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Facts
The assessee, Cadence Design System (India) Pvt. Ltd., challenged a disallowance under Section 40(a)(ia) for alleged non-deduction of TDS on rental expenditure, arguing that TDS was duly deducted and remitted, and the disallowance was based on a technical error in citing Section 194IB instead of 194I in the tax audit report. The assessee also sought a refund of excess Dividend Distribution Tax (DDT) by claiming Double Taxation Avoidance Agreement (DTAA) benefits for a lower tax rate. Additionally, interest charges under Sections 234B and 234C and the initiation of penalty proceedings under Section 270A were contested.
Held
The Tribunal allowed the appeal regarding the Section 40(a)(ia) disallowance, ruling that a mere technical error in mentioning the TDS section should not lead to disallowance when TDS was actually deducted and remitted. However, the claim for DDT refund was dismissed, relying on a Special Bench decision that DTAA benefits do not automatically apply to DDT paid under Section 115O. The Tribunal also held that interest charges were consequential and penalty proceedings premature for adjudication.
Key Issues
1. Whether disallowance under Section 40(a)(ia) for non-deduction of TDS on rental expenditure is justified when TDS was deducted but a wrong section (194IB instead of 194I) was cited. 2. Whether DTAA benefits apply to claim a refund of excess Dividend Distribution Tax (DDT) paid under Section 115O. 3. Validity of interest charges under Sections 234B/234C and premature penalty initiation under Section 270A.
Sections Cited
143(3), 250, 40(a)(ia), 194I, 194IB, 197, 115O, 234B, 234C, 274, 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI YOGESH KUMAR US, JUDICIAL MEMBER ITA No. 1489/Del/2023 (Assessment Year: 2018-19) Cadence Design System (India) Vs. DCIT, Pvt. Ltd, Circle-4(2), Plot Nos. 57A, B & C, Noida Delhi Special Economic Zone, Noida (Appellant) (Respondent) PAN: AAACC1138Q Assessee by : Shri Salil Kapoor, Adv Shri Vibhu Jain, Adv Revenue by: Shri Vivek Kumar Upadhyay, Sr. DR Date of Hearing 18/12/2023 Date of pronouncement 12/03/2024
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in ITA No.1489/Del/2023 for AY 2018-19, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. ITBA/NFAC/S/250/2022-23/1050832602(1) dated 16.03.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 29.09.2021 by the Assessing Officer, National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as „ld. AO‟).
The assessee has raised the following grounds of appeal before us:-
“1. That, in view of the facts and circumstances of the case and in law, the order passed by the National Faceless Assessment Centre ('NFAC-AO') dated 29.09.2021 as upheld by the National Faceless Appeal Centre ('NFAC') dated 16.03.2023 and also the additions/disallowance made therein is illegal, unjust, bad in law, without jurisdiction and highly excessive. The NFAC has also erred in partially confirming the additions made therein vide order passed under Section 250 of the Income-tax Act, 1961 ('the Act'). Page | 1
ITA No. 1489/Del/2023 Cadence Design System (India) Pvt. Ltd
Disallowance amounting to Rs. 5,55, 68,616 made under section 40(a)(ia) of the Act on account of non-deduction of tax at source ('TDS') on rental expenditure amounting to Rs. 18,52,28,719 2.1 That, in view of the facts and circumstances of the case and in law, the NFAC- AO/NFAC has grossly erred in disallowing a sum of Rs. 5,55,68,616/- under Section 40(a)(ia) of the Act (being 30% of rent expense amounting to Rs. 18,52,28,719/-) and has grossly erred by not appreciating the fact that the Appellant has already deducted tax at the prescribed rate under section 1941 of the Act and deposited the same within prescribed timelines. 2.2 That, in view of the facts and circumstances of the case and in law, the NFAC- AO/NFAC has grossly erred in not appreciating that disallowance cannot be made merely because an incorrect section has been mentioned in Tax Audit Report under which taxes have been withheld, especially when appropriate TDS has been deducted and deposited in accordance with law within prescribed timelines. 2.3 That, in view of the facts and circumstances of the case and in law, the NFAC has grossly erred in upholding the disallowance under Section 40(a)(ia) on the ground that taxes have not been withheld under the correct provisions of the Act without granting reasonable opportunity of being heard and explaining the case to the Appellant. 3. Non-grant of additional claim for refund of excess Dividend Distribution Tax ("DDT") - Rs. 4,07,72,163 3.1 That, in view of the facts and circumstances of the case and in law, the NFAC- AO/NFAC has erred in not extending the benefit of applicable Double Taxation Avoidance Agreement between India and USA, & India and Mauritius ("DTAA") qua the rate of tax on payment of dividend to the shareholders. 3.2 That, in view of the facts and circumstances of the case and in law, the NFAC- AO/NFAC has grossly erred in not granting the refund of excess DDT amounting to Rs. 4,07,72,163/- deposited by the Appellant during the year under consideration. 3.3 That, in view of the facts and circumstances of the case and in law, the NFAC- AO/NFAC has grossly erred in not considering that the dividend paid by the appellant to Cadence Design Systems Inc., USA ('Cadence USA') and Gardenia MJM II, Mauritius is to be taxed at the rate of 15% as per the provisions of Article 10 of India-USA Double Taxation Avoidance Agreement ('DTAA') and India- Mauritius DTAA, respectively, and not at the rate of 20.36% as charged in terms of section 115-O of the Act. 3.4 That, in view of the facts and circumstances of the case and in law, the Ld. DRP has erred in not considering the 'dividend' referred to in section 115-O of the Act as income of the shareholder. 4. The additions/disallowances made and the observations made are unjust, unlawful and based on mere surmises and conjunctures. 5. The NFAC-AO has erred in charging interest under section 234B and 234C of the Act. The same has been unjustly and illegally charged.
ITA No. 1489/Del/2023 Cadence Design System (India) Pvt. Ltd
The NFAC-AO has erred in initiating of proceedings under section 274 r.w.s 270A of the Act.” 3. The Ground Nos. 1 and 4 raised by the assessee are general in nature and does not require any specific adjudication.
The Ground Nos. 2 to 2.3. raised by the assessee are challenging the disallowance made u/s 40(a)(ia) of the Act on account of non-deduction of tax at source on rental expenditure.
4.1. We have heard the rival submissions and perused the materials available on record. The assessee company is engaged in the business of developing and exporting software and providing technical support and marketing related services to customers of its group companies. The return of income for the Asst Year 2018- 19 was filed by the assessee company on 26.11.2018 declaring total income of Rs 185,15,56,720/-. During the coruse of scrutiny assessment proceedings, the ld. AO observed that assessee had debited rental expenditure amounting to Rs 21,34,73,145/- in its profit and loss account. The assessee submitted that the same was recorded by it on straight line basis, however, the actual cash outflow for the lease payments was Rs 18,54,35,963/- on which applicable taxes have been withheld. Accordingly, the provision for lease equalization debited in excess of actual cash outflor amounting to Rs 2,80,37,182 (213473145 – 185435963) has been suo moto disallowed by the assessee in the return of income. The assessee before the ld. AO stated vide submissions dated 21.5.2021 and 26.6.2021 that gave the details of deduction of tax at source on rental expenditure of Rs 18,54,35,963/-. Despite this, another show cause notice dated 27.9.2021 was stated to be uploaded in income tax portal by the ld. AO seeking some clarification on this issue, among other issues, requiring compliance by 28.9.2021. This notice was not received by the assessee via email or any other mode. The ld. AO accordingly, proceeded to disallow a sum of Rs 6,40,41,000/- calculated on the basis of 30% of entire rental expenditure u/s 40(a)(ia) of the Act on the ground that show cause notice dated 27.9.2021 was not responded by the assessee and that the assessee had not deducted tax at source on rental expenditure. While doing so, the ld. AO completely ignored the earlier written submissions that were already on record wherein Page | 3
ITA No. 1489/Del/2023 Cadence Design System (India) Pvt. Ltd
complete evidences for deduction of tax at source on rental expenditure were filed by the assessee.
4.2. Before the ld. CIT(A), the assessee again reiterated its stand by stating as under:-
a) Rental expenditure of Rs 18,52,28,719/- on which tax was deducted at source and remitted to the account of the Central Government.
b) Rental expenditure of Rs 2,07,244/- on which tax was not required to be deducted at source as it was below the minimum threshold for deducting tax u/s 194I of the Act.
c) Provision for lease equalization of Rs 2,80,37,182/- which was suo moto disallowed by the assessee in the return of income.
4.3. The ld. CIT(A) observed that as per tax audit report, in respect of item a) above, tax of Rs 50,42,482/- was deducted on payment of rent u/s 194IB of the Act and not u/s 194I of the Act. Accordingly, the deduction claimed by the assessee was denied and disallowance was confirmed to this extent. However, the ld. CIT(A) granted relief of Rs 2,80,37,182/- as it was suo moto disallowed by the assessee in the return of income. With regard to item b) above, the ld. CIT(A) agreed to the fact that a sum of Rs 2,07,244/- representing part of rent expenditure does not warrant any deduction of tax at source as it was below the minimum threshold limit. Hence the only issue that survives before us is the disallowance made u/s 40(a)(ia) of the Act for Rs 18,52,28,719/- towards rental expenditure.
4.4. We find that the assessee had furnished the details of complete rental expenditure together with the details of deduction of tax at source party wise in the following manner:-
SI. No. Party PAN Amount on TDS Details of Rate at which which TDS LDC, if any TDS withheld deducted 10.00% 1 CENTRAL WAREHOUSING AAACC1206D 1,80,000 18,000 CORPORATION 10.00% 2 CHL LIMITED AAACC2587M 8,82,000 88,200 10.00% 3 DEBASISH PANDA ABWPP3300P 17,45,110 1,74,511 Page | 4
ITA No. 1489/Del/2023 Cadence Design System (India) Pvt. Ltd
0.75% 4 RMZ ECOWORLD AABCA7596B 12,76,83,460 9,57,627 0417AB474C 10.00% INFRASTRUCTURE PRIVATE 10.00% LIMITED 10.00% 5 RMZ ECOWORLD AABCA7596B 1,16,07,500 11,60,758 10.00% INFRASTRUCTURE PRIVATE 10.00% LIMITED 10.00% 6 BAJAJ ALLIANZ LIFE AADCA1701E 1,19,84,821 11,98,488 10.00% INSURANCE COMPANY 10.00% LIMITED 10.00% 7 ALPESH KANTIBHAI PATEL AESPP1671G 4,04,820 40,488 10.00% 8 DARSHIT KANUBHAI PATEL BFUPP0268R 1,85,108 18,516 10.00% 9 EVERPLUS FINANCE AND AAACE4256H 15,12,552 1,51,260 10.00% INVESTMENT PVT LTD 10.00% 10 KANUBHAI DHULABHAI AFDPP0326C 3,87,564 38,760 10.00% PATEL 10.00% 11 MANISH KANTI PATEL BJFPP1119Q 1,93,776 19,380 0.75% 12 NEHA MANISH PATEL ALNPP1114E 1,93,776 19,380 10.00% 13 PIYUSHKUMAR RAMANLAL AAWPP5745M 4,04,820 40,488 10.00% PATEL 14 BAJAJ ALLIANZ LIFE AADCA1701E 21,98,280 2,19,828 INSURANCE COMPANY LIMITED 15 DARSHIT KANUBHAI PATEL BFUPP0268R 26,284 2,628 16 MADHUSUDAN CHAUDHARY AAAHM7393A 5,57,521 55,753 HUF 17 MANISH GARG AGQPG6093B 3,86,304 38,632 18 MEENU KAKKAR AQWPK7494C 1,15,500 11,550 19 PANKAJ KAKKAR ALMPK7436M 1,15,500 11,550 20 RMZ ECOWORLD AABCA7596B 1,80,51,017 1,35,384 0417AB474C INFRASTRUCTURE PRIVATE LIMITED 21 RMZ ECOWORLD AABCA7596B 60,17,006 6,01,701 INFRASTRUCTURE PRIVATE LIMITED 22 Satish Khemka AAJPK8421C 3,96,000 39,600
Total amount reported in 18,52,28,719 50,42,482 TAR clause 34.a. S.No. 4
4.5. From the above, it is very clear that the rental expenditure of Rs 18,52,28,719/- had been duly subjected to deduction of tax at source at the applicable rates and one party RMZ Ecoworld Infrastructure Private Limited had even obtained lower deduction certificate u/s 197 of the Act from the TDS officer. When these facts are staring at us, the action of the lower authorities in making a mamooth disallowance of Rs 18,52,28,719/- merely on the wrong mentioning of section 194IB instead of section 194I(b) of the Act cannot be sustained. Hence we have no hesitation to delete the disallowance of Rs 18,62,28,719/- u/s 40(a)(ia) of the Act. Accordingly, the Ground Nos. 2 to 2.2 raised by the assessee are allowed.
ITA No. 1489/Del/2023 Cadence Design System (India) Pvt. Ltd
The Ground Nos. 3 to 3.4. raised by the assessee are seeking relief in respect of additional claim for refund of excess Dividend Distribution Tax (DDT) of Rs 4,07,72,163/-. This issue is no longer res integra in view of the recent decision of the Hon‟ble Special Bench of Mumbai Tribunal in the case of DCIT vs Total Oil India Pvt Ltd in ITA No. 6997/Mum/2019 dated 20.4.2023 reported in 149 taxmann.com 332 (Mum Trib) (SB) wherein it was held that Double Taxation Avoidance Agreement (DTAA) does not get triggered at all when a domestic company pays DDT u/s 115O of the Act where contracting states to a tax treaty intend to extend treaty protection to domestic company paying dividend distribution tax, only then, domestic company can claim benefit of DTAA, if any. Respectfully following the same, the Ground Nos. 3 to 3.4 raised by the assessee are dismissed.
The Ground No. 5 raised by the assessee is regarding chargeability of interest u/s 234B and 234C of the Act, which is consequential in nature.
The Ground No. 6 raised by the assessee is regarding initiation of penalty proceedings u/s 270A of the Act which is premature for adjudication at this stage. Hence, dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 12/03/2024. -Sd/- -Sd/- (YOGESH KUMAR US) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:12/03/2024 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT Page | 6
ITA No. 1489/Del/2023 Cadence Design System (India) Pvt. Ltd
ASSISTANT REGISTRAR ITAT, New Delhi