Disallowance u/s 40(a)(i) justified if assessee failed to deduct TDS

Penta Media Graphics Ltd Vs DCIT/ACIT (ITAT Chennai)

Disallowance u/s 40(a)(i) justified if assessee failed to deduct TDS on payment for software development consultancy charges to foreign companies.

Conclusion: Since assessee had not deducted TDS under section 195 on payment for software development consultancy charges was made to foreign companies and failed to file any evidence neither before AO nor before CIT(A), therefore, AO was justified in making  disallowance under section 40 (a)(i).

Held: Assessee had claimed software development expenses amounting to Rs.7,16,29,306/-.  It filed ledger extracts from the books of the assessee company, from where AO noted that the above amount constituted Rs.6,69,59,378/- as software consultancy charges and balance amount as salary allowances and incentives. AO noted from the ledger amount that this payment for software development consultancy charges was made to foreign companies. AO noted that assessee had not deducted TDS under the provisions of section 195 and required the assessee to explain. Assessee stated that these were expenses that were incurred in foreign exchange for providing technical services abroad and these expenses were in the nature of pay roll for staff, conveyance and small purchases for the particular project which was being done abroad. It was stated that the vendor/customer makes payment directly to the concerned person and debit the same to the assessee’s account. According to AO, this explanation held no ground as assessee except furnishing ledger extracts and giving the above submissions, had not filed any documentary evidence despite various opportunities. According to AO,  assessee company was liable to deduct TDS while making such payment and he invoked the provisions of section 40(a)(i) and made disallowance. Aggrieved, assessee preferred appeal before CIT(A). It was held that assessee failed to prove the nature of payments and assessee did not file any evidence neither before AO nor before CIT(A). Even now, assessee was reluctant to file these details and hence, it was presumed that the payment made abroad for software consultancy charges were in the nature of fee for technical service as per section 9(1)(vii) and assessee’s case squarely fell under the provisions of section 195. Assessee was subject to TDS but failed to deduct the same.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

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