By TIOL News Service

PUNE, JULY 07, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether when subsidary company is accessing standard data server facility of its non-resident holding company, then payments made in relation thereto does not partake the nature of professional/technical services and the provisions of section 194J are not applicable. YES is the answer.

Facts of the case:

The assessee, a subsidiary of Volkswagen AG, Germany, was engaged in the manufacturing of passenger vehicles of Skoda and Volkswagen brand. The assessee had a manufacturing unit at Chakan wherein passenger vehicles were manufactured. Survey was conducted on the premises of the assessee for verification of compliance to the TDS provisions at the Chakan plant. The survey team noted certain defaults in respect of TDS provisions. The AO noted that there was default in deduction of tax u/s 194H/194J of the Act. The total tax effect for the F.Y. 2007-08 was Rs.8,81,819/- on the said default demand was raised u/s 201(1) of Rs.8,81,819/-. The AO also computed the interest under section 201(1A) of the Act. The assessee was issued show cause notice u/s 271C of the Act.The suo motu compliance by the assessee was held to be not correct. The plea of the assessee that the default occurred due to oversight and was a bonafide mistake was also not accepted by the Additional CIT. Hence in the absence of the assessee justifying any reasonable cause for non deduction of tax at source, the assessee was held to be at default to deduct tax at source and penalty under section 271C of the Act was levied.

On appeal, the ITAT held that,

++ the assessee had made certain payments and in respect of one set of payments the assessee had deducted the tax at source under section194C of the Act. However, the AO was of the view that the provisions of section 194J were attracted. In respect of another set of payments the assessee had claimed that it was reimbursement of expenses or the service tax element thereof and no tax was to be deducted at source. In each of the years under appeal, there was admittedly short deduction of tax at source or non deduction of tax at source which the assessee claims due to oversight and the last set of payments on account of TDS were deposited in the bank account in the succeeding year. The assessee pleaded that on account of various reasons as pointed out before the authorities below, there was no merit in the levy of penalty;

++ the first allegation against the assessee was for not deducting the tax at source against payments made to its German company for accessing standard data server facility located outside India. The plea of the assessee was that such services which did not involve any human intervention for transmitting the data through such data lines did not involve technical services and there was no liability to deduct tax at source under section194J of the Act. The second aspect which was raised in this regard was that the off-shore services were rendered outside India and since it did not satisfy the twin conditions laid down in section 9(1)(vii) applicable to the Financial Year 2007-08, there was no merit in holding the assessee to be in default. The issue of applicability of section 194J of the Act, vis-à-vis similar payments of data line charges arise before the Pune Bench of the Tribunal in IGATE Computer Systems Ltd. case and it had been held that as there was no human intervention for transmitting the data it did not involve technical services and the provisions of section 194J of the Act were not applicable. The plea of the assessee in prsent case was similar that where it was accessing standard data server facility of the German company which was located outside India in Financial Years 2007-08 to 2009-10, then the payments made did not partake the nature of professional/technical services and the provisions of section 194J of the Act were not applicable. There was merit in the plea of the assessee in this regard and even where the assessee has deducted the tax at source on such consultancy fees paid and deposited the same in the account of the treasury, but the assessee cannot be held to be liable to penalty under section 271C of the Act.

(See 2017-TIOL-1000-ITAT-PUNE)