Tax was required to be deducted at source on share of ISO audit expenses paid to foreign parent company, as element of income was embedded in receipt of auditor.
FULL TEXT OF THE ITAT JUDGEMENT
Assessee is in appeal before us against the order of ld. CIT (A) dated 31.12.2010 passed for A.Y. 2007-08.
2. The solitary grievance of the assessee is that it has made a provision of Rs.261540/- which is to be paid to SPX Corporation (Parent Co. in USA), towards its share of expenses for ISO audit, it failed to deduct the TDS on such payment, therefore, the AO has disallowed the claim of assessee.
3. The brief facts of the case are that assessee has filed its return of income on 30.10.2007 declaring total income of Rs.87,43,640/- after adjusting brought forward losses of Rs.101,19,786/-. The case of the assessee was selected for scrutiny assessment and a notice u/s 143(2) was issued and served upon the assessee. On scrutiny of the accounts it revealed to the AO that assessee has made a provision, whereby it has credited the account of parent company by a sum of Rs.2,61,540/-. The provision was made for the purpose of carrying out environmental audit. According to the assessee, it has not deducted the TDS, because it has just reimbursed the expenses and on reimbursement of expenses TDS was not required to be deducted. The ld. AO has rejected the claim of the assessee on the ground that amount is payable to a third party for the services rendered by that party. The element of income is embedded in the alleged provision because, for carrying out the audit service, if third party would receive any amount then that amount would be taxable in India.
4. Alternatively, assessee has contended that a sum of Rs.1,05,989/- was written back as an income being excess provision and it was offered for taxation. According to the assessee the only amount payable by it is Rs.1,55,,551/- which at the most can be disallowed.
5. We find that qua this argument AO has just observed that contention of the assessee is not acceptable because it had made a provision of Rs.2,61,540/-
6. Appeal to the CIT (A) did not bring any relief to the assessee.
7. Before us ld. counsel for the assessee, on the strength of two Tribunal decisions rendered in the case of ACIT Vs. Modicon Network Pvt. Ltd. reported in 14 SOT 204 and Nathpa Jhakri Joint Venture Vs. ACIT Reported in 37 SOT 160 (Mum) contended that expenses reimbursed to the parent company TDS would not be required to be deducted.
8. On the other hand ld. DR relied upon the order of ld. CIT (A).
9. We have duly considered the rival contention and gone through the case law relied upon by the assessee. In the case of Modicon Network Pvt. Ltd. there was a joint venture and arrangement of incurring expenses was made. The assessee has reimbursed part of the expenses thus it was conclude by the Tribunal that reimbursement without any element of profit or income embedded therein, no deduction of TDS would require. Similarly in the case of Nathpa Jhakri Joint Venture, the ITAT, Mumbai has held that if amount paid or payable to non-resident is chargeable to tax in his hand and assessee fail to deduct tax at source then said amount shall not be allowed as deduction u/s 40 (a) (i). The counsel for the assessee also drew our attention towards the order of ITAT, Mum. in the case of DCIT vs. Lazard India P. Ltd. in 41 SOT 72, his submissions are that there is no mala fide in the conduct of the assessee, it has just reimbursed the expenses to the parent company. It has not made this arrangement for avoiding payment of taxes. Under a bona fide belief it has reimbursed the expenses without deducting TDS. We are of the view that section 195 put an obligation for deducting TDS while making payment to non- resident. It nowhere provides that such an obligation can be absolved by showing reasonable cause for not deducting the TDS while making payment or crediting the account. Thus the contentions of the assessee that under bona fide belief, it has reimbursed the expenses are irrelevant. The element of income is embedded in the receipt of the auditor. If the receipts are routed through the parent company that does not extinguish the element of income from the payments. Therefore assessee was bound to deduct TDS. It failed to deduct TDS, hence a disallowance is to be made u/s 40 (a) (i). As far as quantification of the amount is concern, we find that assessee has made the provision for a sum of Rs.2,61,540/-. The excess provision has been written back and a sum of Rs.1,05,989/- was offered for tax in the next year. Thus the exact amount paid without deducting the TDS is Rs.1,55,551/-. The assessee has raised the plea before the AO but ld. AO has not assign any reason for not accepting this plea. If we confirmed the disallowance of the total amount then amount of Rs.1,05,989/- would suffer tax twice i.e. by way of disallowance in this year and in the next year when assessee has written back the provison. Therefore, we direct the AO to exclude this amount from the disallowance after verification that it was offered for tax in the next year.
10. The appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 16/07/2013.