ITAT Mumbai on Linked TDS and Section 40(a)(i) Disallowance: Appeal Remanded to CIT(A)

The Mumbai Bench of the Income Tax Appellate Tribunal in the case of International Specialty Products (India) Private Limited Vs DCIT (ITAT Mumbai), ITA No. 5817/Mum/2025, delivered on 25/08/2026, addressed a crucial issue concerning the interplay between:

  • TDS liability and default proceedings under Sections 201(1), 201(1A) read with Section 195, and
  • Disallowance of expenditure under Section 40(a)(i) pursuant to reassessment under Section 147.

The dispute arose for Assessment Year 2019-20 and involved a disallowance of ₹2,35,72,409, being payments made to a non-resident entity, M/s Ashland Singapore Pte. Ltd., towards consulting and professional services, on which no tax was deducted at source.

The Tribunal did not decide the merits of the disallowance. Instead, it held that the appeal on Section 40(a)(i) disallowance should not be adjudicated in isolation when the foundational order under Sections 201(1) and 201(1A) read with Section 195 is itself under challenge before the same appellate forum. Accordingly, the ITAT remanded the matter to the CIT(A) with specific directions.

Background of the Proceedings

Genesis of the Reassessment

  1. The assessee had made a payment of ₹2,35,72,409 to M/s Ashland Singapore Pte. Ltd., a company based in Singapore, described as consideration for consulting and professional services.
  2. The TDS officer, in separate proceedings under Sections 201(1) and 201(1A) read with Section 195 of the Income Tax Act 1961, concluded that:
    • The remittance was chargeable to tax in India; and
    • The assessee ought to have deducted tax at source under Section 195.
  3. On that basis, an order treating the assessee as an assessee-in-default under Sections 201(1) and 201(1A) was passed.

Subsequently, the Assessing Officer (AO) relied substantially on the findings recorded in the Section 201(1) / Section 201(1A) order to:

  • Reopen the assessment under Section 147, and
  • Disallow the entire payment of ₹2,35,72,409 under Section 40(a)(i) for failure to deduct TDS.

Thus, both the reassessment and the Section 40(a)(i) disallowance were directly rooted in the TDS default order under Sections 201(1) and 201(1A) read with Section 195.

Proceedings before the CIT(A)

Grounds Raised by the Assessee

Before the National Faceless Appeal Centre, Delhi (CIT(A)), the assessee mounted a twofold challenge:

  • Validity of reassessment under Section 147 – including jurisdictional and legal grounds against reopening of the assessment.
  • Merits of the disallowance under Section 40(a)(i) – contending, inter alia, that:
    • The payment to Ashland Singapore Pte. Ltd. was not chargeable to tax in India; and
    • Consequently, no obligation to deduct tax arose under Section 195, and no disallowance could be made under Section 40(a)(i).

Importantly, the assessee brought to the notice of the CIT(A) that:

  • The order under Sections 201(1) and 201(1A) read with Section 195—which constituted the very bedrock of the reassessment and the disallowance—had already been appealed against before the First Appellate Authority; and
  • That appeal was still pending adjudication.

Approach of the CIT(A)

The CIT(A) acknowledged that the Section 201(1) / Section 201(1A) order, forming the base of the reassessment, was under appeal. Nevertheless, he proceeded to: