2015 (10) TMI 921 - AT - Income Tax

Sharing of expenses with the holding company - non deduction of TDS u/s 194J - Disallowance of Shared Service Cost under the head Operating & Administrative Expenses - AR s argument to the effect that expenditure so reimbursed have already been made subject to deduction of tax at source in the hands of holding company when the payment was actually made - Held that - Expenditure incurred by holding company on which tax has already been deducted at source, mere reimbursing of such expenses by the assessee to the holding company cannot be disallowed on the plea that assessee has not again deducted tax at source, otherwise it will amount to double deduction of tax in respect of very same expenditure. However, it appears that the AO has not examined this aspect of deduction of tax at source by holding company in respect of expenditure which requires deduction of tax at source under the provisions of Chapter XVII. In the interest of justice and fair-play, we restore the appeal back to the file of the AO with a direction to verify the deduction of tax at source in terms of provisions of Chapter XVII, Part B and if the AO found that taxes have already been deducted at source in respect of expenditure which requires deduction of tax at source by the holding company while making payment, no disallowance can be made with reference to such expenditure in the hands of the assessee while reimbursing the same to the holding company. - Decided in part in favour of assessee by way of remand.

Summary

Issues:
Disallowance of shared service cost under the head operating & administrative expenses.

Analysis:
The appeal was filed against the order of CIT(A) for the assessment year 2008-09 under Section 143(3) of the I.T. Act. The solitary issue raised was the disallowance of shared service cost under operating & administrative expenses amounting to Rs. 1,34,47,668. The AO disallowed the expense as the assessee had shared service cost with its associate company, and no tax was deducted at source on such payment. The CIT(A) confirmed the addition, leading to the appeal before ITAT.

The learned AR argued that the assessee merely reimbursed the actual cost incurred by the holding company without any mark-up, and since no income arose from the transaction, tax deduction at source was not required. Legal precedents and circulars were cited to support this argument. The contention was that double deduction of tax would occur if tax was deducted again on the same payment.

On the other hand, the learned DR argued that the additional share of expenditure in the form of reimbursement was unreasonable, especially considering the significant expenditure already debited by the assessee for various purposes. The non-deduction of tax at source was highlighted as a justification for disallowing the claim under Section 40(a)(ia).

After considering the contentions and reviewing the orders of lower authorities, ITAT found that the AO did not adequately consider the circumstances of the case. The AO failed to recognize that the assessee was a new entity in the market, incurring substantial costs to establish itself. The holding company provided services to the assessee, which was reimbursed on an actual basis. The argument that tax was already deducted at source by the holding company was deemed valid to avoid double taxation.

Therefore, ITAT directed the AO to verify the deduction of tax at source by the holding company in accordance with Chapter XVII. If taxes were already deducted on the expenditure requiring tax deduction at source, no disallowance could be made in the hands of the assessee. The appeal was allowed in part, emphasizing the importance of justice and fair-play in tax assessments.