No TDS on Reimbursement Expenses if separate bills raised

By | December 6, 2015

Summary of Case:-

The assessee had deducted the TDS in respect of the payment made to the C & F agent and separate bills had been raised in respect of reimbursement expenses incurred by the agent. Since the reimbursement bills were separately raised, there was no requirement to deduct TDS in respect thereof. Under the circumstances, it cannot be said that there is any legal infirmity in the impugned order passed by the Tribunal in holding that disallowance under section 40(a)(ia) of the Act could not be made in respect of reimbursement bills which were separately raised as no TDS was required to be deducted in respect thereof.

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HIGH COURT OF GUJARAT

Pri.Commissioner of Income-tax-1

v.

Consumer Marketing (India) (P.) Ltd.

MS. HARSHA DEVANI AND A.G. URAIZEE, JJ.

TAX APPEAL NO. 646 OF 2015

SEPTEMBER  21, 2015

Mrs. Mauna M. Bhatt, Advocate for the Appellant.

ORDER

Ms. Harsha Devani, J. – In this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the appellant – revenue has challenged the order dated 30.03.2015 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench “B” in ITA No.2125/Ahd/2011 by proposing the following two questions, stated to be substantial questions of law :

“[1] Whether the Appellate Tribunal has substantially erred in upholding the decision of the CIT (A) in deleting the addition of Rs.8,33,252/- made on account of disallowance of interest under section 36(1)((iii) of the Act?

[2] Whether the Appellate Tribunal has substantially erred in upholding the decision of the CIT (A) in deleting the addition of Rs.55,94,825/- made on account of disallowance under section 40(a)(ia) of the Act ?”

2. The assessment year is 2008-09 and the relevant accounting period is the previous year 2007-08. The assessee filed return of income on 30.10.2008 declaring total income of Rs.80,79,294/-. The case was selected for scrutiny. The Assessing Officer noticed that the assessee had given interest free loans of Rs.81,14,103/- out of which, Rs.70,14,103/- was given to M/s Arti Impex, Rs.6,00,000/- to Shri Ashok Sharma and Rs.5,00,000/- to Mrs. Rajkumari Sharma. The assessee submitted that it had entered into purchase and sale transactions with M/s Arti Impex and since the party was delaying payment and in fact, did not want to pay them, they had transferred such amount to loan account, which was a mis-classification on their part as it should have been taken as “debtor”. The assessee further pointed out that in any case, they had sufficient interest free funds to the tune of Rs.1,99,40,000/- to take care of the advances. It was also pointed out that the payment of interest was specifically for term loan obtained for acquisition of assets for the business and had been obtained on hypothecation of that particular asset. The interest free loans (which were, in fact, debts) were not advanced out of the said term loan, which were directly disbursed for the acquisition of the particular business asset.

3. The Assessing Officer computed interest disallowance at Rs.9,73,692/-, but allowed expenditure on account of interest paid and limited the disallowance to Rs.8,33,252/-. The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), who deleted the additions made by the Assessing Officer. The revenue carried the matter before the Tribunal, but did not succeed.

4. In respect of proposed question No.1, Mrs. Mauna Bhatt, learned senior standing counsel for the appellant submitted that the Tribunal has upheld the order passed by the Commissioner (Appeals) basically for the sake of consistency and that the Tribunal has not relied on its decision in the assessee’s case, but has relied on the decision of the Commissioner (Appeals) in assessee’s own case for assessment year 2007-08 in respect of which, further appeal was not filed in view of the low tax effect involved. It was submitted that the findings recorded by the Commissioner (Appeals) as well as the Tribunal being erroneous, the matter requires consideration.

5. A perusal of the order passed by the Commissioner (Appeals) reveals that he has noted that there was a direct nexus between the borrowings and the utilization of funds, and therefore, it could not be said that interest bearing funds were diverted for non-business purpose. He further took note of the fact that similar issue had come up for consideration in the previous year when such disallowance was deleted. Since the facts were identical in the year under consideration, he held that interest free funds were not diverted for non-business use and deleted the addition made by the Assessing Officer. The Tribunal concurred with the findings recorded by the Commissioner (Appeals) and upheld the said order.

6. From the facts noted hereinabove, it is apparent that the term loan, on which deduction of interest was sought, had entirely been used for the purpose of purchasing the assets which were hypothecated to the bank. The assessee had also produced sufficient evidence before the Assessing Officer to indicate that it had sufficient interest free funds to take care of the advances even if the same were accepted to be the advances. The Commissioner (Appeals) has recorded a categorical finding of fact to the effect that the Assessing Officer has failed to establish any nexus between the borrowings and the utilization of funds. It is in these circumstances, that the Tribunal has recorded a concurrent finding of fact to the effect that it could not be said that interest bearing funds were diverted for non-business purpose.

7. Having regard to the fact that the conclusion arrived at by the Tribunal is based upon concurrent findings of fact recorded by it after appreciation of the evidence on record, in the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal, the same does not give rise to any question of law.

8. As regards proposed question No.2, the assessee debited Rs.62,85,013/- as clearing and forwarding charges, but out of this amount, deducted TDS (Tax Deducted at Source) only on an amount of Rs.7,45,801/-. It was the case of the assessee that the C & F agent incurs the expenses on behalf of the company and he is merely acting as a front man of the company; and that these expenses have no nexus with the commission he is supposed to get for his work. Before the Assessing Officer the assessee submitted that the part of the clearing and forwarding expenses, which forms reimbursement of expenses, does not attract the TDS provisions. The nature of such expenses was also pointed out to the Assessing Officer. It was submitted that the C & F agent raises a debit note for the expenses to be reimbursed by the company along with necessary bills/receipts/supporting evidence. He also raises an invoice for the services rendered by him with service tax. It is this invoice which attracts TDS, which has been duly deducted.

9. The Assessing Officer disallowed an amount of Rs.55,94,825/- on which tax was not deducted at source and added it back to the total amount. While making such addition, the Assessing Officer placed reliance upon the decision of the Supreme Court in the case of Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 . The assessee carried the matter in appeal before the Commissioner (Appeals), who deleted the disallowance. The revenue carried the matter before the Tribunal, but did not succeed.

10. Mrs. Mauna Bhatt, learned senior standing counsel, submitted that the Tribunal has failed to appreciate that the Assessing Officer had recorded a finding that the assessee had entered into a contract for carrying out work as per the requirement of the assessee. Therefore, for the payment made for carrying out any work, TDS is liable to be deducted as per section 194C of the Act. Under the circumstances, the payment made without deducting TDS is not allowable under section 40(a)(ia) of the Act. Referring to the assessment order, it was pointed out that the same clearly shows that there is no evidence that no TDS was made on reimbursement and the TDS was deducted on bills separately raised. It was, accordingly, urged that the matter requires consideration on the question a proposed or as may be deemed fit by this court.

11. A perusal of the order passed by the Commissioner (Appeals) reveals that he has taken note of the fact that the assessee did not deduct TDS on reimbursements made to C & F agent on separate bills of reimbursement on account of freight and other payments made on behalf of the assessee. The Commissioner (Appeals) placed reliance upon the decision of the Tribunal in the case of Om Satya Exim (P.) Ltd. v. ITO rendered on 13.05.2011 in ITA No.1335/Ahd/2010 wherein, the Tribunal had considered the circular issued by the C.B.D.T. bearing No.715 dated 08.08.1975 and found that since in the facts of the said case, no composite bill had been raised by the commission agent, the circular would not be applicable. The Tribunal, in that decision, also placed reliance upon an earlier decision in which it was held that when the bill for reimbursement of expenses has been separately raised, section 194J of the Act is not applicable. It was held that TDS is not required to be deducted from such reimbursement of expenses and hence, section 40(a)(ia) of the Act is not applicable with regard to such payments. The Commissioner (Appeals) noted that the jurisdictional Tribunal in case of payment to Customs House Agent held that no TDS is required to be deducted in the case where reimbursement bills were separately raised. The assessee had also made payment to clearing and forwarding agents and separate bills were raised in respect of reimbursement of expenses incurred by the agents on behalf of the assessee. The fact that separate bills were issued for services and for reimbursements is not in dispute as per the assessment order. Since the facts of the assessee’s case were identical to the case decided by the Tribunal, the Commissioner (Appeals) followed the same and accordingly, held that disallowance in respect of those claims under section 40(a)(ia) of the Act cannot be made and deleted the additions. The Tribunal, in the impugned order, has concurred with the findings recorded by the Commissioner (Appeals), namely, that no TDS is required to be deducted in case where the reimbursement bills were separately raised.

12. Thus, from the concurrent findings of fact recorded by the Tribunal, it is apparent that the assessee had deducted the TDS in respect of the payment made to the C & F agent and separate bills had been raised in respect of reimbursement expenses incurred by the agent. Since the reimbursement bills were separately raised, there was no requirement to deduct TDS in respect thereof. Under the circumstances, it cannot be said that there is any legal infirmity in the impugned order passed by the Tribunal in holding that disallowance under section 40(a)(ia) of the Act could not be made in respect of reimbursement bills which were separately raised as no TDS was required to be deducted in respect thereof. Under the circumstances, the impugned order passed by the Tribunal does not give rise to any question of law, much less a substantial question of law, as proposed or otherwise.

13. In the light of the above discussion, the appeal fails and is, accordingly, dismissed.

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