The Income Tax Appellate Tribunal (ITAT), Pune Bench has in its recent ruling in the case of M/s. Barclays Technology Centre India Pvt. Ltd. has quashed the order confirming disallowance of leased line charges on account of non-deduction of tax at source.
Facts of the case:
- The assessee, M/s. Barclays Technology Centre India Pvt. Ltd. is an Indian Private limited company engaged in providing Software Solution services to Barclays group worldwide.
- It has one undertaking approved as a 100% Export Oriented unit eligible for deduction under section 10B of the Income-tax Act, 1961, another unit within the area of Special Economic Zone (SEZ) entitled to deduction under section 10AA of the Act and still another unit in Domestic Tariff Area (DTA) in Mumbai.
- During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee paid a sum of Rs.2,41,82,749 as leased line charges to various vendors in India, which were claimed as deduction.
- On being called upon to explain as to why no deduction of tax at source was made in terms of section 194J of the Act, it was submitted that the amount paid was not in the nature of fees for Professional or technical services or royalty etc. in the hands of recipient warranting any deduction of tax at source.
- The payment was held by the AO to be in the nature of fees for technical services requiring deduction of tax at source u/s 194J of the Act. Having not done so, the AO invoked section 40(a)(ia) of the Act. He noticed that out of such sum of Rs.2.41 crore, an amount of Rs.55,46,411/- was incurred against SEZ unit. The AO opined that the enhanced claim of deduction u/s.10AA due to disallowance u/s 40(a)(ia) on this count will not be available to the assessee.
Issue involved:
The issue involved in this case was whether the assessee was liable to deduct tax at source on the amount of leased line charges paid by it to various vendors in India so as to warrant disallowance under section 40(a)(ia) of the Act.
Order of ITAT: Deliberation and Ruling
- When we consider Explanations 5 and 6 read with Explanation 2 to section 9(1)(vi), it becomes graphically clear that the leased line charges paid for transmission by any technology, get covered within the definition of “Royalty” by the Finance Act 2012 w.r.e.f. 01-06-1976 covering the assessment year under consideration.
- The assessee is an Indian company and it made payment of leased line charges to various vendors in India. In view of the fact that a resident paid leased line charges to another resident, the matter ends by examining the ambit of the term “Royalty” under the Act itself and there is no need to examine various DTAAs which have been looked into by the Tribunal in certain decisions for holding that leased line charges are not `royalty’ in the light of the definition of the term “Royalty” as used in the respective DTAAs.
- Even though the amount became chargeable to tax as royalty in the hands of the recipient under the Act for the year under consideration but the same did not fasten an obligation to deduct tax at source as the assessee could not have activated its sixth sense to ascertain beforehand that an obligation to deduct tax at source was in offing.
- Once there is no liability to deduct tax at source at the material time, the fortiori is that there can be no question of disallowance u/s 40(a)(ia) of the Act
In view of above deliberations the coram of S.S.Visvanethra Ravi and R.S.Syal, while allowing the assessee’s appeal observed that as the scope of “Royalty” came to be expanded after the close of the financial year when the assessee had already paid lease line charges. Accordingly the ITAT held that the same could not have triggered deduction of tax at source so as to warrant any disallowance under section 40(a)(ia) of the Act.
Further it was held that in view of decision in allowing deduction of Rs.2.41 crore in entirety, there can be no question of making any separate disallowance in respect of 10AA unit.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
