2016 (3) TMI 207 - AT - Income Tax

TDS u/s 195 - Addition u/s 40(a)(ia) - amount reimbursed to M/s Aakriti Creations Pvt. Ltd - whether these are genuine reimbursement of expenses and there was no profit element and hence no income liable to tax was contained therein ? - Held that - Hon ble Delhi High Court in case of Van Oord ACZ India (P) Ltd. vs. Commissioner of Income Tax 2010 (3) TMI 167 - DELHI HIGH COURT held that liability to deduct at source arises only when the sum is paid to the non-resident was chargeable to tax. Once that was chargeable to tax, it was not for the assessee to find out how much amount of the receipts was chargeable to tax, but it was the obligation of the assessee to deduct the tax at source on the entire sum paid by the assessee to the recipient. Under Section 195, the obligation to deduct tax at source was attracted only when the payment was chargeable to tax in India. Thus as pointed out by the CIT(A) in the order the Hon ble Delhi High Court held that no liability for deduction of tax at source arose under Section 195 in the case of mobilization and demobilization costs reimbursed to a non-resident, not being taxable in India, hence disallowance under Section 40(a)(ia) did not arise. Recently, in case of CIT vs. Ansal Land Mark Township (P) Ltd. 2015 (9) TMI 79 - DELHI HIGH COURT it was held that what is common to both proviso to Section 40(a)(ia) and Section 210(1) of the Act is that as long as the payee/resident has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax. In view of this the order of the CIT(A) is upheld. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of expenses under section 40(a) (ia) of the Income Tax Act, 1961 for failure to deduct tax on reimbursement payments.

Detailed Analysis:
The appellant, engaged in the business of manufacturing and exporting garments, claimed a payment of Rs. 3,19,66,460 to its sister concern as reimbursement of expenses without deducting tax. The Assessing Officer proposed disallowing this payment under section 40(a) (ia) of the Income Tax Act, 1961, citing a liability to deduct tax under section 194C. The appellant argued that the reimbursement had no profit element, relying on a previous ITAT judgment. However, the Assessing Officer, referring to a Supreme Court judgment, disallowed the amount, noting the lack of clear billing details and citing a CBDT Circular.

Upon appeal, the CIT(A) considered various judgments, including one by the Delhi High Court, which held that no liability for tax deduction arose in cases where payments were not taxable in India. The CIT(A) reviewed audited accounts and reimbursement details, concluding that no tax deduction liability existed. The CIT(A) also highlighted the obligation to deduct tax only on amounts chargeable to tax in India, as established by the Delhi High Court.

During the hearing, the parties presented their arguments, with the Revenue contesting the CIT(A)'s decision. The appellant, supported by the CIT(A)'s order and legal precedents, emphasized the factual aspects of the case. The Tribunal examined the records, noting the Assessing Officer's acceptance of the genuineness of the reimbursements and the absence of a profit element. Citing the Delhi High Court's rulings, the Tribunal upheld the CIT(A)'s decision, emphasizing the absence of tax liability due to the non-taxable nature of the payments.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order based on the absence of tax liability on the reimbursed amounts not chargeable to tax in India. The decision aligned with the principles established by the Delhi High Court regarding tax deduction obligations in such scenarios.

The judgment, delivered by the Appellate Tribunal ITAT Delhi, provided a detailed analysis of the disallowance of expenses under section 40(a) (ia) of the Income Tax Act, 1961, emphasizing the absence of tax liability on reimbursements not subject to taxation in India. The decision underscored the importance of clear billing details and the obligation to deduct tax only on amounts chargeable to tax, as established by relevant legal precedents and court judgments.