No TDS on reimbursements to directors and on traded goods supplied to client

Techknowledgy Interactive Partners P. Ltd. Vs ITO (ITAT Mumbai)

The ITAT, Mumbai in the matter of Techknowledgy Interactive Partners P. Ltd. v. ITO [ITA No. 350/MUM/2009 dated January 9, 2023] has held that no tax is required to be deducted at source on amount reimbursed to the director of the company. Further, when tax has been deducted at source by the assessee while receiving software consultancy services, disallowance cannot be done by the Revenue Department. Further, directed the Revenue Department to verify whether the assessee was merely a trader of a software and held that, if the purchases of software is traded goods and supplied to another client and not for the use of the assessee, no tax is required to be deducted at source.

Facts:

Techknowledgy Interactive Partners P. Ltd. (“the Appellant”) is engaged in the business of trading in software and software products.

The Appellant had filed its return of income on October 31, 2005, declaring a total income of INR 3,64,579/-. The Revenue Department (“the Respondent”) after scrutiny assessment under Section 143(3) of the Income Tax Act, 1961 (“the IT Act”), passed a final assessment order dated December 20, 2007, assessing a total income of INR 19,16,750/-.

The Respondent made disallowances under Section 40(a)(ia) on account of non-deduction of tax at source on payment car hire charges which was reimbursed to the directors of the company; software consultancy charges paid to one M/s Orbit Software and software consultancy charges paid to one M/s Springfield Organics. The Appellant preferred an appeal, however, the Appellate Authority also confirmed the order of the Respondent vide order dated September 29, 2008 (“the Impugned Order”).

Being aggrieved, this appeal has been filed.

The Appellant contended that it had made tax deduction at source on the payment made to M/s Orbit Software and despite that, the Respondent disallowed the deduction holding that tax deduction was not made at source. Further, payment to M/s Springfield Organics was made for purchasing a software, which the appellant further supplied to one of its clients and softwares developed specifically for a client is held to be goods and sales tax was to be levied and hence, no tax was required to be deducted at source. Further, the provision of Section 40(a)(ia) of the IT Act is not applicable on reimbursement the payments made by the directors of the company as car hire charges.

Issue:

Whether the Respondent was right in passing the Impugned Order disallowing deductions as sought by the Appellant?

Held:

The ITAT, Mumbai in ITA No. 350/MUM/2009 held as under:

Held that, tax is not required to the deducted at source from payments made in the nature of reimbursements to the directors of the company towards car hire charges and therefore the addition was required to be deleted.

Observed that, the Appellant had already deducted tax at source on the sum paid to M/s Orbit Software and it was also recorded in the Impugned Order.

Held that, as tax was already deducted at source by the Appellant, there was no reason for the Respondent to disallow the deduction.

Further held that, if the software purchased by the Appellant from M/s Springfield Organics was a traded good, to be further supplied to one of its clients and not to be used by the Appellant, it was not subject to tax deduction at source.

Directed the Respondent to verify if the software purchased by the Appellant from M/s Springfield Organics were traded goods.

Relevant Provisions:

Section 143(3) of the Income Tax Act, 1961:

“On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:”

Section 40(a)(ia) of the IT Act:

“40. Amounts not deductible.– 

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession“,-

(a) in the case of any assessee-

…

(ia) thirty percent. of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139,-

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in subsection (1) of section 139, thirty per cent. of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.

Explanation.-For the purposes of this sub-clause,-

(i) “commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;

(ii) “fees for technical services” shall have the same meaning as in Explanation2 to clause (vii) of sub-section (1) of section 9;

(iii) “professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J;

(iv) “work” shall have the same meaning as in Explanation III to section 194C;

(v) “rent” shall have the same meaning as in clause (i) to the Explanation to section 194-I;

(vi) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;”

FULL TEXT OF THE ORDER OF ITAT DELHI

01. This appeal is filed by the assessee for assessment year 2005–06 against the appellate order passed by the Commissioner of Income-tax (Appeals)–XXIX, Mumbai dated 29^th September, 2008, wherein the learned CIT (A) has confirmed the disallowance under section 40 (a) (ia) of the Income-tax Act, 1961 (the Act) amounting to ₹60,000 and ₹14,71,752/-.

02. The brief facts of the case shows that the assessee is a private limited company engaged in the business of trading in software and software products. It filed its return of income on 31^st October 2005, declaring total income of ₹3,64,579/–. The case was selected for scrutiny and the assessment order under section 143 (3) of the Act was passed on 20^th December, 2007, assessing the total income of the assessee at ₹19,16,750/-.

03. The learned assessing officer made disallowance on account of non-deduction of tax at source on

i. payment of car hire charges which is reimbursed to the directors of the company amounting to ₹60,000/-,

ii. software consultancy charges paid to Orbit Software amounting to ₹7,71,752/- and s

iii. Software consultancy charges paid to M/s Springfield Organics amounting to ₹7,00,000/-.

Accordingly, the addition of ₹1,531,752/– was made on account of non-deduction of tax at source on various payments under section 40 (a) (ia) of the Act.

04. The assessee being aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT (A), who confirmed the above-mentioned disallowance by passing an order dated 29^th September, 2008. Therefore, the assessee is aggrieved and is in appeal before us.

05. The learned authorized representative submitted that

i. with respect to the payment of ₹771,752 software consultancy charges paid to Orbit Software, the assessee has made tax deduction at source on the above amount and despite this the learned assessing officer has made disallowance invoking the provisions of section 194J of the Act holding that tax is not deducted on consulting charges paid to the above company. The assessee also submitted before the learned CIT (A) that the tax has been deducted and the same should be allowed as a deduction. The learned CIT (A) has also categorically reproduced that the appellant has already deducted tax at source on an amount of ₹7,71,752/- but has not deducted tax at source only on payment of ₹7,00,000/- to Springfield Organics. Therefore, the addition on account of software consultancy charges paid to Orbit Software Company is not correct.

ii. Disallowance of ₹7,00,000/- made on account of payment to M/s Springfield Organics is related to the purchase of software from that company. He submitted that as assessee is in the business of trading in software the above amount is traded goods for the assessee and therefore, no tax was required to be deducted. The software was also purchased and supplied to a USA based client of the appellant. The software was specifically made by the supplier on the direction of the appellant. The decision of Commissioner of sales tax Maharashtra in the case of Mastek Ltd. (DDQ 11-2001/ADM-5/83/D-7 dated 3^rd August, 2004, clearly covers the issue that where software developed specifically for a customer was held to be goods and since tax was levied thereon. If the sale tax was levied, it was sale of goods and no tax was required to be deducted therefore, there is no violation of the provisions of section 40(a)(ia) of the Act.

iii. With respect to the disallowance of ₹60,000/- for non-deduction of tax, the assessee submitted that this payment was made as reimbursement of expenses to Mr. Pankaj Dalal, who is Director of the assessee company as car hire charges. During the course of appellate proceedings assessee also gave name of four different persons to whom the above payment of ₹60,000/- was made by Mr. Pankaj Dalal, and this amount was reimbursed. That entire payment of ₹60,000/- is nothing but payment made to Shri Pankaj Dalal, director in the nature of reimbursement towards car hire charges incurred by him from time to time which has not been disputed at all. Mr. Pankaj Dalal has given an evidence that he has made these payments to 4 different persons ranging from ₹12,000/- to ₹17,000/-. Therefore, on this sum the provisions of section 40(a)(ia) of the Act are not applicable.

Accordingly, the learned authorized representative submitted that the disallowance confirmed by the learned CIT (A) is not proper.

06. The learned departmental representative vehemently supported the order of the learned lower authorities.

07. We have carefully considered the rival contentions and perused the orders of the lower authorities.

i. The first payment is a car hire charges reimbursement to the director of the company amounting to ₹60,000/- on which the learned assessing officer was of the view that tax is required to be deducted. Before us, the assessee has submitted that it is a reimbursement of expenditure to the director of the company who is undergoing frequent travel. These payments have been made by the director of the company to various taxi owners. The instances of four persons are mentioned wherein the payment made by the director to those persons are ₹12,000/- to ₹17,000/-. As the above payment is in the nature of reimbursement and paid to Mr. Pankaj Dalal, we find that no tax is required to be deducted at source on amount reimbursement to Mr. Pankaj Dalal. The addition therefore requires to be deleted to the extent of ₹60,000/-.

ii. With respect to the software consultancy charges to Orbit Software paid of ₹771,752/–, it was pointed out that assessee has deducted tax at source on the above sum. This fact has also been recorded in the order of the learned CIT (A) at para number 3.4 that assessee has already deducted tax at source on sum of ₹7,71,752/– paid to Orbit Software. As the ld CIT (A) has also recorded the factum of payment on which tax is deducted, there is no reason to sustain the disallowance. Accordingly, disallowance is not correct. It is also deleted.

iii. The third payment is with respect to the software consultancy charges paid to Springfield organics. As the assessee has submitted that it is a trader in the software, the above software has been purchased as traded goods to be supplied to a USA client and not to be used by the assessee. Software is goods therefore, in the given instance; it cannot be subjected to tax deduction at source. However, this fact needs to be verified by the learned assessing officer. In view of this, we set-aside this ground of appeal to the file of the learned assessing officer for verification. If the purchases of software is traded goods and supplied to another client and not for the use of the assessee, no tax is required to be deducted at source.

08. In view of this appeal of the assessee is allowed with above direction.

09. In the result, the appeal of the assessee is allowed with above direction.

Order pronounced in the open court on 09.01.2023

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