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TMI Blog2009 (10) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... ale made to it, and not a case of any business expenditure paid to sister concern, and as such, otherwise provisions of s. 40A(2)(a) are not applicable. The AO has also not been able to prove that the discount allowed by the assessee to a sister concern was excessive or unreasonable having regard to the commercial practice prevailing in the market. Addition u/s 40(a)( ia) - non deduction of TDS on account of freight and cartage and contractual civil job carried out - Payment towards agency charges - HELD THAT:- As the assessee has deducted tax at source, and the said payment has not been disallowed by the AO. Two payments are towards payment of customs duty, and other expenses paid by the agent for/on behalf of the assessee - These reimbursement expenses were not made towards any services rendered by the agent, but have been made to set off of the expenses incurred by the agent while clearing the imported goods from the customs for/on behalf of the assessee. Since no element of income is embedded in reimbursement of expenses incurred by agency for/on behalf of the assessee, the assessee was not obliged to deduct tax at source, and, therefore, the CIT(A) has rightly de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 40A(2)(b) of the IT Act, 1961 ("the Act"). 3. We have heard both the parties and perused the order of the authorities below. 4. In the course of assessment proceedings, it was noticed by the AO that assessee has allowed discount of Rs. 18,09,407 on sales of Rs. 1.81 crores to M/s Bergess Manning India Ltd. a related concern covered by s. 40A(2)(b) of the Act. The discount allowed was worked out at about 9.97 per cent of total sales. The assessee has given detailed explanation before the AO about the basis and the circumstances under which the discount on sales was allowed by the assessee to M/s Bergess Manning India Ltd. 5. After considering the assessee's explanation, and facts and circumstances of the case, the AO was of the view that only 5 per cent of the discount would be justified as in the asst. yr. 2001-02, discount to the extent of 5 per cent was found justified. The AO, therefore, allowed discount only to the extent of Rs. 9,05,000 and balance amount of Rs. 9,04,407 was disallowed under s. 40A(2)(b) of the Act. 6. On an appeal, the CIT(A) has deleted the addition by following the Tribunal's decision in the assessee's own case pertaining to the asst. yrs. 2000-01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he very fact that out of the total domestic sales of Rs. 13.20 crores, the sales to the sister concern is Rs. 11.11 crores clearly justifies giving a trade discount of 11 per cent to the sister concern as compared to 3 per cent to the others. Further, there is no rationale or basis or any logic of the authorities below in unilaterally deciding a disallowance by reducing the entitlement from 11 per cent as claimed by the assessee to 3 per cent (by the AO). 8 per cent [by the CIT (A)] and 5 per cent (by the Tribunal). This ad hoc rough and ready method is without any basis to support the same especially when in para 12 the Tribunal has accepted the contentions of the assessee that there was justification in allowing a higher discount than as given to other domestic customers. 11. Sec. 40A(2)(a) pertains to disallowance to an expenditure which is made by the assessee i.e., an amount actually spent by the assessee as an expenditure. The expression used in this provision is 'incurs any expenditure in respect of which payment has been or is to be made to any person'. This clearly shows that actual payment must be made and there has to be an expenditure incurred before the provision can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some contractual civil job carried out it was found that TDS was short deducted. Thus the assessee had paid an amount of Rs. 2,09,485 and was required to deduct TDS of Rs. 4,189. Whereas the TDS deducted was only Rs. 1,490. Assessee was required to explain the deficiency and also show cause for disallowance keeping in view provisions of s. 40(a). It has been stated that part of the payment related to supply of material by the contractor and part related to supply of services. It was vociferously argued that TDS was deductible only with reference to the services rendered and was therefore correctly deducted. The contentions have been examined. It is an admitted position that M/s Unicon Constructions worked as a contractor for the assessee. It is contended that no TDS was deductible in respect of part of the contract relating to supply of material. The contention follows from a flawed premise that TDS is a deduction with reference to the income earned by the payee. As per provision of law, the contractee is not authorized to segregate the service part of the contract from the total value of the work performed and deduct TDS only with reference to it. The copies of the bills of to M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts were reimbursement of expenses on which no tax was deductible at source as reimbursement of expenditure does not constitute any income in the hands of the payee, chargeable to tax. We have perused the details of the payment made to M/s Sky Train Services, and find that the assessee has made the following payments to M/s Sky Train Services in the year under consideration : (i)Payment towards agency charges 1,01,219 (ii)Payments towards customs duty paid on behalf of the assesse 8,878 (iii)Payment towards reimbursement of expenses 42,503 16. In respect of the payment towards agency charges amounting to Rs. 1,01,219, the assessee has deducted tax amounting to Rs. 2,094 at source, and the said payment has not been disallowed by the AO. The other two payments are towards payment of customs duty, and other expenses paid by the agent for/on behalf of the assessee. These reimbursement expenses were not made towards any services rendered by the agent, but have been made to set off of the expenses incurred by the agent while clearing the imported goods from the customs for/on behalf of the assessee. Since no element of income is embedded in reimbursement of expenses incurred by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mirrors, optic light fixing complete with tubelights, P F, and floor tiles etc. The whole work is composite, and the supply of the goods were not made independently to that of the labour works. Merely because the assessee has bifurcated the payment into two groups that by itself is not sufficient to say that there were two independent and distinct contracts entered into by the assessee with the contractor. The assessee's contention is, thus, found to be without merit, and since the assessee has not deducted the tax with regard to the payment of Rs. 1,34,900 paid to M/s Unicorn Constructions, the AO was very much justified in disallowing the deduction by invoking the provision of s. 40(a) of the Act. Therefore, the order of the CIT(A) on this issue is set aside, and that of the AO is restored, meaning thereby that the disallowance of Rs. 1,34,900 made by the AO is justified, and is to be added back to the total income of the assessee. 20. Ground No. 3 is against the CIT(A)'s order in deleting the addition of Rs. 53,070 made by the AO on account of late deposit of employees contribution to PF account. The aforesaid addition has been deleted by the CIT(A) in the light of the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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