In ITA No.473/Chny/2019 -ITAT- Payment by Trusted Aerospace Engineering to sister concern TASI USA was purely reimbursement of expenses, no default under Section 195 of Income Tax Act: ITAT (Chennai)
Members V. Durga Rao (Judicial) & Manish Borad (Accountant) [14-06-2023]

Read Order: The Deputy Commissioner of Income Tax, Corporate Circle-3(1), Chennai v. Trusted Aerospace Engineering Pvt. Ltd.

Chahat Varma

New Delhi, June 16, 2023: The Chennai Bench of the Income Tax Appellate Tribunal has ruled that the payment made by Trusted Aerospace Engineering Pvt. Ltd. (assessee) to its sister concern, TASI USA, did not include any income component and it was purely reimbursement of expenses. Therefore, the assessee cannot be considered in default for not deducting tax at source under Section 195 of the Income Tax Act.

Factual background of the case was that the assessment order had revealed that the assessee had incurred an expenditure under the head ‘HS Pure Power Programme’ without deducting tax at source. The Assessing Officer (AO) noted that the payment was made to a non-resident entity involved in engineering design costs, product development costs, and engineering support. The assessee argued that the payments were not for technical services but rather for the cost of products manufactured by its sister concern. However, the AO was not satisfied and he invoked provisions of Section 195 of the Act holding that the alleged payment was liable for deduction of tax at source and thus, disallowed the expenditure under Section 40(a)(i) of the Act. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the alleged payment was not liable to tax in India and held that the disallowance made under Section 40(a)(ia) of the Act was uncalled for.

The bench comprising of V. Durga Rao (Judicial) and Manish Borad (Accountant) observed that that the payments made by TASE India to its sister concern TASE USA were in the nature of reimbursement of expenses related to the Pure Power Project's first phase. It was noted that the agreement between TASE India and Hamilton Sundstrand Corporation USA, dated 24.06.2009, was entered into for the manufacturing of new products as part of the Pure Power Program. As the Indian facility of the assessee was not fully established at that time, they relied on their sister concern, which was well equipped with the necessary facilities for carrying out the manufacturing work.

The Tribunal also referred to the Supreme Court's decision in the case of GE India Technologies Pvt. Ltd. vs. CIT [LQ/SC/2010/951], wherein it was held that the obligation to deduct tax at source under Section 195 of the Act does not arise at the moment the payment is made to a non-resident but arises only when such remittances is a sum chargeable to income tax under Sections 4, 5, and 9 of the Act.

In line with this reasoning, the Tribunal concluded that no tax was required to be deducted by the assessee on the alleged payments.