2021 (2) TMI 547 - AT - Income Tax

Addition u/s 40(a)(ia) - payment of Cross Charge by the assessee - whether CIT(A) was justified in holding that the payment of Cross Charge by the assessee to Pfizer Ltd. was in the nature of reimbursement of expenses, whereas as per the cost sharing agreement, the payment was on estimate basis which cannot be regarded as reimbursement of quantifiable expenses? - CIT-A held that the second proviso to section 40a(ia) inserted by Finance Act, 2012, shall be operative retrospectively and therefore the assessee shall not be treated as an assessee in default? - HELD THAT - We find that the assessee paid cross charges to Pfizer Ltd. in terms of the cost sharing agreement dated 21.11.2003 ( original agreement ) for sharing personnel cost and supplemental cost sharing agreement dated 13.12.2004 ( supplemental agreement ) for sharing the common costs and expenses pertaining to marketing, promotion, sales distribution and administration and other charges. Admittedly, Pfizer Ltd. has deducted appropriate taxes before making payment to the shared employees in accordance with the provisions of section 192 of the Act and as stipulated in para 2.4 of the original agreement. The expenses under dispute represent reimbursement of amount incurred by shared employees while they are on business tours. Shared employees can claim the said amount only after providing documentary evidence. Hence, such expenses are not liable for TDS. The disallowance u/s 40(a)(ia) of the Act is not warranted in view of the second proviso to section 40(a)(ia) of the Act r.w. first proviso to section 201(1) inserted vide Finance Act, 2012, provided the payee has (a) furnished return of income u/s 139, (b) taken into account the stated sum for computing the income in the return of income and (c) has paid the tax due on the income returned and there is a certificate of a Chartered Accountant to that effect. In the instant case, since all the conditions/requirements were complied with by the payee Pfizer Ltd. , the assessee cannot be considered as an assessee-in-default and therefore, disallowance u/s 40(a)(ia) is not warranted. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of payment of Cross Charge as reimbursement of expenses.
2. Retrospective applicability of second proviso to section 40(a)(ia) of the Income Tax Act.

Issue 1: Interpretation of payment of Cross Charge as reimbursement of expenses:
The appeal involved a dispute regarding the nature of payments made by the assessee to Pfizer Ltd. The Revenue contended that the payments were not mere reimbursements but were on an estimate basis, thus requiring tax deduction at source. The Commissioner of Income Tax (Appeals) and the ITAT analyzed the cost sharing agreements and supplementary agreements between the parties. It was found that the expenses represented reimbursement of amounts incurred by shared employees during business tours and were not liable for TDS. The ITAT referred to a certificate from Pfizer Ltd. confirming the nature of expenses as reimbursement without any mark-up. Citing relevant case laws, the ITAT concluded that the second proviso to section 40(a)(ia) of the Act, along with the first proviso to section 201(1), exempted the assessee from being considered an assessee-in-default due to compliance with specified conditions.

Issue 2: Retrospective applicability of second proviso to section 40(a)(ia) of the Income Tax Act:
The second issue revolved around the retrospective applicability of the second proviso to section 40(a)(ia) of the Income Tax Act. The ITAT relied on previous judgments and the provisions of the Act to determine that the assessee, Pfizer Ltd., had fulfilled all necessary conditions to avoid being treated as an assessee-in-default. The ITAT emphasized that the provisions were declaratory and curative in nature, with retrospective effect. Referring to the CIT(A)'s order in a similar case for AY 2009-10, the ITAT affirmed the decision to delete the disallowance made by the Assessing Officer. The ITAT dismissed the Revenue's appeal, upholding the order of the CIT(A) and confirming that no disallowance under section 40(a)(ia) was warranted due to the retrospective applicability of the relevant provisions.

In conclusion, the ITAT dismissed the Revenue's appeal based on the interpretation of the nature of payments and the retrospective applicability of the provisions under the Income Tax Act, highlighting compliance by the payee and the absence of income embedded in the reimbursed expenses.