2013 (2) TMI 259 - AT - Income Tax

Disallowance u/s 40(a)(ia) TDS on reimburse of expense - The assessee is a Joint Venture Company promoted by GAIL & HPCL for distribution and marketing - GAIL and HPCL deputed their personnel who worked under the control and management of Joint Venture - Salary, cost of these employees are a charge on the profits of the assessee - The employees were carrying out the work of the Assessee as its employees not carrying out the work on behalf of GAIL or HPCL Held that - Such payment cannot be considered as payment towards work executed by GAIL and HPCL in the course of work contract. Following the decision in case of UNITED HOTELS LTD. (2004 (11) TMI 293 - ITAT DELHI-E) that reimbursement of salary to the deputed personnel would not attract deduction of tax at source In favour of assessee Disallowance of expense - Feasibility studies of earlier years, written off Amount represents payments made to GAIL and HPCL during F.Y. 2004-05 and 2005-06 towards reimbursement of cost of salary of certain employees - These employees were engaged in planning, procurement of fixed assets, liaison with Government authorities for various approvals and other activities pertaining to various projects proposed to be undertaken in respect of its CNG business - Held that - Following the decision in case of LIC Housing Finance Limited. (2006 (4) TMI 183 - ITAT BOMBAY-H) that all the expenditure specified in Sec. 35D (2) incurred before commencement of business is eligible for amortisation u/s. 35D (1)(i). Direct to A.O. to consider said expenditure u/s 35D In favour of assessee

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act for the assessment years 2007-08 and 2008-09.
2. Deduction of tax at source (TDS) on reimbursement of salaries.
3. Nature of expenditure and eligibility for amortization under Section 35D of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act for the assessment years 2007-08 and 2008-09:

The primary issue in both appeals was the disallowance made by the Assessing Officer (AO) under Section 40(a)(ia) due to the assessee's failure to deduct tax at source on the reimbursement of salaries paid to GAIL and HPCL. The AO treated these payments as contractual payments for the supply of labor, thus attracting Section 194C of the Income Tax Act. Consequently, the AO disallowed Rs. 1,30,67,866/- for the assessment year 2007-08 and Rs. 1,01,72,133/- for the assessment year 2008-09.

2. Deduction of tax at source (TDS) on reimbursement of salaries:

The assessee argued that the amounts reimbursed to GAIL and HPCL were towards the salaries of employees deputed to the assessee company and did not constitute contractual payments. The CIT(A) upheld the AO's view, stating that the provision of management support, including manpower, by GAIL and HPCL was part of a contractual agreement under the MOU, thus attracting Section 194C.

Upon appeal, it was noted that the employees worked under the control and management of the assessee, and the payments were reimbursements of salaries, not fees for technical services or contractual payments. The Tribunal referred to similar cases, including United Hotels Ltd. v. ITO, CIT v. Industrial Engineering Projects (P.) Ltd., and CIT v. Siemens Aktiongesellschaft, which supported the view that such reimbursements do not attract TDS. The Tribunal concluded that the payments were reimbursements and not subject to TDS, thus deleting the disallowance under Section 40(a)(ia).

3. Nature of expenditure and eligibility for amortization under Section 35D of the Income Tax Act:

For the assessment year 2008-09, the AO disallowed Rs. 59,38,916/- debited as "feasibility studies of earlier years, written off," considering it capital in nature and not pertaining to the relevant assessment year. The assessee contended that the expenditure was revenue in nature and relied on the decision in CIT v. Diamond Products Ltd. The AO also rejected the alternate plea for amortization under Section 35D without providing a basis.

The CIT(A) upheld the AO's disallowance, stating that the expenditure did not pertain to the assessment year 2008-09 and was capital in nature. The CIT(A) also denied the alternate claim for amortization under Section 35D and the capitalization of the expenditure.

Upon appeal, the Tribunal directed the AO to consider the expenditure under Section 35D, referencing the decision in LIC Housing Finance Ltd. v. Dy. CIT. The Tribunal also deleted the addition made under Section 40(a)(ia), reiterating that the nature of the expenditure being salaries of deputed employees did not attract TDS, as discussed in the earlier issue.

Conclusion:

The Tribunal allowed the appeals of the assessee, deleting the disallowances made under Section 40(a)(ia) for both assessment years and directing the AO to consider the feasibility study expenditure under Section 35D for the assessment year 2008-09. The Tribunal's decision was based on the nature of the payments being reimbursements of salaries and not contractual payments, thus not attracting TDS.

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