2017 (6) TMI 1382 - AT - Income Tax

TDS u/s 192 - Addition u/s 40a(ia) - disallowance of payments made to employees - whether sec 40(a)(ia) being not applicable as no amount was payable as at the year-end? - Revenue denied the claim on the basis that the expenditure has been merely routed through the books of its sister concerns which were inoperational so that their staff was surplus - HELD THAT - Section 40(a)(ia) places an additional burden i.e. of deduction of tax at source and its payment to the credit of the Central Government qua the specified sum/s for its deduction in computation of business income so that the very fact of its invocation implies that the condition of deductibility is otherwise met. The applicability of TDS in such a case would depend on the nature of the payment and the work done (by the sister concerns). If on the other hand the debit notes state of only the employees having been deputed to the assessee-company which may deploy them for any work it deems fit and proper for the purpose of its business it would be a case of the employees being made available to the assessee-company. The payment in such a case would have to be directly to the concerned persons in-as-much as they stand seconded i.e. are on deputation to the assessee-company even as they continue to be the regular employees of and on the rolls of their parent firms. The TDS in this latter case would be on salary i.e. as against on the aggregate payments made/credit allowed (during the year) directly to the sister concern/s as the obligation to pay salary thereto on account of second-ment/deputation is on the assessee-company. How we wonder could this be regarded as a case of reimbursement of expenditure? The assessee need not have credited or routed the transaction through the account of the sister concern/s. That is considered either way it is not a case of reimbursement of expenditure. This is precisely what the Revenue means when it states that the assessee-company has merely routed the expenditure through the account of the related parties and that therefore nothing turns thereon. Be that as it may where however the concerned employees or the sister concerns as the case may be have discharged their tax liability on the relevant income/s the assessee-company following the procedure enshrined in s. 40(a)(ia) r/w. s. 201 (as amended by Finance Act 2012) claim saving from the rigor of s. 40(a)(ia). This is as the said amendments have been clarified by the Hon ble Courts as in the case of CIT v. Ansal Landmark Township (P.) Ltd. 2015 (9) TMI 79 - DELHI HIGH COURT as curative and therefore retrospective. Amendment by precluding application of s. 40(a)(ia) in cases where the payee/creditor has discharged the tax liability on the relevant sum for the relevant year only seeks to operationalize and apply the decision Hindustan Coca Cola Beverages (P.) Ltd. 2007 (8) TMI 12 - SUPREME COURT The matter accordingly setting aside the impugned order is for fresh determination on the lines indicated above restored to the file of the AO to do so by issuing definite findings of fact. The assessee on whom the burden to establish its claims lie shall be allowed proper opportunity to represent its case before him. Assessee s appeal is allowed for statistical purposes.

Summary

Issues:
- Applicability of section 40(a)(ia) of the Income Tax Act, 1961 regarding tax deduction at source on payments made to related firms.
- Whether the expenditure was merely a reimbursement or a direct payment to employees of related firms.
- Interpretation of legal precedents and amendments in determining tax liability.

Analysis:
1. Applicability of Section 40(a)(ia):
The dispute revolves around the applicability of section 40(a)(ia) of the Income Tax Act, 1961, concerning tax deduction at source on payments made to related firms. The assessee, a dealer of Yamaha Motor Company Ltd., distributed mechanized fishing equipment and made payments to related firms without deducting tax at source. The Revenue argued that the payments were routed through related parties' books and did not discharge the obligation to deduct tax at source. The Tribunal held that the condition of deductibility was met, implying the invocation of section 40(a)(ia), which necessitates tax deduction at source.

2. Nature of Expenditure:
The Tribunal examined whether the expenditure was a reimbursement of expenses or a direct payment to employees of related firms. It was observed that the employees were on deputation to the assessee-company, and the payment was made to the sister concerns. The Tribunal emphasized that the nature of payment and services rendered determined the applicability of tax deduction at source. The Tribunal highlighted the distinction between reimbursement and direct payment, emphasizing the obligation to deduct tax at source based on the payment's nature.

3. Interpretation of Legal Precedents and Amendments:
The Tribunal referred to legal precedents and amendments to interpret the tax liability in the present case. Citing the decision in Palam Gas Service v. CIT and other court rulings, the Tribunal clarified the legal position regarding tax deduction at source. Additionally, the Tribunal discussed the retrospective application of amendments and the curative nature of certain provisions to determine the tax liability in cases where the payee has discharged the tax liability. The Tribunal directed a fresh determination by the Assessing Officer, emphasizing the burden on the assessee to establish its claims.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes, setting aside the impugned order and restoring the matter for fresh determination based on the legal principles and factual findings discussed in the judgment.