In the recent case of Techknowledgy Interactive Partners P. Ltd. v. ITO [ITA No. 350/MUM/2009 dated January 9, 2023], the ITAT, Mumbai has pronounced its judgment on various issues related to the tax deduction at source. The Appellant, Techknowledgy Interactive Partners P. Ltd., is a company engaged in the business of trading in software and software products. The Revenue Department (“the Respondent”) made disallowances under Section 40(a)(ia) of the Income Tax Act, 1961, in the final assessment order passed on December 20, 2007, assessing the total income of INR 19,16,750/-.
The Appellant challenged the disallowances made by the Respondent, contending that tax was already deducted at source on the payment made to M/s Orbit Software and that the disallowance was unwarranted. The Appellant also argued that the payment made to M/s Springfield Organics was for purchasing software, which was further supplied to one of its clients and hence, no tax was required to be deducted at source. The Appellant also argued that the provision of Section 40(a)(ia) of the Income Tax Act was not applicable to the reimbursement of payments made by the directors of the company as car hire charges.
The ITAT, Mumbai held that no tax was required to be deducted at source on the amount reimbursed to the director of the company towards car hire charges and that the disallowance made by the Respondent was required to be deleted. The ITAT also observed that the Appellant had already deducted tax at source on the payment made to M/s Orbit Software and that there was no reason for the Respondent to disallow the deduction. The ITAT 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. The ITAT directed the Respondent to verify if the software purchased by the Appellant from M/s Springfield Organics was indeed a traded good.
In conclusion, the ITAT, Mumbai in this case has provided clarity on various aspects of tax deduction at source, reiterating that the provisions of Section 40(a)(ia) of the Income Tax Act are not applicable to reimbursements made to directors of a company and that tax deduction at source is not required if the software purchased by a company is a traded good and supplied to another client and not for the use of the company. This judgment provides much-needed relief to companies engaged in the software and technology business, as it eliminates the burden of tax deductions at source in such cases