Once certificate u/s 195(2) is obtained for NIL deduction, AO cannot disallow the expense u/s 40(a)(i) – Mum ITAT

DCIT v M/s Carl Zeiss India (P) Ltd (ITA No 1251(B)/2014, 1258(B)/2014 dated 24 July 2015) Mumbai ITAT


During the course of assessment proceedings, the AO noted that the assessee has claimed Rs.1,12,51,602 under the head cost of senior management pertaining to activities of Carl Zeiss India Branch. On query, by the AO, the assessee submitted that during the financial year amount has been reimbursed to Carl Zeiss, Singapore Pte Ltd. being the cost allocated based on the proportion of work performed. Thus, it was submitted that the cost reimbursed by the assessee is in the nature of reimbursement on actual basis without any mark-up. The assessee has also pointed out that the payment was made and the amount was remitted only after obtaining a certificate from the AO u/s 195(2). 

The AO did not accept the contention of the assessee and was of the view that the services provided by the head office through 3 senior managerial personnel fall under the category of fee for technical services (FTS). Thus, the AO held that the remittance in truth and reality is consideration for technical services disguised as reimbursement of expenses. Since the assessee did not deduct tax at source, the said payment of Rs.1,12,51,602 was disallowed and added to the total income.

The CIT(A) gave partial relief by accepting contentions of the assessee with respect to 1 managerial personnel and dismissed the ground regarding other 2 personnel and upheld the order of the AO that the services were indeed FTS.


  • It is pertinent to note that the assessee has remitted the amount in question to the non-resident after obtaining a certificate from the AO u/s 195(2) dated 25-01-2009.
  • The AO iwhile granting the certificate u/s 195(2) has duly recorded the fact that the payment in question is in respect of availing the services of Carl Zeiss Pte.Ltd. Singapore under the agreement dated 01-10-2006 for providing , certain managerial and human resources to India branch. The AO also have noted the facts that the payment werein connection with the salaries and other cost of managerial and HR officials charged to Indian branch which includes the cost of MD, Chief Officer, HR & Quality, web. administrator for IT application specialists
  • Since the assessee has already made an application u/s 195(2) of the Act for seeking permission from the concerned authority to remit the said payment to the non-resident without deduction of tax at source and the AO has determined the tax deductable at source as nil and allowed the assessee to remit the said amount without deduction of TDS.
  • Therefore, once the assessee has complied with the provisions of sec.195 and obtained a certificate from the AO in accordance with the requirement of sec.195(2) then, the assessee cannot be penalised by invoking the provisions of section 40(a)(i) of the Act. 
  • Accordingly, without going into the issue of the nature of payment whether FTS or not we are of the view that once assessee has complied with the provisions of section 195 by obtaining the certificate u/s 195(2) then, no disallowance can be made in respect of the said amount paid to the non-resident by invoking the provision of section 40(a)(i) of the Act.

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