Standard

No TDS is applied on director reimbursements or traded products provided to clients

Fact and issue of the case

The brief facts of the case shows that the assessee is a private limited company engaged in the business of trading in software and software products. It filed its return of income on 31st October 2005, declaring total income of ₹3,64,579/–. The case was selected for scrutiny and the assessment order under section 143 (3) of the Act was passed on 20th December, 2007, assessing the total income of the assessee at ₹19,16,750/-.

The learned assessing officer made disallowance on account of non-deduction of tax at source on i. payment of car hire charges which is reimbursed to the directors of the company amounting to ₹60,000/-, ii. software consultancy charges paid to Orbit Software amounting to ₹7,71,752/- and s iii. Software consultancy charges paid to M/s Springfield Organics amounting to ₹7,00,000/-. Accordingly, the addition of ₹1,531,752/– was made on account of non-deduction of tax at source on various payments under section 40 (a) (ia) of the Act.

The assessee being aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT (A), who confirmed the above-mentioned disallowance by passing an order dated 29th September, 2008. Therefore, the assessee is aggrieved and is in appeal before us.

The learned authorized representative submitted that

i. with respect to the payment of ₹771,752 software consultancy charges paid to Orbit Software, the assessee has made tax deduction at source on the above amount and despite this the learned assessing officer has made disallowance invoking the provisions of section 194J of the Act holding that tax is not deducted on consulting charges paid to the above company. The assessee also submitted before the learned CIT (A) that the tax has been deducted and the same should be allowed as a deduction. The learned CIT (A) has also categorically reproduced that the appellant has already deducted tax at source on an amount of ₹7,71,752/- but has not deducted tax at source only on payment of ₹7,00,000/- to Springfield Organics. Therefore, the addition on account of software consultancy charges paid to Orbit Software Company is not correct.

ii. Disallowance of ₹7,00,000/- made on account of payment to M/s Springfield Organics is related to the purchase of software from that company. He submitted that as assessee is in the business of trading in software the above amount is traded goods for the assessee and therefore, no tax was required to be deducted. The software was also purchased and supplied to a USA based client of the appellant. The software was specifically made by the supplier on the direction of the appellant. The decision of Commissioner of sales tax Maharashtra in the case of Mastek Ltd. (DDQ 11-2001/ADM-5/83/D-7 dated 3rd August, 2004, clearly covers the issue that where software developed specifically for a customer was held to be goods and since tax was levied thereon. If the sale tax was levied, it was sale of goods and no tax was required to be deducted therefore, there is no violation of the provisions of section 40(a)(ia) of the Act.

iii. With respect to the disallowance of ₹60,000/- for non-deduction of tax, the assessee submitted that this payment was made as reimbursement of expenses to Mr. Pankaj Dalal, who is Director of the assessee company as car hire charges. During the course of appellate proceedings assessee also gave name of four different persons to whom the above payment of ₹60,000/- was made by Mr. Pankaj Dalal, and this amount was reimbursed. That entire payment of ₹60,000/- is nothing but payment made to Shri Pankaj Dalal, director in the nature of reimbursement towards car hire charges incurred by him from time to time which has not been disputed at all. Mr. Pankaj Dalal has given an evidence that he has made these payments to 4 different persons ranging from ₹12,000/- to ₹17,000/-. Therefore, on this sum the provisions of section 40(a)(ia) of the Act are not applicable. Accordingly, the learned authorized representative submitted that the disallowance confirmed by the learned CIT (A) is not proper.

The learned departmental representative vehemently supported the order of the learned lower authorities.

Observation of the court

We have carefully considered the rival contentions and perused the orders of the lower authorities.

i. The first payment is a car hire charges reimbursement to the director of the company amounting to ₹60,000/- on which the learned assessing officer was of the view that tax is required to be deducted. Before us, the assessee has submitted that it is a reimbursement of expenditure to the director of the company who is undergoing frequent travel. These payments have been made by the director of the company to various taxi owners. The instances of four persons are mentioned wherein the payment made by the director to those persons are ₹12,000/- to ₹17,000/-. As the above payment is in the nature of reimbursement and paid to Mr. Pankaj Dalal, we find that no tax is required to be deducted at source on amount reimbursement to Mr. Pankaj Dalal. The addition therefore requires to be deleted to the extent of ₹60,000/-.

ii. With respect to the software consultancy charges to Orbit Software paid of ₹771,752/–, it was pointed out that assessee has deducted tax at source on the above sum. This fact has also been recorded in the order of the learned CIT (A) at para number 3.4 that assessee has already deducted tax at source on sum of ₹7,71,752/– paid to Orbit Software. As the ld CIT (A) has also recorded the factum of payment on which tax is deducted, there is no reason to sustain the disallowance. Accordingly, disallowance is not correct. It is also deleted. iii. The third payment is with respect to the software consultancy charges paid to Springfield organics. As the assessee has submitted that it is a trader in the software, the above software has been purchased as traded goods to be supplied to a USA client and not to be used by the assessee. Software is goods therefore, in the given instance; it cannot be subjected to tax deduction at source. However, this fact needs to be verified by the learned assessing officer. In view of this, we set-aside this ground of appeal to the file of the learned assessing officer for verification. If the purchases of software is traded goods and supplied to another client and not for the use of the assessee, no tax is required to be deducted at source.

In view of this appeal of the assessee is allowed with above direction.

In the result, the appeal of the assessee is allowed with above direction. Order pronounced in the open court on 09.01.2023

Read the full order from here

Techknowledgy-Interactive-Partners-P.-Ltd.-Vs-ITO-ITAT-Mumbai-1

Conclusion

The tribunal has ruled in favour of the assessee and dismiss the appeal.

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February, 11
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Income Tax
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Standard

Mere non-production of vouchers by employee expenses cannot be disallowed

Fact and Issue of the case

The assessee filed an appeal to the ITAT related to the following issue:

Assessing officer erred on facts and in law in completing assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 (‘the Act’), vide order dated 30.10.2019, at an income of Rs. 3146,87,81,016/- under the normal provisions and at book profit of Rs. 3557,57,46,134 under section 115JB of the Act.
Transfer Pricing Officer (‘TPO’) erred on facts and in law in partly disallowing claim of deduction under section 80IC to the extent of Rs.1,87,74,679 by reducing profits of the eligible undertaking by making transfer pricing adjustment on inter-unit transfer price of goods procured by the eligible unit from non-eligible unit during the relevant previous year.
Assessing officer erred on facts and in law in enhancing the value of closing inventory and thereby income of appellant by Rs. 39,50,000 in respect of proportionate amount of depreciation on model fee incurred during the year and debited to the profit and loss account, alleging the same to be directly related to manufacture of finished goods and, therefore, attributable to the closing stock of such goods.
That the assessing officer erred on facts and in law in making disallowance of Rs.7,38,27,378 (comprising of Rs. 2,28,58,951 in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426 in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that the same were not supported with evidences/ bills of expenditure incurred abroad.

Observation of Court

The Tribunal have heard both the parties and have perused the material available on record. Though this claim was not made before the lower authorities, Tribunal find that the additional ground raised by the assessee raises a pure question of law, facts for the same are on record. Thus, Tribunal accordingly admitted the additional ground of appeal raised by the assessee following the decision of the Honourable Supreme Court in the case of National Thermal Power Co Ltd vs CIT: 229 ITR 383(SC) We also find that the issue on merits is squarely covered in favour of the assessee by the order dated 24.10.2016 passed by Tribunal in the preceding assessment years, i.e. AY 2010-11 and AY 2011-12 wherein the Tribunal held that lease premium charges were not allowable revenue deduction. However, the Tribunal allowed the alternate plea raised by the assessee company and held the premium paid for acquisition of leasehold rights to be an intangible asset, independent from the land itself, eligible for depreciation under Section 32(1)(ii) of the Act.

With regards to disallowance of reimbursement of foreign travelling expenses to directors/employees amounting to 7.38 crores, the learned Authorised Representative submitted that the disallowance was made on the ground of non-submission of evidence/proof of actual expenses incurred by employees. It was submitted that in the course of discharge of official duties, the employees of the company are required to travel abroad and incur incidental expenses in foreign currency like local conveyance, boarding and lodging expenses, telephone expenses etc. The assessee had introduced a policy fixing per diem allowance payable to employees, depending upon the grade/category of the employees and the place/country of travel. The employees are not entitled to any extra allowance in the event the actual expenditure incurred by the employee is in excess of such per diem allowance. It was submitted that for payment of per diem allowance, as per policy, the assessee does not require the expenses to be necessarily supported /backed by bills considering the practical difficulties/impossibilities in producing invoices for petty expenses like local conveyance, telephone bills, etc. The employees are only required to submit details of expenditure incurred in specified form, on basis of which travel bill is settled. It was submitted that in the assessment order, the AO made disallowance of Rs.7,38,27,378/- (comprising of Rs. 2,28,58,951/- in respect of Dharuhera, Gurgaon, Haridwar and Neemrana plants and Rs. 5,09,68,426/- in respect of head office expenses) out of expenditure incurred towards re-imbursement of foreign travel expenses incurred by employees, on the ground that declaration furnished by the employees was not a sufficient evidence to establish the incurrence of actual expenses, which were required to be supported with bills/invoices of factual expenditure incurred by the employees.

The learned Authorised Representative submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of Delhi Bench of the Tribunal in the assessee’s own case for the AYs 2007-08 and 2008-09, wherein the Tribunal held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees, which has been reaffirmed by the Tribunal in the order dated 24.10.2016 passed for the assessment years 2010-11 and 2011-12. It was further pointed out by the Ld. AR that following the order of the Tribunal for AYs 2010-11 and 2011-12, the Tribunal has also decided the issue in favour of the assessee in appellate orders passed for AY 2009-10, 2012-13 and 2013-14.

Tribunal have heard both the parties and have perused the material available on record. The Tribunal, in assessee’s own case, has held in A.Ys. 2010-11 and 2011-12 where tribunal have heard the rival contentions note that similar issue relating to disallowance relating to re-imbursement of foreign travelling expenses to directors/employees was deleted by the Tribunal in the assessee’s own case for assessment year 2007-08 which was followed in assessment year 2008-09. The relevant observations of the Tribunal for assessment year 2007-08 where the assessing officer in this case has not doubted the fact that employees/ directors of the company travelled abroad and the fact that they have incurred incidental expenses in foreign currency. The reason for disallowance is that employees have not furnished to the assessee evidence in support of the fact that they have incurred conveyance, boarding and lodging expenses etc. When reasonable amount of daily allowance is fixed as per the rules of the company and when these D.A. rules are followed by the assessee, in our view, the incurring of expenditure by the employees is not to be doubted. Even in cases where officers of the government of India travel abroad, daily allowance is given and vouchers for such expenditure are not insisted because of practical difficulties in submitting bills/ vouchers of petty expenses. In such circumstances, what is to be examined by the assessing officer is the reasonableness of the expenses incurred as compared to the general rates of expenses and allow the same. The assessee submits that the fixed per diem allowance payable to employees depending on the grade is reasonable. When such rates are reasonable the question of disallowance does not arise unless the revenue demonstrates that the rates are excessive. In this case it is not that the expenses are not incurred for the stated purpose nor is it that the rates are unreasonable. The disallowance in question in our view on the sole ground that vouchers are not produced by the employees cannot be sustained. In the result this ground of the assessee is allowed.”

Thus, this Tribunal in A.Ys 2010-11 and 2011-12 and earlier years has held that disallowance cannot be made merely on the basis that vouchers were not produced by the employees. Tribunal also find that the Tribunal has in the appeal for the assessment years 2009-10, 2012-13 and 2013-14, decided the issue in favor of the assessee company following the aforesaid order passed for assessment years 2010-11 and 2011-12. As, the facts have not changed in this year as well, therefore, the issue is squarely covered by the decision of the Tribunal for earlier Assessment Years.

The tribunal also held that the assessee is eligible for depreciation at 25% on lease hold rights acquired in Haridwar and Neemrana. As regards the land at Haridwar, the AO is directed to allow the claim of depreciation as per opening WDV carry forward from the earlier years. In so far as the depreciation of land at Neemrana is concerned the same shall be allowed after verification of the relevant payments claimed to have been made by the assessee. In the final result, the appeal of the assessee is partly allowed.

Conclusion

Read the full ITAT order from below

Mere-non-production-of-vouchers-by-employee-expenses-cannot-be-disallowed

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April, 19
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Income Tax
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Standard

Should you deduct TDS u/s 194C in absence of a written contract

Introduction

According to Section 194C, any person responsible for paying any sum to any resident (contractor) for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor 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 an amount equal to-

1% where the payment is being made or credit is being given to an individual or HUF
2% where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

No deduction shall be made if:-

payment to the contractor does not exceed Rs 30,000
aggregate of such payments to contractors does not exceed Rs 75,000

Provisions of Law

[Section 194C(6)]- No deduction shall be made from any sum credited or paid to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, [where such contractor owns ten or less goods carriages at any time during the previous year] furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

According to Section 40(a)(ia) 30% of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1), will be disallowed. In view of the second proviso to section 40(a)(ia) read with proviso to section 201(1) of the Income Tax Act no disallowance of expense u/s 40(a)(ia) can be made unless the assessee has been treated as assessee in default under Section 201(1) of the Act for its failure to deduct tax at source from the payment made on account of interest.

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In simple words, if the amount paid by payer have been included by the payee in his return of income for relevant AY, filed the return of income u/s 139 and has paid the tax due on the income declared in such return, to the extent the recipient (i.e. payee) from the assessee have so included the sum in his return of income and filed the same, no disallowance u/s.40(a)(ia) of the Act can be made by the AO.

Is a person liable to deduct tax at source under Section 194C if there is no written contract with the contractor?

A similar situation arose in the case of Sri. Singonahalli Chikkarevanna vs Assistant Commissioner Of Income (24/02/2020).‘

Facts of the Case:-

Assessee is engaged in the business of vehicle hire and takes vehicles along with drivers on hire from various persons and pays vehicle hire charges and petrol and diesel expenses to such cab owners.
During the course of assessment proceedings, the Assessing Officer (AO) noticed from the profit and loss account of the assessee that the assessee has debited a sum for vehicle hire charges paid and for petrol and diesel expenses paid.
The assessee was asked to produce details of TDS on expenses, however, the assessee had failed to do so.
The AO disallowed payments debited as vehicle hire charges and petrol and diesel charges by invoking the provisions of section 40(a)(ia) for non-deduction of TDS.

Proceedings of CIT(A)

CIT(A) confirmed the disallowance made by the Assessing Officer. Hence, the assessee went in appeal before the Income Tax Appellate Tribunal (ITAT).

Proceedings of ITAT

Pertaining to entire amount of vehicle hire charges which are disallowed by the AO

Assessee had contended that he had not entered into an agreement with either with the owners of the vehicles nor with the drivers for the transportation and thus, applicability of section 194C the Act do not arise and consequently disallowance u/s 40(a)(ia) is not warranted.
The ITAT held that a contract need not be in writing, even an oral contract is good enough to invoke the provisions of Section 194C. It may be inferred from the conduct of the parties.
The cab owners have received the payments from the assessee towards the hiring charges, therefore, the presumption normally would be that there was a contract for hiring of vehicles.
Therefore, if the assessee has made the payment for hiring the vehicles, the provisions of section 194C are clearly applicable.
The contract has to be looked into party- wise not on the basis of the individual. In our opinion, all the payments made to a cab owner throughout the year are to be aggregated to ascertain the applicability of the TDS provision as all the payments pertain to a contract.
The amendment brought in by the Finance Act, 2014 with effect from 01.04.2015 restricts the amount of disallowance for non-deduction of tax to 30% of expenditure. The proviso is also amended to the effect that 30% of such sum shall be allowed as a deduction in computing the income of the previous year in which tax has been paid.
Though the substitution in section 40 has been made effective with effect from 01.04.2015, in the view of the Tribunal, the benefit of the amendment should be given to the assessee either by directing the Assessing Officer to confirm from the cab owners, as to whether the said parties have deposited the tax or not and further or restrict the addition to 30% of the disallowance.
Accordingly the disallowance is to be restricted to 30% of the amount liable for TDS u/s 194C of the Act. Accordingly, this issue was partly allowed.

With regard to disallowance of a sum of Rs.2,42,41,856 by invoking the provisions of section 40(a)(ia) of the Act towards reimbursement of petrol and diesel charges to the drivers.

It was submitted that the assessee has collected a sum towards petrol and diesel expenses from the parties and paid an amount to the cab drivers.
According to the assessee, this amount was directly paid by the assessee to the petrol pump and not to the cab owners and accordingly it was reimbursed by the concerned parties.
This was duly reflected in the profit and loss account of the assessee and there was no dispute on this account. The assessee submitted that when such amount of petrol and diesel expenses are paid directly to the petrol pump, the assessee is not liable to deduct TDS on the same.
The assessee has argued that he had not entered into any contract with the cab owners for the vehicles and drivers provided by them and the individual payments made to them were not regular or routine and as such the provisions of section 194C were not attracted.
This argument of the assessee is without any merit, as this is not a case where the payments are being made once in a blue moon to a particular car owner.
Further, the assessee has not brought on record anything to show that the payments were not more than the prescribed limit of Rs.30,000 at any instance or Rs.75,000 during the financial year.
It is an undisputed fact that the assessee is engaged in the business of vehicle hire and takes vehicles along with drivers on hire from various persons and pays vehicle hire charges and petrol and diesel expenses to such cab owners.
When the Assessing Officer has confronted the assessee on the issue of tax deduction at source, the assessee has relied on the provisions of section 194C(6) of the Act and argued that he was not liable to deduct tax at source on the payments as he had obtained PAN of the persons from whom vehicle was taken on hire and these persons were regular income tax payers.
Thus, the fact of existence of a contract with the cab owners was not denied by the assessee but he argued that the provisions of section 194C(6) of the Act are applicable to his case.
The Department submitted that the claim of the assessee that petrol and diesel expenses were in nature of reimbursement was not acceptable for the reason that the provisions of TDS get attracted even in the case of reimbursement.
The assessee has taken vehicle on hire along with the drivers and the payment made to the cab owners includes that for petrol and diesel.
It is observed that as agreed by and between the assessee and the cab owners, a vehicle was to be provided by the assessee to the parties and thus, the assessee was to bear the vehicle expenses actually incurred by the said cab owners and which will be reimbursed by the parties concerned.
Bills for such expenses incurred by the said cab owners were separately raised by them on the assessee in addition to bills for hire charges and since the amount of bills so raised was towards the actual expenses incurred by them, there was no element of any profit involved in the said bills.
It was thus a clear case of reimbursement of actual expenses incurred by the assessee and, therefore, was not of the nature of payment covered by section 194C of the Act.
After considering all the facts of the case, Tribunal was of the view that the provisions of section 194C of the Act were not applicable to the reimbursement of actual expenses and the assessee was not liable to deduct tax at source from such reimbursement.

The appeal filed by the assessee was partly allowed by the ITAT:-

Upto 30% disallowance for not deducting tax at source on vehicle hire charges (it will be considered as contractor services under section 194C even if there is no written contract)
No disallowance for TDS not deducted under section 194C for petrol reimbursements.

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