2018 (2) TMI 1628 - AT - Income Tax

TDS u/s 195 - Disallowance of expenses u/s 40(a)(i) - reimbursement of expenses - Held that - There is no appearance from the side of the assessee despite notice. We are, therefore, proceeding to dispose of this appeal ex parte qua the assessee but on merits. Admitted position as emanating from the impugned order that the aforesaid payment made by the assessee represents its share in the expenses incurred by the group companies on cost to cost basis. No material has been brought on record by the ld. DR to demonstrate that it was not a reimbursement but a payment made with some mark-up having profit element. It is a settled legal position that when reimbursement of expenses is made which does not include any mark up or profit element, there can be no question of taxing such amount in the hands of the recipient. Once a particular amount is not chargeable to tax in the hands of the non-resident recipient, the question of applicability of section 195 does not arise. Recently, the Hon ble Supreme Court in DIT(I.T.) VS. A.P. Moller Maersk A/S (2017 (2) TMI 993 - SUPREME COURT) has held that once payment is in the nature of reimbursement of expenses, that is, it is a cost sharing arrangement, it cannot be income chargeable to tax in the hands of recipient. Similar view was earlier taken in DIT VS. Wizcraft International Entertainment P. Ltd. (Bom) (2014 (5) TMI 149 - BOMBAY HIGH COURT) holding that payment by way of reimbursement of expenses is not taxable in India. In view of the fact that the amount paid by the assessee to non-residents is not chargeable to tax in their hands and, as such, the provisions of section 195 of the Act are not attracted, there can be no question of applying section 40(a)(i) for making disallowance in the hands of the assessee. - Decided against revenue.

Summary

Issues:
- Deletion of addition of expenses under section 40(a)(i) of the Income-tax Act, 1961.

Analysis:
The judgment pertains to an appeal filed by the Revenue against the order of the CIT(A) for the assessment year 2012-13. The sole issue raised in the appeal was the deletion of an addition of ?1,09,06,277 made by the Assessing Officer on account of disallowance of expenses under section 40(a)(i) of the Income-tax Act, 1961. The expenses in question were related to 'Group charges' claimed by the assessee under 'Other expenses,' and the Assessing Officer disallowed the amount due to the absence of tax deduction at source under section 195 of the Act.

The assessee explained that the 'Group charges' represented its share in expenses incurred by foreign group companies, which were reimbursed on a cost-to-cost basis without any profit element. The Tribunal noted that no evidence was presented to show that the payment included a profit element. Referring to legal precedents, including a Supreme Court ruling and a Bombay High Court decision, the Tribunal emphasized that reimbursement of expenses without a profit element cannot be taxed in the recipient's hands. Therefore, as the payment made by the assessee was not chargeable to tax in the hands of the non-resident recipients, the provisions of section 195 were not applicable, and there was no basis for disallowance under section 40(a)(i).

The Tribunal upheld the deletion of the disallowance made by the Assessing Officer and dismissed the Revenue's appeal. The judgment highlighted that when expenses are reimbursed without a profit element, they cannot be considered as income chargeable to tax in the recipient's hands. The decision was based on established legal principles and recent judicial interpretations, reinforcing that reimbursement of expenses does not attract tax liability.