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TMI Blog2024 (12) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... The same is evident from the presentation in the Balance Sheet of the period under consideration. In the balance sheet for year ending 31.03.2016,note no.6 under the head 'short-term borrowings' the 'Loans repayable on demand' from the group companies is disclosed. In the interim period group companies has advanced a loan as 'Short Term Loan Advances' under Current Assets of same amount. From the above evidence, it can safely be concluded that the assessee-company was enjoying borrowing facilities from the bank through it's group entity companies and the funds have been advanced to the assessee. As per the contention of the assessee to the extent of the funds utilized in respect of bank borrowing in the name of the group entity companies, the interest cost is reimbursed. In fact, the assessee is paying only the interest to the bank but itis through the group entity companies. The group entity companies is not in lending business. From the Balance Sheet of the assessee it has been observed that the assessee has shown the loan amount in the name of the group entity companies. If the credit limit has not been not transferred in the name of the assessee but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. A search action u/s 132 of the Income Tax Act was conducted on the Ruparel Realty group on 25.11.2021.On the basis of the details forwarded by the DDIT(Inv), Unit6(3), Mumbai the Ld. Assessing Officer is of the view that the assessee has prima facie committed default in deduction of TDS and consequently proceedings u/s 201(1) / 201(1A) of the Income Tax Act, 1961 ( IT Act ) were initiated against the various group entities the assessee. 5. The AO after serving notices and seeking reply of the assessee, determined that the assessee was in default and passed an order under section 201(1A) of the IT Act thereby determining an interest of Rs. 1,27,458/- payable by the assessee for the default on account of non deduction of TDS under section 194A of the IT Act. 6. Being aggrieved by the said order, the assessee filed appeal before Ld. CIT(A), however, the same was decided against the assessee. 7. Aggrieved with the above order, the assessee preferred appeal before us and the only ground raised by the assessee is with regard to challenging the order of Ld. CIT(A) in upholding the order of AO in considering the assessee as assessee in default for non deduction of TDS, without asserti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e groups is to secure maximum possible finance by one or another way to keep the projects alive at minimum possible cost compliance, is thus thereby achieved. 7. The entity in whose name the funds are borrowed becomes Principal Borrower with other entities standing as co borrowers. Projects of both principal borrower and co borrowers are generally mortgaged. Therefore, the loans / funds are borrowed for the group (co-borrowers and other entities) as a whole for utilization in the various projects of the group. The funds are then transferred to various group entities as per project requirements. 8. The servicing and repayment of the loans also happen from cash flows of all such entities including but not limited to principal borrower and co-borrowers. However, the same has to be routed through the principal borrower. 9. The funds sanctioned by the lender are for utilization by not only the principal borrower but also the co-borrowers whose projects are mortgaged to secure the loan facility and for other general corporate purposes. The lender provides flexibility to utilize the facility amount through the principal borrower to other projects in the group to ensure completion and succ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 22,57,772 2,25,777 18,062 Total 1,59,32,156 15,93,215 1,27,458 Assessment proceedings dropped with respect to two of the group entities : Without prejudice to above we would further like to emphasize on the fact that similar proceedings were initiated against some of our group entities i.e. 1. HOME BUILDERS, 2. HOME BUILDERS AND INFRASTUCTURES PRIVATE LIMITED, and the said proceedings were dropped accepting the contention of the assessee the details of the said cases are hereby produced with the submissions. Evaluation of Section 194A r.w.s. 2(28A) of the IT Act. Section 194A: Interest other than Interest on securities . (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force: Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Analysing section 194A of the IT Act in the assessee s case. As discussed, this Section of Income Tax Act is concerned with the deduction of interest accrued on sources other than securities. One must note that if the provisions of Section 194A apply to specific earnings, the same will be subjected to tax deduction at a rate of 10%. However, if individuals fail to provide their PAN, the Deductor has to deduct 20% tax as per the 194A TDS rate. The Section 194 payment is made out in the form of Interest on loans and advances Earnings on fixed deposits Interest on recurring deposits Fundamental Provisions of 194 A These pointers highlight the fundamental provisions of Section 194A Besides HUF and individuals, entities that pay interest to resident individuals are required to deduct TDS. If at any time HUF or individuals have to get their accounts audited under the clauses of 44AB, they have to deduct TDS on interest payout. I. Tax is deductible at source only in respect of payment of income or other sum comprising an element of income. The relevant provisions of the Act, will clearly prove that tax is deductible at source only in respect of income. This view clearly emerges from the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o make it clear that tax is deductible at source only in respect of an amount which partakes the nature of income and not otherwise. 3) Section 191 Direct payment Section 191 also falls under Chapter XVII-A and it deals with a situation where an assessee has to make payment of tax directly in respect of income, which is not subject to the provisions of TDS or where though it is subject to TDS provisions, but no TDS has been deducted at source in respect thereof. For the sake of ready reference, section 191 is reproduced as follows: Section 191: Direct payment. 191. In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct. Explanation. For the removal of doubts, it is hereby declared that if any person including the principal officer of a company, (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or after so deducting fails to pay, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ster concerns and in no circumstances, it can be treated as interest within the definition of section 2(28A). Furthermore, the ultimate beneficiary of bank interest is bank and it cannot be treated as interest paid to the sister concerns since the sister concerns has not provided any loan for and on behalf of the assessee to any third party or the Bank. The provisions of section 194A are not applicable on any payment made to any banking company to which the Banking Regulation Act, 1949 applies as in the case of assessee, the payment reimbursed to the sister concerns towards interest is what is paid by the sister concerns to the Banks. Section 194A (1) is applicable only to 'income by way of interest'. However, the impugned transaction is that of pure reimbursement of bank interest. There is no borrowing whatsoever. 'Interest' as per section 2(28A) means 'interest payable ... in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred. Here, the assessee has not borrowed any money or otherwise from its sister con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., a subsidiary of NCL - Assessee- company was engaged in business of broadcasting - It had two channels Agreement was entered between assessee and NCL for transfer of media rights of BCCI matches - As per agreement NCL was under obligation to provide for bank guarantee to BCCI for Rs. 2000 crore - NCL had been paying bank guarantee commission to various banks year after year as per agreed terms - NCL had set a condition that 80 per cent of bank guarantee commission had to be reimbursed to it by assessee - Accordingly, assessee reimbursed certain amount to NCL - Assessee had not deducted TDS on these payments - Whether since there was no money borrowed or debt incurred and payment made to NCL was only in nature of reimbursement of expenses incurred by NCL and assessee, it did not come under purview of interest so as to make assessee liable for TDS under section 194A - Held, yes [Para 12] [In favour of assessee] From the above judgments, we can state that, interest expenses booked in the books of account are in nature of reimbursement only as group entities has to reimburse interest expenses incurred by principal mortgagor / borrower. Since the group has multiple companies/entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling under section 9(1)(vii). Where the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India and accordingly, there was no obligation to deduct tax at source therefrom under section 195 of the Act. 5. JDIT (Int.Tax) Vs. KRUPP UHDE GmbH [2009] 26 DTR (Trib) 289 (Mum): [2010]1 ITR 614 (Mum) It was, inter alia, held in this case that amounts received by the assessee towards reimbursement of expenses were not liable to tax as fees for technical services. 6. NathpaJhakri Joint Venture Vs ACIT [2010] 5 ITR (Trib) 75 (Mum) It was held in this case that reimbursement of expenses was not income in the hands of the non-resident and therefore, not liable to TDS under section 195 of the Act. It was further held that it is axiomatic that tax is charged on income and not on receipts. The reimbursement of expenses by the Indian assessee to the non-resident was not taxable in the hands of the non-resident. Only if the sum paid or credited is chargeable to tax in the hands of the payee, the assessee is liable to deduct tax at source. If the assessee payer did not mov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad provided services to the assessee by deploying its employees for such work and the cost was for reimbursement for such expenses besides other related expenditure. Revenue was unable to dislodge these findings of fact recorded by the Tribunal. That being the position, we must proceed on the basis that the payment in question was in the nature of reimbursement of costs. As held by the Supreme Court in the case of Director of Income Tax v/s. A. P. Moller Maersk A. S. reported in 78 taxmann.com 287 and consistently followed by this Court in the number of decisions, liability to deduct tax at source in such a case, would not arise. No question of law arises. IN THE ITAT MUMBAI BENCH 'C' Onward e- Services Ltd. v. Assistant Commissioner of Income-tax, Central Circle 37* [ASSESSMENT YEARS 2005-06 AND 2007-08] IT: Reimbursement of interest by subsidiary to parent company which, in turn, had repaid it to lender bank, did not involve any element of income and, thus, no TDS liability would arise under section 194A on reimbursement Section 194A of the Income-tax Act, 1961 - Deduction of tax at source - Interest other than interest on securities - Assessment year 2005-06 Assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not made payment of interest to bank or to supplier and amount credited to suppliers' account was towards reimbursement of expenses incurred by suppliers - Whether in view of aforesaid, Commissioner (Appeals) was justified in holding that provisions of section 194A would not be attracted and, consequently, question of making any disallowance under section 40(a)(ia) would not arise - Held, yes [Para 10] [In favour of assessee] IN THE ITAT MUMBAI BENCH 'B' Neo Sports Broadcast (P.) Ltd. v. Commissioner of Income-tax (TDS), Mumbai* IT APPEAL NOS. 4010 4011 (MUM.) OF 2014 [ASSESSMENT YEARS 2010-11 AND 2011-12] Section 194A, read with section 263, of the Income-tax Act, 1961 - Deduction of tax at source - Interest other than interest on securities (Reimbursement of commission to holding company) - Assessment years 2010-11 and 2011-12 - Assessee was a step-down subsidiary of ZSPL., a subsidiary of NCL - Assessee- company was engaged in business of broadcasting It had two channels - Agreement was entered between assessee and NCL for transfer of media rights of BCCI matches - As per agreement NCL was under obligation to provide for bank guarantee to BCCI for Rs.2000 crore - N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration Ltd. v. Dy. CIT [2016] 67 taxmann.com 259/238 Taxman 287/383 ITR 59 (Kar) This Court in Karnataka Power Transmission Corporation Ltd. v. Dy. CIT [2016] 67 taxmann.com 259/238 Taxman 287/383 ITR 59 (Kar) while considering the applicability of Section 194A of the Act has observed that, Section 194A of the Act mandates the tax Deductor to deduct 'income tax' on any income by way of interest other than income by way of interest on securities. The phrase 'any income' and 'income tax thereon' if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of the income tax on that income by way of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision, Section 194A (1) of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax Deductor. Further reliance placed on: 1. Neo Sports Broadcast (P.) Ltd. v/s Commissioner of Income-tax (TDS), Mumbai (ITAT MUMBAI IT APPEAL NOS. 4010 amp; 4011 (MUM.) OF 2014) 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY Pr. Commissioner of Income Tax 1 v. Goldman Sachs (India) Finance Pvt Ltd (GSIFPL) 19. HIGH COURT OF GUJARAT Principal Commissioner of Income Tax, Central, Ahmedabad v. Plastene India Ltd. R/TAX APPEAL NO. 1284 OF 2018 20. In case of Shree Siddhivinayak Infrastructure Realty before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2017-18 (Assessee s sister concern) 21. In case of Shree Siddhivinayak Infrastructure Realty before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2018-19 (Assessee s sister concern) 22. In case of Shree Siddhivinayak Infrastructure Realty before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2019-20 (Assessee s sister concern) 23. In case of Ruparel Infra Realty Private Limited before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2018-19 (Assessee s sister concern) In the light of the discussion in the preceding paras (I) and (II), it is clearly established that 1. Tax is deductible at source only in respect of payment of income or other sum comprising an element of income. 2. Reimbursement of expenses does not partake the nature of income, in the hands of the payee of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we had number of income tax scrutinies and TDS enquiries of many group entities every year. Almost 5-6 scrutinies every year. This question of non-deduction of TDS on reimbursement of Interest is being asked and explained in almost all the cases. 4. Undue Hardship and injustice: If you make us to deduct the TDS on reimbursements amongst the group entities, the amount of TDS would be much higher than what it should be and no wonder it could be more than the actual total interest paid by the principal borrower, which is gross injustice and unnecessary hardship to the business. In light of the above, we would request your honour to delete the interest demand raised by the Ld. A.O. 8. On the other hand, Ld. DR objected to the submissions made by the Ld AR and relied upon the orders passed by the revenue authorities. 9. We have heard the counsels for both the parties and we have also perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities. From the records, we noticed that the assessee has submitted relevant documents to prove that the payment of interest is a reimbursement in nature. As per the language used by the Parli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the case of Onward e-service Ltd. Vs ACIT, [2012] 22 taxmann.com 60 (Mumbai), wherein it was held that Reimbursement of interest by subsidiary to parent company which, in turn, had repaid it to lender bank, did not involve any element of income and, thus, no TDS liability would arise u/s 194A on reimbursement. 11. Apart from above, Ld. AR also placed on record the copies of proceedings dropped in the case of assessee s sister concern by the AO himself under the identical circumstances which are at paper book page No. 7 to 15 and also copy of orders passed by Ld. CIT(A) in assessee s sister concerns which are also at paper book at page No. 85 to 245, wherein it has been held by the revenue themselves that the reimbursement of expenses by the appellant to sister concerns are in the nature of pure reimbursement to principal borrower and it does not partake the nature of income, in the hands of the payee of such expenses . 11. Therefore, in the light of the above legal proposition and also in view of our detailed discussion, it is held that the assessee is under no statutory obligation to deduct the tax at source under section194A.Consequently, the interest payable for failure to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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