ITAT Bangalore: No Disallowance Under Section 40(a)(i) When Income Is Resolved Under VSVS
The Bengaluru Bench of the Income Tax Appellate Tribunal in IQVA RDS (India) Private Limited Vs DCIT has clarified an important aspect of disallowance under Section 40(a)(i) in cases where the deductee’s tax dispute is settled under the Direct Taxes Vivad se Vishwas Scheme, 2024 (VSVS).
The Tribunal held that once the non-resident recipient of income settles its tax liability under VSVS, the corresponding disallowance made in the hands of the assessee for non-deduction of tax at source under Section 40(a)(i) cannot continue, in view of CBDT Circular No.19/2024, FAQ No.58.
Background of the Dispute
For Assessment Year 2013-14, an assessment was framed under Section 143(3) read with Section 144C and Section 92CA of the Income Tax Act 1961. The assessee, IQVA RDS (India) Private Limited [formerly QUINTILES RESEARCH (INDIA) PVT. Ltd.], had originally reported total income of ₹1.26 crore.
The Assessing Officer (AO) completed the assessment determining total income at about ₹8.59 crore, mainly on account of:
- Transfer pricing adjustment of ₹6.61 crore to the arm’s length price (
ALP) of international transactions; - Disallowance under Section 36(1)(va) for delayed deposit of employees’ PF contribution of ₹34.13 lakh;
- Disallowance under Section 40(a)(i) of ₹37.74 lakh for alleged failure to deduct tax at source (
TDS) on payments treated as fees for technical services.
The assessee carried the matter in appeal before ITAT Bangalore.
Issues Raised Before the Tribunal
At the appellate stage, three main issues arose:
- Challenge to the transfer pricing adjustment under
Section 92CA; - Disallowance under
Section 36(1)(va)for belated payment of PF; - Disallowance under
Section 40(a)(i)for non-deduction of TDS on:- Computer license fees of about ₹6.81 lakh; and
- Recruitment expenses of about ₹30.94 lakh.
However, not all these issues ultimately survived for adjudication.
Transfer Pricing Adjustment Resolved Through MAP
During the hearing, the assessee produced a letter dated 09.03.2022 requesting permission to withdraw the grounds relating to transfer pricing.
- The assessee had opted for resolution of its international transaction pricing under the Mutual Agreement Procedure (MAP).
- A MAP resolution dated 11.02.2022 had already settled the transfer pricing dispute with the competent authorities.
As the TP adjustment of ₹6.61 crore stood resolved through MAP, the assessee withdrew those grounds, and the Tribunal treated the TP dispute as no longer alive.
PF Disallowance Under Section 36(1)(va) Not Pressed
Another ground related to disallowance under Section 36(1)(va) for delayed deposit of employees’ PF contributions.
- The assessee acknowledged the binding nature of the Supreme Court judgment in Checkmate Services Pvt. Ltd. v. CIT [2022] 143 taxmann.com 178, which went in favour of the Revenue on this issue.
- In light of this decision, the assessee chose not to press this ground.
Accordingly, the Tribunal dismissed the PF-related ground as not pressed.