2021 (5) TMI 140 - AT - Income Tax

Disallowance of Expenditure under section 40(a)(ia) - reimbursement of salary cost paid to its related party on the ground that no taxes have been withheld on the same - counsel made submissions that he is ready to produce the evidence that the holding company has deducted TDS on reimbursement of salary - HELD THAT - We are of the view that once the holding Company MIDCO Limited has deducted TDS on salary to seconded employees, the assessee is not required to deduct TDS on the same salary because there is no markup. Hence, we remit the this issue back to the file of the AO just for the purpose of verification that the holding company MIDCO Limited is deducted the TDS and the assessee is able to prove that the holding company MIDCO Limited has deducted the TDS then no disallowance is to be made but assessee has to produce the evidence before the Assessing Officer. In term of the above, the matter is remanded back to the file of the Assessing Officer. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues: Disallowance of expenditure under section 40(a)(ia) - reimbursement of salary cost to associate party without TDS deduction.

Detailed Analysis:

Issue 1: Disallowance under section 40(a)(ia) - Reimbursement of Salary Cost
The appeal concerns the disallowance made by the Assessing Officer in relation to the reimbursement of salary cost paid to the associate party of the assessee, citing non-deduction of taxes under section 40(a)(ia) of the Income-tax Act, 1961. The CIT(A) upheld this disallowance, leading to the current appeal. The assessee argued that the reimbursement was made on a cost-to-cost basis without any markup, and the related party did not provide any services. However, the authorities found that no TDS was deducted on the salary payments made to employees of the holding company, who were deputed to work for the assessee. Despite the appellant's contentions, the lack of detailed evidence led to the disallowance being confirmed.

Issue 2: Tribunal's Decision and Analysis
Upon hearing both parties, the Tribunal considered the crucial aspect of whether the holding company had indeed deducted TDS on the salary payments to the deputed employees. The assessee's counsel expressed readiness to provide evidence of TDS deduction by the holding company if given the opportunity. The Senior DR acknowledged that if TDS was deducted by the holding company on the salary payments, no further deduction was necessary by the assessee. Consequently, the Tribunal remitted the issue back to the Assessing Officer for verification purposes. The Tribunal opined that if the holding company had deducted TDS, no disallowance should be made, provided the assessee furnishes the requisite evidence to the Assessing Officer.

Conclusion
In conclusion, the Tribunal allowed the appeal for statistical purposes and remanded the matter back to the Assessing Officer to verify whether the holding company had indeed deducted TDS on the salary payments to the deputed employees. The decision emphasized the importance of substantiating claims with concrete evidence to avoid disallowances under section 40(a)(ia) of the Income-tax Act, 1961.