2014 (6) TMI 1037 - HC - Income Tax

Disallowance 40(a)(ia) - expenses paid by the assessee company to its associate company on cost sharing basis - HELD THAT - If these expenses have been incurred in the business of the associate/subsidiary and these are payments made to the regular employees employed by the subsidiary/associate and towards their salary then the reimbursement of such expenses by the present assessee would not require it to make any deduction. Tax would not be required to be deducted at source. In such circumstances and going by the factual position which is undisputed we are of the view that the Tribunal was not required to answer any larger question or decide a wider controversy. Even we are not required to go into the same considering the peculiar facts and circumstances and the nature of the arrangement. The payment is thus not for any service but as reimbursement of expenses is the conclusion reached upon noticing the undisputed factual position. In such circumstances the view taken is a possible view and the appeal therefore does not raise any substantial question of law. The appeal is therefore dismissed.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding expenses paid by assessee to its associate company on a cost-sharing basis without deducting tax at source.

Analysis:
The appeal before the High Court challenged the order of the Income Tax Appellate Tribunal concerning expenses paid by the assessee company to its associate company on a cost-sharing basis for the assessment year 2006-07. The appellant contended that the Tribunal erred in allowing the claim of expenses as the assessee failed to deduct tax at source, invoking section 40(a)(ia) of the Income Tax Act, 1961. The appellant argued that this issue raised a substantial question of law warranting admission of the appeal.

On the other hand, the respondent argued that the Tribunal's order was based on undisputed facts and did not suffer from any error of law. The respondent contended that the findings of the Tribunal were not perverse and did not warrant interference by the High Court. The respondent urged that the appeal should be dismissed as it did not raise any substantial question of law.

Upon examining the facts presented in the appeal memo and its annexures, it was revealed that the assessee company engaged in the manufacture of process control instrumentation had paid an amount to its subsidiary on account of business service charges on a cost-sharing basis. The revenue department acknowledged that these expenses were in the nature of salary or remuneration paid to regular employees of the subsidiary. The assessing officer added the amount to the income of the assessee for failure to deduct tax at source.

The Income Tax Appellate Tribunal, in its order, noted the undisputed facts and concluded that if the expenses were reimbursed and incurred in the business of the associate/subsidiary for payments to regular employees, no tax deduction at source was required. The Tribunal determined that the payment was a reimbursement of expenses, not for any service, based on the factual position. Considering the peculiar facts and circumstances of the case, the High Court concurred with the Tribunal's view that no substantial question of law was raised by the appeal. Consequently, the appeal was dismissed with no costs awarded.