61,39,047, disallowance u/d. 36(1)(va) of Rs.34,13,440 and disallowance u/s. 40(a)(i) of Rs.37,74,669.

2. During the course of hearing, the assessee has furnished a letter dated 09.03.2022 stating the request for withdrawal of the Transfer Pricing grounds pursuant to the resolution of TP adjustment under the Mutual Agreement Procedure [MAP] dated 11.02.2022. In view of this, the TP adjustment of Rs.6,61,39,047 challenged by the assessee as per the revised Grounds of Appeal filed before us does not survive.

3. Thus, the only issues that remain is disallowance of Rs.37,74,669 for disallowance of expenditure on account of non-deduction of tax at source and further disallowance u/s. 36(1)(va) for late payment of PF. The second issue is now squarely covered in favour of the Revenue by the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. v. CIT [2022] 143 taxmann.com 178 and therefore the assessee did not press this ground of appeal and hence dismissed.

4. Thus the only issue remains is with respect to disallowance of Rs.37,74,669 for non-deduction of tax at source. The assessee has claimed the computer license fee of Rs.6,80,949 and also recruitment expenses of Rs.30,93,720 wherein tax was not deducted by the assessee. The ld. AO has made the above disallowance stating that it is taxable as fees for technical services. The assessee submits that this issue has been settled under the Direct Taxes Vivad se Vishwas Scheme, 2024 [VSVS] by recipient of the income. The assessee also stated that FAQ No.58 of the Circular No.19/2024 the CBDT has clarified that where the deductee has paid the taxes and settled the liability under VSVS, the corresponding consequential relief shall also be available to the debtor and the consequential relief for expenses shall available to such deductor. The ld. AR has vehemently stated that now the disallowance cannot be sustained in the hands of the assessee for the above reason.

5. The ld. DR, Dr. Divya K J, CIT(DR), also agreed to the same.

6. As the issue for non-deduction of tax at source u/s. 40(a)(i) of the Act is made in the hands of the assessee for failure to deduct tax at source to a nonresident assessee and in the case of non-resident assessee also the issue is settled under VSVS, therefore according to the CBDT Circular No.19/2024 dated 16.12.2024 with reference to FAQ No.58, he disallowance in the hands of the assessee also cannot survive. Accordingly, the solitary ground of disallowance of expenditure is allowed in favour of the assessee directing the ld. AO to delete the disallowance of Rs.37,74,669.

7. Accordingly the appeal of the assessee is PARTLY ALLOWED.

Order pronounced in the open court on 20th May, 2026.