TOYO ENGINEERING INDIA PRIVATE LIMITED,KANJURMARG WEST vs. DEPUTY COMMISSIONER OF INCOME TAX- 15(3)(1), MUMBAI, MARINE LINES

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ITA 962/MUM/2026Status: DisposedITAT Mumbai11 June 2026AY 2022-20237 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. is applicable to the India-Japan DTAA as well. Therefore, payments for software licenses for end-use are not taxable in India, and no TDS was required.

What were the facts?

The assessee made payments for software outside India. The Assessing Officer disallowed these payments under Section 40(a)(i) for non-deduction of TDS. The CIT(A) confirmed the disallowance for a portion of these payments, distinguishing the Supreme Court's ruling based on the applicable Double Taxation Avoidance Agreement (DTAA).

What were the issues?

Whether payments for software are fees for technical services or purchase of goods/licenses, and if TDS is required when the income is not taxable in India as per the applicable DTAA.

Which sections of the Income-tax Act were involved?

Section 40(a)(i),Section 195,Section 90(2)

AI-generated summary — verify with the full judgment below

IN THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI “I” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER ITA No.962/MUM/2026 (AY: 2022-23) Toyo Engineering India Pvt. Ltd. vs. DCIT-15(3)(1), Toyo House, LBS Marg, Kanjurmarg 451, 4th Floor, Aayakar Bhavan, West, Mumbai-400078. Maharishi Karve Road, Mumbai.- 400020. PAN/GIR No: AAACT1772H (Appellant) (Respondent) Assessee by Shri Nitesh Joshi Revenue by Shri Sridhar G. Menon (Sr. DR) Date of Hearing 11.06.2026 Date of Pronouncement 10.09.2026 O R D E R PER BIJYANANDA PRUSETH, AM:

This appeal filed by the assessee emanates from the order passed under

section 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the National Faceless

Appeal Centre [in short, ‘NFAC’], dated 28.11.2025 for the assessment year (AY)

2022-23.

2.

The grounds of appeal raised by the assessee are as under:

“General Grounds

1.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in partly upholding the additions amounting to Rs. 13,83,20,352 made by the Assessing Officer in the assessment order passed u/s 143(3) of the Act.

Disallowance u/s 40(a)(i) of the Act in respect of fees paid for technical services outside India: Rs. 13,83,20,352

2 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance of Rs. 13,83,20,352 made u/s 1 40(a)(i) of the Act in respect of software payments alleging the same to be fees paid for technical services overlooking that the payment had been made for standard of the shelf software.

3.

In doing so, the Ld. CIT(A):

(a) erred in not appreciating the fact that the impugned payments were made under a cost-sharing arrangement and did not constitute income chargeable to tax in India.

(b) erred in holding that the ratio of decision of the Hon'ble Supreme Court ('SC) in case of Engineering Analysis Centre of Excellence vs CIT [(432 ITR 471) (2021)] is not applicable to the facts of Appellants case solely on the basis that the SC decision was concerned with the India-USA Double Taxation Avoidance Agreement ('DTAA') whereas in the Appellants case the applicable treaty is between India-Japan.

(c) erred in not appreciating the fact that the amount paid by the Appellant was not chargeable to tax in India as per the India-Japan Double Taxation Avoidance Agreement ('DTAA') and thereby there was no obligation to deduct tax at source on the said payments.

(d) erred in rejecting the appellant's claim stating that appellant has not made any submission on agreement made with Japan entity with whom the said transactions were made nor furnished copy of the applicable Double Taxation Avoidance Agreement, without appreciating the fact that Appellant had already submitted relevant supporting during the remand proceedings.

(e) erred in not appreciating the fact that the liability to deduct TDS u/s 195 would arise only when there is an income element in the payment made to a non-resident.

(f) erred in not appreciating the fact that since provisions of India-Japan Treaty are more beneficial as compared to provisions of the Income-tax Act provision of Treaty ought to be applied while withholding TDS as per provision of section 90(2) of the Act.”

3.

Facts of the case, in brief, are that the assessee filed return of income for

AY 2022-23 declaring total income of Rs.142,32,96,203/-. The case was selected for scrutiny and assessment was completed u/s 143(3) read with section 144B of

the Act. During the assessment proceedings, the AO noted that the assessee

failed to furnish the requisite details and supporting evidences despite being

afforded repeated opportunities. The AO made a disallowance of

Rs.41,62,67,084/- u/s 40(a)(i) of the Act in respect of royalty payments made

outside India for want of details regarding the payments and TDS compliance.

Further, an addition of Rs.45,04,73,329/- was made on account of decrease in the

net profit/PBDIT ratio and Rs.13,78,98,350/- was added on account of profit on

unexplained imports. The AO also made an addition of Rs.24,79,09,263/- u/s 69C

of the Act on account of bogus purchases. He further, disallowed club expenses

of Rs.14,74,084/- u/s 37(1) of the Act, as being personal expenditure. Thus,

aggregate additions of Rs.1,25,40,22,110/- were made to the returned income

and the total income was assessed at Rs.2,78,59,38,390/-.

4.

Aggrieved by the order of AO, the assessee filed appeal before the CIT(A). The CIT(A), after considering the submissions of the assessee, additional evidences and remand report of the AO, partly allowed the appeal. In respect of disallowance u/s 40(a)(i), the CIT(A) deleted the disallowances of Rs.8,85,19,901/- on foreign technical-service payments and Rs.18,94,26,832/- relating to domestic technical-service payments, on which requisite TDS had been deducted and deposited. However, the disallowance of Rs.13,83,20,352/- relating to foreign technical-service payments on which TDS had not been deducted was confirmed.

He observed that decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, 432 ITR 471 (SC) is not applicable because in the said case DTAA was with USA whereas in the present case, transaction is with Japan. The CIT(A) has deleted all other additions. 5. Aggrieved by the order of CIT(A), the assessee filed appeal before the Tribunal. The Ld. AR submitted that the disallowance of Rs.13,83,20,352 u/s 40(a)(i) was unjustified, as the payments represented fees for technical services made outside India and the same were not liable to withholding tax in India. Reliance was placed on the decision of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT. It was submitted that where the income was not chargeable to tax in India, the provisions of section 40(a)(i) could not be invoked. The Ld. AR further submitted that the CIT(A) disallowed the impugned amount on the ground that the decision of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) is applicable to the DTAA with USA whereas the appellant’s transaction is with Japan. However, the decision of the Hon’ble Court also covers DTAA with Japan. Hence, the case of the assessee is fully covered by decision of the Hon’ble Supreme Court. 6. On the other hand, the Ld. AR relied on the decision of the AO and CIT(A).

He submitted that the CIT(A) has rightly confirmed the disallowance made by the

AO u/s 40(a)(i) of the Act because the assessee had not deducted TDS on the

impugned payment of Rs.13,83,20,352/-.

7.

We have heard both sides and perused the materials on record. We have also carefully gone through the decision of the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd.(supra). The AO made various additions including addition of Rs.41,62,67,084/- on account of disallowance u/s 40(a)(i) of the Act due to non-compliance of assessee before him. During appellate proceedings, the assessee filed various details and evidences and requested to admit the additional evidence under Rule 46A of the Income-tax Rules, 1962. The CIT(A) called for remand report from the AO and deleted the disallowance of Rs.8,85,19,901/- and Rs.18,94,26,832/- paid to non-resident and resident respectively because tax has been deducted on payments to them. However, he did not allow Rs.13,83,20,352/- being payment made to non- resident because tax was not deducted on software payments based on the ruling of the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). The AO in remand report has stated that it is a legal issue, which will have to be decided on merits by the CIT(A). The Hon’ble Supreme Court in above case held that payments made by Indian and end-users or distributors to non-resident computer software suppliers or manufactures for purchase or use of software do not qualify as taxable “royalties” under the Income-tax Act for Double Taxation Avoidance Agreement (DTAA). There is no TDS liability because these transactions are considered purchase of goods/copy right licenses for end use rather than a transfer of copy right ownership. The Indian buyers do not need to deduct tax at source u/s 195 of the Act. The decision applied to direct end user imports, resale through local distributors and software bundled directly with hardware. Considering the Hon’ble Supreme Court ruling in the above case, the provisions of DTAA with Japan, the remittances for license fees for use of software will be covered under Article 7- Business Profits of DTAA of India with Japan and accordingly will not be taxable in India in the absence of it not being attributable to any Permanent Establishment (PE) of assessee in India. We also find that the CIT(A) did not allow relief by observing that the decision of the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence (supra) covers DTAA with USA whereas the appellant’s transactions are with Japan. However, we find from the order of the Hon’ble Supreme Court at page 55 that it also covers DTAA with Japan, which is at serial No.11 of 18 countries mentioned in the table at page 54 and 55 of the order. Hence, the case of the assessee is fully covered by the above decision of the Hon’ble Supreme Court. The Ld. CIT-DR has not been able to distinguish the case either on fact or in law. Hence, respectfully following the above decision, we set aside the order of CIT(A) and allow the grounds of the assessee. 8. In the result, the appeal is allowed. Order is pronounced on 10.09.2026.

Sd/- Sd/- (SAKTIJIT DEY) (BIJYANANDA PRUSETH) VICE PRESIDENT ACCOUNTANT MEMBER *Aniket Chand; Sr. PS MUMBAI Date: 10.09.2026 Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 6

4.

CIT 5. DR/AR, ITAT, MUMBAI 6. Guard File

By Order

Assistant Registrar ITAT, MUMBAI

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