2016 (7) TMI 259 - AT - Income Tax

Disallowance u/s 40(a)(ia) - reimbursement of expenses - Held that - As per the agreement, the marketing companies are required sufficient number of employees for effectively marketing the products. As per the agreement, the salary expenses, travelling and conveyance expenses, etc., incurred by the marketing companies are required to be reimbursed by the assessee-company. Thus, the reason as to why the expenses were reimbursed by the assessee-company to the marketing companies are sufficiently explained. CIT(A) given a finding that the marketing companies have deducted tax at source from the salary payments. Thus, the expenses which have been reimbursed by the assessee have already suffered tax deduction at source at the end of the marketing companies. Hence, we are of the view that though the character of marketing expenses are in the nature of reimbursement of expenses yet the same has already suffered tax at source, i.e., the marketing companies have deducted tax at source from the said payments. Accordingly, we are of the view that there is no requirement of invoking the provisions of section 40(a)(ia) of the Act in the hands of the assessee. Various case law relied upon by the assessee has taken the view that the reimbursement of expenses does not require tax deduction at source. - Decided against revenue Bombay High Court in the case of CIT v. OCB Engineers relied upon wherein it was held that Reimbursement of salary expenses of employees to the sister concern, who were deputed by the sister concern to the assessee does not require deduction of tax at source.

Summary

Issues:
- Disallowance of sales promotion expenses under section 40(a)(ia) of the Act for assessment year 2008-09.

Analysis:
1. The judgment pertains to two appeals filed by the Revenue against the orders passed by the Commissioner of Income-tax (Appeals) for the assessment years 2008-09 and 2009-10. The appeal for the year 2009-10 was dismissed due to the low tax effect as per Circular No. 21 of 2015. The focus then shifted to the appeal for the year 2008-09 concerning the disallowance of sales promotion expenses under section 40(a)(ia) of the Act.

2. The Assessing Officer disallowed sales promotion expenses amounting to ?8.73 crores as the assessee did not deduct tax at source from reimbursements made to its group companies. However, the Commissioner of Income-tax (Appeals) ruled in favor of the assessee, stating that the reimbursements did not contain any income element, and thus, no TDS was required. The Commissioner relied on the business model and agreements between the assessee and marketing companies to support this decision.

3. The Tribunal examined the agreements and found that the marketing companies were reimbursed for salary, traveling, and other expenses by the assessee. It was noted that the marketing companies had already deducted tax at source from the salary payments, as evidenced by TDS statements and bills. The Tribunal cited precedents and upheld the Commissioner's decision, emphasizing that the reimbursements had already suffered TDS and did not necessitate further deduction under section 40(a)(ia) of the Act.

4. The Tribunal also referenced a judgment by the Allahabad High Court in a similar case, where it was held that if salaries had already suffered tax deduction and reimbursement circumstances were explained, there was no need to invoke section 40(a)(ia) of the Act. Applying this reasoning to the present case, the Tribunal concluded that the expenses reimbursed by the assessee had already undergone TDS by the marketing companies, hence no additional TDS was required.

5. Ultimately, the Tribunal upheld the Commissioner's decision, stating that the expenses in question had already been subject to TDS by the marketing companies, and therefore, there was no basis for invoking section 40(a)(ia) of the Act. The appeals filed by the Revenue were dismissed based on these findings.