No TDS and Disallowability on AMC, Software Expenses, Legal and Professional Charges

The Bangalore ITAT has upheld the expenses incurred by the assessee-company, Honeywell Technology Solutions (P) Ltd, for the assessment year 2011-12. The company, engaged in the business of software development and IT enabled services, incurred a total of Rs. 32.87 crore on the maintenance of computer licenses, purchase of software, legal and professional charges, and communication charges. Out of this amount, Rs. 11.42 crore was paid to non-residents for which tax was not deducted at source, leading to a disallowance made under Section 40(a)(i)/(ia) by the Revenue. The Revenue also deemed the balance of Rs. 21.45 crore (purchase of software) as capital expenditure and disallowed the same by allowing depreciation at 30%.

The CIT(A) had upheld the disallowance under Section 40(a)(i) and directed the Revenue to decide the assessee’s claim of tax deduction at source on Rs. 19.85 crore, as per the license agreement for less than 2 years. However, the ITAT observed that the High Court ruling in Samsung Electronics, relied upon by the CIT(A), was rendered on 15.10.2011, after the year under consideration, and relied on a coordinate bench ruling in Infineon Technologies to delete the disallowance made under Section 40(a)(i) on software payments made prior to the High Court ruling.

Regarding the disallowance of communication expenses of Rs. 2.45 crore paid to the parent company, the ITAT observed that the payment was made for providing point-to-point connection between two computers or local area networks. The parent company had entered into an agreement with the third-party vendor for providing data link services and the proportionate cost was recovered from the affiliates. The ITAT acknowledged the assessee’s submission that the payment was for the utilisation of the data link facility and not for the use of the third-party vendor’s equipment. The ITAT relied on a coordinate bench ruling in J & P Coats Ltd. and held that the payment was not taxable as equipment royalty or process royalty and would not fall under the category of royalty within the meaning of Article 12 of DTAA.

With respect to the disallowance of legal and professional charges under Section 40(a)(i), the ITAT observed that the assessee had availed the services of professional firms for compliance with tax laws in the USA in connection with employees sent to the USA for projects. The ITAT relied on an ITAT Delhi ruling in Chander Mohal Lall v. ACIT and held that professional services do not fall under the category of “Fee for technical services” within the meaning of Section 9(1)(vii) of the Income Tax Act. The ITAT stated that since the services were rendered and payments received outside India, the question of deducting tax at source under Section 195 of the Act did not arise. The ITAT also held that the payments could not be taxed as FIS under Article 12 of the India-US DTAA as the technical knowledge was not “made available” to the assessee.

In conclusion, the ITAT held that the expenses incurred by Honeywell Technology Solutions (P) Ltd were allowable and deleted the disallowance made by the Revenue under Section 40(a)(i) and (ia). The ITAT also held that the payment of communication expenses and legal and professional charges were not taxable under the Income Tax Act and the DTAA. This judgement was delivered on 30.05.2022 and is in favour of the assessee. ca in gurgaon

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