2014 (12) TMI 1326 - AT - Income Tax

TDS u/s 194C - non-deduction of TDS by the assessee on so-called reimbursement of advertisement expenses to its dealers - addition u/s 40(a)(ia) - Held that - From the facts of the assessee s case, it appears that it was a structure arrangement wherein the payments are routed through the distributors to circumvent the provisions of Chapter XVII-B of the Act. The bill raised for advertisement in the Danik Bhaskar by DB Corp Ltd., Zone-I, M.P. Nagar, Bhopal was in the name of Spice Communication Ltd. And the client name is also mentioned as Spice Communication Ltd. The SPG Distributors have mentioned in its letter to Mr. Sahil Kohli, Spice Mobile Ltd., placed at page 15 of the paper book, that they have already issued a cheque no.136282 of ₹ 2,24,795/- and asked for reimbursement. Thus, the bill raised by the advertisement agency was not in the name of distributor. This fact itself shows that there was a structure arrangement to avoid the TDS provisions. The assessee himself has submitted letters from various regional distributors that they have complied with the provisions of TDS under the Act. Such confirmations are placed at pages 42 to 45 of the paper book. Certain bills raised by the advertisement agencies are in the name of distributors. Whether these persons have made TDS or not is not clear from the records. CIT (A) was justified in directing the assessee to produce the evidences before Assessing Officer to establish that the parties to whom the reimbursements have been made had actually complied with the provisions of Chapter XVII-B. Such verification is necessary to arrive at the correct facts of the case and to establish the extent of default on the part of the assessee for violating the provisions of TDS in respect of the payments of the advertisement expenses through the structural arrangement.

Summary

Issues:
1. Disallowance made under section 40(a)(ia) of the Income Tax Act, 1961 on reimbursement of advertisement expenses.
2. Liability of the assessee to deduct TDS under section 194C of the Act.
3. Whether payments made for advertisement expenses were purely reimbursements or structured arrangements to circumvent TDS provisions.

Analysis:
1. The appeal and cross objection arose from the CIT (Appeals) order for the Assessment Year 2009-10, where the Assessing Officer disallowed an amount under section 40(a)(ia) of the Act. The CIT (A) dealt with the issue extensively, emphasizing that TDS is applicable only on sums constituting income in the hands of the payee. The CIT (A) directed the assessee to provide evidence of TDS deduction by parties receiving reimbursements. The revenue and the assessee appealed against this decision.

2. The revenue contended that the CIT (A) erred in deleting the addition made under section 40(a)(ia) and in holding that the assessee was not liable to deduct TDS under section 194C. The revenue argued that even if recipients deducted TDS, the assessee remained liable. The cross objection by the assessee challenged the disallowance under section 40(a)(ia) and argued that TDS provisions did not apply to reimbursements.

3. The assessee, engaged in mobile handset business, claimed that reimbursements to distributors for advertisement expenses did not attract TDS under section 194C as no work contract existed. The assessee presented distributor undertakings on TDS compliance. The revenue contended that the structure indicated attempts to avoid TDS liability. The ITAT held that while TDS is not applicable on pure reimbursements, in this case, a structured arrangement was evident to avoid TDS. The ITAT upheld the CIT (A)'s direction for the assessee to prove TDS compliance by reimbursement recipients.

In conclusion, the ITAT dismissed the revenue's appeal and the assessee's cross objection, emphasizing the need for verification of TDS compliance by reimbursement recipients to determine the extent of the assessee's default in TDS obligations for advertisement expense payments made through structured arrangements.