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Facts
The assessee, a foreign company engaged in engineering and consultancy, filed its return for AY 2021-22. The AO passed a draft assessment order proposing additions. The assessee objected, and after DRP's directions, the AO passed the final assessment order, making several additions including disallowance of interest on delayed TDS, payment to an international freelancer, miscellaneous expenses, and bank guarantee charges.
Held
The Tribunal held that interest paid on delayed TDS is not a business expenditure. The payment to Mr. Antony Burchell was held to be salary, making the disallowance under Section 40(a)(i) valid. The disallowance of miscellaneous expenses was set aside and remanded to the AO. The disallowance for bank guarantee charges was deleted as no principal-agent relationship existed. The ground regarding penalty proceedings was dismissed as premature.
Key Issues
Whether interest on delayed TDS is a business expenditure, whether payment to an international freelancer is salary or consultancy fee, and whether bank guarantee charges attract TDS provisions.
Sections Cited
143(3), 144C(13), 201(1A), 37(1), 40(a)(i), 192, 44DA, 194H, 270A, 143(2), 144C(5), 144C(1)
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Income Tax Appellate Tribunal, Hyderabad ‘ DB-A ‘ Bench, Hyderabad
Before: Shri Ravish SoodShri Madhusudan Sawdia
(िनधा�रण वष�/Assessment Year: 2021-22) M/s Nippon Koei Co. Ltd Vs. ADIT (International Hyderabad Taxation)-2, PAN:AABCN8434F Hyderabad (Appellant) (Respondent) िनधा��रती �ारा/Assessee by: Shri GSV Prasad, Anand Swaroop and S K Mohanty, CAs राज� व �ारा/Revenue by:: Smt. U. Mini Chandran, CIT(DR) सुनवाई की तारीख/Date of hearing: 27/10/2025 घोषणा की तारीख/Pronouncement: 21/11/2025 आदेश/ORDER Per Madhusudan Sawdia, A.M.:
This appeal is filed by Nippon Koei Co. Limited (“the assessee”), feeling aggrieved by the order passed by the Learned Assistant Director of Income Tax (Int. Taxation)-2, Hyderabad (“Ld. AO”), u/s 143(3) r.w.s. 144C(13) of the Income Tax Act (“ the Act”),dated 31/10/2023 for the A.Y. 2021-22.
The assessee has raised the following grounds of appeal:
3. The brief facts of the case are that the assessee is a foreign company engaged in the business of engineering, consultancy, and electric power. The assessee filed its return of income for the Assessment Year 2021-22 declaring total income of Rs.6,27,12,098/- for its branch office in India. The case of the assessee was selected for scrutiny and accordingly, notice under section 143(2) of the Income Tax Act, 1961 (“the Act”) was issued on 27.06.2022. As the assessee was an eligible assessee within the Page 2 of 20 meaning of clause (b) of sub-section (15) of section 144C of the Act, the Learned Assessing Officer (“Ld. AO”) passed a draft assessment order under section 144C(1) of the Act on 31.12.2022 proposing a total addition of Rs.3,47,02,323/-.
4. Against the draft order of the Ld. AO, the assessee filed its objections before the Learned Dispute Resolution Panel (“Ld. DRP”). The Ld. DRP issued its directions under section 144C(5) of the Act on 28.09.2023. Pursuant thereto, the Ld. AO passed the final assessment order under section 143(3) read with section 144C(13) of the Act on 31.10.2023, making the additions on account of Disallowance of interest paid under section 201(1A) of the Act of Rs.2,10,265/-, Disallowance of lead role expenditure of Rs.19,58,509/-, Disallowance of payment made to M/s. Antony Burchell of Rs. 3,08,08,089/-, Disallowance under section 44DA of the Act of Rs. 3,49,255/- and Disallowance under section 40(a) of the Act of Rs. 13,76,205/-. Accordingly, the Ld. AO made a total addition of Rs. 3,47,02,323/- and assessed the total income of the assessee at Rs.9,74,14,421/-.
5. Aggrieved with the final order of the Ld. AO, the assessee preferred an appeal before this Tribunal. The Learned Authorized Representative (“Ld. AR”) submitted that the Ground No.1 of the assessee pertains to disallowance of Rs.2,10,265/- made by the Ld. AO on account of interest paid under section 201(1A) of the Act for delay in deposit of tax deducted at source (“TDS”). The Ld. AR contended that such interest is compensatory
Page 3 of 20 in nature and not penal, and therefore allowable as a business expenditure under section 37(1) of the Act. In support, the Ld. AR placed reliance on the decision of this Tribunal in the case of Trinity Infraventures Ltd. vs. ACIT (ITA No.403/Hyd/2021 for A.Y.2017–18 dated 25.08.2022), wherein the Tribunal deleted a similar disallowance made by the Ld. AO on account of interest paid for delayed deposit of TDS. Accordingly, the Ld. AR pleaded for deletion of the disallowance of Rs.2,10,265/-.
Per contra, the Learned Departmental Representative (“Ld. DR”) relied on the findings of the Ld. AO and submitted that the interest paid under section 201(1A) of the Act arises from failure to deposit TDS within the prescribed time and cannot be treated as expenditure incurred wholly and exclusively for business purposes. Accordingly, the Ld. DR prayed for upholding of the disallowance made by the Ld. AO.
We have carefully considered the rival submissions and perused the material available on record. The issue under consideration relates to the allowability of interest paid under section 201(1A) of the Act as a business expenditure. We have gone through the decision of this Tribunal in the case of Trinity Infraventures Ltd. vs. ACIT (supra), as relied upon by the Ld. AR. On perusal of the same, we found that the decision of the Hon’ble Madras High Court in the case of CIT vs. Chennai Properties & Investment Ltd. 239 ITR 435 was not considered by the Tribunal while passing that order. We have gone through the relevant
Page 4 of 20 portion of the order of the Hon’ble Madras High Court in the case of CIT vs. Chennai Properties & Investment Ltd (Supra) which is to the following effect:
On perusal of the above, we find that in Chennai Properties & Investment Ltd. (supra), the Hon’ble Madras High Court categorically held that interest paid on account of delayed remittance of TDS cannot be treated as business expenditure under section 37(1) of the Act and cannot be regarded as a compensatory payment. Therefore, following the binding judicial precedent of the Hon’ble Madras High Court, we hold that the interest paid under section 201(1A) of the Act is not allowable as a Page 5 of 20 deduction under section 37(1) of the Act as business expenditure. Accordingly, we find no infirmity in the order of the Ld. AO in disallowing the sum of Rs.2,10,265/-. Consequently, Ground No.1 raised by the assessee stands dismissed.
Ground No. 2 of the assessee relates to disallowance of Rs.3,08,08,089/- under Section 40(a)(i). In this regard, the Ld. AR submitted that the assessee is engaged in providing consultancy services to Chennai Metro Rail Limited (“CMRL”) in connection with Chennai Metro Rail Project Phase-2. Since the assessee itself did not have the requisite expertise for carrying out certain technical functions, it engaged Mr. Anthony Burchell (“Mr. Tony”), an international expert, as an independent freelance consultant. The Ld. AR submitted that during the year under consideration, the assessee has made payment of Rs.3,08,08,089/- /- to Mr. Tony on account of the consultancy charges. However, the Ld. AO has treated the same as salary paid to Mr. Tony. As there was no TDS made by the assessee under section 192 of the Act, on the said payment, the Ld. AO disallowed the same under section 40(a)(i) of the Act. It was further submitted that the nature of services rendered by Mr. Tony is purely consultancy and that the assessee has discharged GST under Reverse Charge Mechanism (RCM) on such payments, which would arise only in the case of procurement of consultancy services, and not in the case of salary. Therefore, according to the Ld. AR, the GST characterization supports the consultancy nature of the arrangement. The Ld. AR also submitted that Mr. Tony issued
Page 6 of 20 invoices to the assessee for the consultancy services rendered. Such invoicing would never arise in the case of an employer- employee relationship. The payments were in the nature of professional fees and were not salary payments. Hence, TDS was not deductible under section 192 of the Act. It was also brought to our notice that for the immediately preceding assessment year, the Tribunal had restored the issue to the file of the Ld. AO to examine the nature of the services rendered in the light of GST payments. Therefore, the Ld. AR submitted that, following the principle of consistency, the present matter also requires similar treatment.
Per contra, the Ld. DR strongly supported the order of the Ld. AO and submitted that the agreement between the assessee and Mr. Tony, as examined by the Ld. AO, clearly establishes an employer-employee relationship. The Ld. DR invited our attention to Article 1, Article 2, Article 4, Appendix-1 (Scope of Services), and Appendix -2 (Financial Terms & Conditions) of the agreement of the assessee with Mr. Tony (page nos. 281 to 291 of the paper book), where it is specifically mentioned that: a. Mr. Tony shall report to the General Manager of Railway Engineering Department of the assessee (“GM”) (Article- 1). b. He shall receive instructions from the GM from time to time (Article-1). c. He is exclusively assigned to the assessee’s project and shall devote his full time to the services (Article-2).
Page 7 of 20 d. He is entitled to paid and unpaid leave, subject to approval from the GM (Article-4). e. He is engaged as Team Leader of the assessee’s Design Task Team, which is part of the assessee’s organizational framework (Appendix-1). f. At para no. 2, 10 and 11 of Appendix-1, the term “employer” has been used in the context of the assessee. g. He shall be paid monthly fees of US$ 35,000 and shall be allowed 15 days paid leave per year (Appendix-2). 10.1 The Ld. DR emphasized that exclusive full-time engagement, reporting hierarchy, leave sanction process, and monthly payment structure are characteristics of a typical employer-employee arrangement. The Ld. DR also pointed out that Mr. Tony was engaged continuously for the entire year and also during the preceding year, which is not consistent with a freelance consultancy model. The use of term “employer” at Appendix-1 in the context of the assessee further strengthens the contention of the Revenue that Mr. Tony is an employee of the assessee. The Ld. DR therefore submitted that the payments made to Mr. Tony are salary, attracting TDS under section 192 of the Act, and since the assessee has failed to deduct tax, the disallowance under section 40(a)(i) of the Act has rightly been made and should be upheld.
In the rejoinder, the Ld. AR also clarified, by referring to the confirmation placed at page no. 395 of the paper book, that the term ‘employer’ used in certain correspondences referred to CMRL and not to the assessee, and therefore the reliance placed by the Ld. DR on such terminology is misplaced. Thus, the Ld. AR
Page 8 of 20 prayed that the disallowance made by the Ld. AO under section 40(a)(i) of the Act may be deleted.
We have considered the rival submissions and perused the material available on record. While we note the clarification that the term “employer” was used in the context of CMRL and not the assessee, the decisive issue is not terminology, but the substance of the working relationship evidenced from the contractual terms and actual conduct. We have gone through Article 1, Article 2, Article 4, Appendix-1 (Scope of Services), and Appendix-2 (Financial Terms & Conditions) of the agreement of the assessee with Mr. Tony (page nos. 281 to 291 of the paper book), which is to the following effect:
Page 11 of 20 12.1 On careful examination of the relevant clauses of the agreement, we find the following features: a. Mr. Tony shall report to the General Manager of Railway Engineering Department of the assessee (“GM”) (Article- 1). b. He shall receive instructions from the GM from time to time (Article-1). c. He is exclusively assigned to the assessee’s project and shall devote his full time to the services (Article-2). d. He is entitled to paid and unpaid leave, subject to approval from the GM (Article-4). e. He is engaged as Team Leader of the assessee’s Design Task Team, which is part of the assessee’s organizational framework (Appendix-1). f. At para no. 2, 10 and 11 of Appendix-1, the term “employer” has been used in the context of the assessee.
Page 12 of 20 g. He shall be paid monthly fees of US$ 35,000 and shall be allowed 15 days paid leave per year (Appendix-2). 12.2 These attributes fundamentally align with an employer- employee relationship rather than that of an independent consultant. The payment of GST under RCM does not alter this conclusion, as GST classification cannot determine the nature of income for the purpose of the Act. Therefore, in our considered view, the payment made to Mr. Tony is to be treated as salary, attracting TDS under section 192 of the Act. Since no TDS was deducted, the disallowance made by the Ld. AO under section 40(a)(i) is upheld. Accordingly, Ground No. 2 of the assessee is dismissed.
The Ground No.3 of the assessee pertains to the addition of Rs.3,49,255/- made by the Ld. AO on account of disallowance of certain expenses under section 44DA of the Act. It was submitted that these expenses represent small amounts incurred towards reimbursement of expenses incurred by the staff of the Head Office located in Japan. The Ld. AR submitted that though the assessee could not produce the necessary supporting evidence before the Ld. AO during the assessment proceedings, the same was duly furnished before the Ld. DRP along with explanations. The Ld. AR invited our attention to para nos. 2.4 to para no. 2.4.3 of the order of the Ld. DRP, wherein the relevant factual details were recorded. It was further submitted that although the Ld. DRP, in para no. 2.4.1 of its order, noted the factual position and the evidences furnished by the assessee, in Page 13 of 20 the subsequent paragraphs, the Ld. DRP discussed certain unrelated issues and omitted to adjudicate this specific ground. Therefore, the Ld. AR prayed that the matter may be restored to the file of the Ld. AO for reconsideration of the issue afresh, after examining the evidences already produced before the Ld. DRP.
Per contra, the Ld. DR fairly accepted that there was no specific adjudication by the Ld. DRP on this issue and submitted that the issue may be remanded to the file of the Ld. AO for fresh adjudication.
We have carefully considered the rival submissions and perused the material available on record. We have gone through para nos. 2.4 to 2.4.3 of the Ld. DRP’s directions, which is to the following effect:
Page 15 of 20 15.1 On perusal of the above, we find that although the relevant facts and explanations were noted, there is no clear finding or adjudication given by the Ld. DRP on the disallowance made by the Ld. AO under section 44DA of the Act. Therefore, considering these facts and in the interest of justice, we deem it appropriate to set aside this issue to the file of the Ld. AO with a direction to re-adjudicate the matter afresh, after affording due opportunity of being heard to the assessee. The assessee shall be at liberty to file all necessary supporting evidences and documents, including those already submitted before the Ld. DRP, to substantiate its claim. Accordingly, Ground No.3 of the assessee is allowed for statistical purposes.
The issue involved in ground no.4 pertains to disallowance of Rs.13,76,205/- made under section 40(a) of the Act towards performance bond guarantee and bank guarantee charges. The Ld. AR submitted that the said expenditure was incurred by Head Office (“HO”) in Japan on behalf of the branch office in India towards charges paid to a lender in Japan against funds availed by the assessee in India, and subsequently the assessee reimbursed the same to its HO in Japan. It was further submitted that such payments are not in the nature of commission or brokerage to attract the provisions of section 194H of the Act, as there exists no principal–agent relationship between the assessee and the bank. In support of this contention, the Ld. AR relied on the decision of the Coordinate Bench of the Tribunal in the case of Navnirmaan Highway Project Pvt. Ltd. vs. DCIT [ITA
Page 16 of 20 No.117/Del/2017, order dated 03.09.2019], wherein it was held that when a bank issues a bank guarantee on behalf of an assessee, the relationship between the bank and the assessee is not that of a principal and agent. Therefore, the provisions of section 194H of the Act are not attractive in such cases. Accordingly, the Ld. AR prayed for deletion of Rs.13,76,205/- made under section 40(a) of the Act.
Per contra, the Ld. DR supported the order of the Ld. AO/DRP, contending that the assessee was required to deduct tax at source under section 194H of the Act and failure to do so warranted disallowance under section 40(a) of the Act. Accordingly, the Ld. DR prayed for upholding of the deletion of Rs.13,76,205/- made by the Ld. AO.
We have carefully considered the rival submissions and perused the material available on record. We find merit in the contention of the Ld. AR. The issue stands squarely covered by the decision of the Coordinate Bench of the Tribunal in the case of Navnirmaan Highway Project Pvt. Ltd. vs. DCIT (supra). In this regard, we have gone through para no.7 of the order of the Coordinate Bench of the Tribunal in the case of Navnirmaan Highway Project Pvt. Ltd. vs. DCIT (supra), which is to the following effect:
Page 18 of 20 18.1 On perusal of the above, we find that the Tribunal has categorically held that no TDS is deductible under section 194H of the Act on bank guarantee charges as there is no principal–agent relationship between the bank and the assessee. Therefore, respectfully following the said judicial precedent, we hold that the payment made by the assessee towards performance bond guarantee and bank guarantee charges to the Bank are not in the nature of commission or brokerage to attract the provisions of section 194H of the Act, as there exists no principal–agent relationship between the assessee and the bank. Therefore, we hold that the disallowance made by the Ld. AO under section 40(a) of the Act is unsustainable. Hence, we direct the Ld. AO to delete the disallowance of Rs.13,76,205/- made under section 40(a) of the Act. Accordingly, Ground No.4 of the assessee is allowed for statistical purposes.
Ground No.5 raised by the assessee is in respect of initiation of penalty proceedings by the Ld. AO under section 270A of the Act. The initiation of penalty proceedings is only a consequential and preliminary step, and therefore, the ground raised by the assessee at this stage is premature. It is well settled that no appeal lies against mere initiation of penalty proceedings, as the cause of action would arise only when a penalty order is actually passed under section 270A of the Act. Accordingly, this ground of appeal does not survive for adjudication at this stage. Therefore, we hold that Ground No.5 raised by the assessee is premature and is dismissed as infructuous.
In the result, the appeal of the assessee is partly allowed for statistical purposes.