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2017 (10) TMI 1081 - AT - Income TaxTDS u/s 194J - non deduction of tds on certain expenditure incurred for the purpose of carrying out its own work from sister concern - payments made to M/s Jindal Power Ltd in view of the various debit notes issued for salary and travelling of the personnel deputed by them to serve the assessee company which is a task carried out by that company - contention of the assessee is that the memorandum and articles of Association of the assessee as well as the company does not provide that they are engaged in the business of manpower services - Held that - According to us, such an argument is not germane to the concept of tax deduction at source. According to the provisions of section 194C of the income tax act any payment made for the work carried out is subject to tax deduction at source under section 194C of the income tax act. Further, according to provisions of section 194J of the income tax act any payment made for fees for technical services is also subject to tax deduction at source. Therefore, the argument of the assessee that memorandum of Association of the recipient company does not cover the clause of the manpower supply does not help the case of the assessee. In any case the recipient of income is engaged in the provision of services in power sector which is part of the object of that company and same is also the business of the assessee company. The bills are with respect to the Senator Travels private limited which have been reimbursed by the assessee company to that company. In view of this, it is apparent that when the persons deputed by the Jindal Power Ltd to the assessee company were of the level of executive and going up to the level of Executive Director, it cannot be said to be the reimbursement of salary expenditure when it is coupled with several expenditure of domestic and international travelling for the business of the company. Further, it is also important that all these persons were throughout working for the company as well as with Jindal power Ltd. In view of this, it is apparent that those persons were working for the projects of the company and Jindal Power Ltd has been paid by the assessee as remuneration for getting work done from Jindal Power Ltd. Therefore, according to us, the Ld. CIT (A) has correctly adjudicated that tax is required to be deducted under section 194J of the income tax act, as it is a fees for technical services paid by the assessee to Jindal power Ltd, in the form of reimbursement of salary as well as travelling expenses. There is no reference about the quality of staff that is required to be provided, what are the terms and conditions of the deputation would be there, where this staff would be deployed etc. Even otherwise this letter, which is claimed to be an agreement, is after incurring of the cost by that company. Therefore, it is apparent that there is no understanding between the parties about this reimbursement. Further in some of the employees there is sharing of the cost where as in some of the employees there is no share of cost to Jindal Power limited. In view of this it cannot be said that it is a pure reimbursement of expenses which does not require TDS. The assessee also could not establish that what kind of staff it has of its own to execute the kind of work it is earning revenue for. It has earned the revenue of ₹ 190942881/- for the year where the total cost of salary reimbursed is ₹ 30866545/- which is almost 20 % of the work billing. Hence in absence of the facts that how the work are executed by the assessee whether it fully by the staff on loan or it has its own staff also, it is not possible to accept the contention that reimbursement of salary coupled with other reimbursement of international and domestic travel is reimbursements of expenses simplicitor escaping withholding tax liability. The next contention of the assessee that all these expenses have already been paid and therefore the tax requirement deduction applies only in case of payment outstanding at the end of the year and not whatever has been paid during the year does not stand in view of the decision in the case of Palam Gas Services v. CIT 2017 (5) TMI 242 - SUPREME COURT as concluded that section 40(a)(ia) covered not only those cases where the amounts were payable but also where it was paid. Thus we confirm the finding of the Ld. CIT (A) that the disallowance under section 40 a (ia) has been correctly made as the tax should have been deducted under chapter XVII-B of the income tax act on payments made by the assessee to Jindal Power Ltd. - Decided against assessee. Assessee in default when the assessee has paid certain expenditure to the recipient of the income and when the recipient of income has paid tax on that particular income - Held that - No difficulty in accepting the argument of the Ld. authorized representative that if the tax has been paid by the recipient of the income on the income in holding the transactions and no disallowance should be made in the hands of the assessee. In view of this we set aside this issue back to the file of the Ld. assessing officer to allow the benefit of the 2nd proviso to the section 40 a (ia) and if the assessee is able to satisfy the AO that the recipient of the income has offered the income in its return of income on furnishing the section 139 of the income tax, incorporated such income in its return of income, has paid the due tax thereon and he furnishes requisite certificate as prescribed therein that no disallowance be made. Therefore, if the assessee would like to have the benefit of this particular proviso by furnishing requisite certificate is an mentioned in the provisions of section 201 of the income tax act, the appellant may furnish to the ld AO same within 60 days of the order and the Ld. assessing officer may consider the claim of the assessee in accordance with the law. - Decided partly in favour of assessee.
Issues Involved:
1. Disallowance of salary reimbursements and traveling reimbursements due to non-deduction of tax under Section 194J. 2. Classification of payments as fees for services and expenses without recognizing the direct correlation between the actual expenditure incurred and the reimbursement. 3. Existence of an agreement for reimbursement of salaries. 4. Applicability of provisions of Section 40(a)(ia) to amounts paid during the previous year. 5. Consideration of the remedial amendment in the second proviso to Section 40(a)(ia) by the Finance Act, 2012. Detailed Analysis: 1. Disallowance of Salary Reimbursements and Traveling Reimbursements: The primary issue revolves around the disallowance of ?3,08,66,545/- for salary reimbursements and ?40,63,698/- for traveling reimbursements. The Assessing Officer (AO) noted that the payments made to Jindal Power Limited for personnel on deputation should have been subjected to tax deduction under Section 194C, as it was considered a payment for services rendered. The assessee argued that these were mere reimbursements of actual costs incurred by Jindal Power Limited, which had already deducted tax under Section 192 on payments to employees. The AO, however, disallowed the expenses under Section 40(a)(ia) due to non-deduction of tax at source, leading to an increased total income assessment of ?3,50,97,046/-. 2. Classification of Payments as Fees for Services: The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the payments to Jindal Power Limited were composite payments for services and expenses, not mere reimbursements. The CIT(A) emphasized that there was no agreement specifying the expenses and that these payments should be treated as fees for technical services under Section 194J, requiring tax deduction. 3. Existence of an Agreement for Reimbursement of Salaries: The CIT(A) noted the absence of a formal agreement between the assessee and Jindal Power Limited detailing the reimbursement of salaries. The only document presented was a letter from Jindal Power Limited requesting reimbursement of expenses, which lacked specifics about the terms and conditions of deputation, quality of staff, and deployment details. This lack of agreement led to the classification of payments as fees for services rather than simple reimbursements. 4. Applicability of Provisions of Section 40(a)(ia): The assessee contended that Section 40(a)(ia) applied only to amounts payable as of the last day of the previous year, not to amounts already paid. However, this argument was refuted based on the Supreme Court's decision in Palam Gas Services v. CIT, which clarified that Section 40(a)(ia) covers both payable and paid amounts. 5. Consideration of Remedial Amendment in Second Proviso to Section 40(a)(ia): The assessee argued that the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, should apply retrospectively, benefiting the assessee if the recipient of the income (Jindal Power Limited) had paid taxes on the income received. The Tribunal referred to the Delhi High Court's decision in CIT v. Ansal Landmark Township (P) Limited, which supported the retrospective application of the second proviso. The Tribunal directed the AO to verify if Jindal Power Limited had included the income in its return and paid taxes accordingly. If so, the disallowance under Section 40(a)(ia) should not be made. Conclusion: The Tribunal concluded that the disallowance under Section 40(a)(ia) was justified due to the non-deduction of tax at source, as the payments were considered fees for technical services. However, the Tribunal allowed the assessee to benefit from the second proviso to Section 40(a)(ia) if it could prove that Jindal Power Limited had paid taxes on the income received. The case was remanded to the AO for verification, and the appeal was partly allowed.
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