It is apparent that the persons deputed by the recipient of the income were not routine employees, but were highly qualified and technical employees who were providing the head and brain’ to the assessee company. It cannot be said to be the reimbursement of salary expenditure when it was coupled with several expenditure of domestic and international travelling for the business of the company. Further, it was also important that all these persons were throughout working for the company as well as with M/s Jindal Power Limited. Therefore, the CIT(A) has correctly adjudicated that tax was required to be deducted under section 194J. Therefore, it is apparent that there was no understanding between the parties about this reimbursement. Further in some of the employees there was sharing of the cost where as in some of the employees there was no share of cost to M/s Jindal Power Limited. In view of this, it cannot be said that it was a pure reimbursement of expenses which does not require TDS.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
1. This is an appeal filed by the assessee against the order of the ld CIT(A)-XVII, New Delhi dated 18.11.2013 for the Assessment Year 2010-11.
2. The assessee has raised the following grounds of appeal:-
“1. That the Commissioner of Income Tax (Appeal) – XVII, New Delhi has grossly erred on facts and in the circumstances of the case and in law in disallowing salary reimbursements and travelling reimbursements of Rs.3,08,66,545/– and Rs.40,63,698/- respectively of personnel on deputation u/s 40 (a) (ia) alleging non-deduction of tax under s.194 J, which have no application to the facts in the appellant’s case.
2. That the Commissioner of Income Tax (Appeal) – XVII, New Delhi has grossly erred on facts and in the circumstances of the case and in law in arbitrarily holding payment of actual costs salaries reimbursements viz. Rs. 3,08,66,545/- and Rs.40,63,698/- to Jindal Power Limited as composite payment of fees for services and expenses without appreciating that there is a direct co-relation between actual expenditure incurred by Jindal Power Limited and that recovered from the appellant company.
3. That the Commissioner of Income Tax (Appeal) – XVII, New Delhi has grossly erred on facts and in the circumstances of the case and in law in holding that there is no agreement between the appellant and Jindal Power Limited for reimbursement of salaries.
4. That the Commissioner of Income Tax (Appeal) – XVII, New Delhi has grossly erred on facts and in the circumstances of the case and in law in not appreciating that the provisions of sec. 4o(a)(ia) applied only to those amounts which were remaining payable as on the last day of the previous year whereas in the appellant‘s case the two sums viz. Rs. 3,08,66,545/- and Rs.40,63,698/- on account of salary expenditure and travelling expenditure stood paid during the previous year.
5. That the Commissioner of Income Tax (Appeal) – XVII, New Delhi has grossly erred on facts and in the circumstances of the case and in law in ignoring the remedial amendment in second proviso to sub-clause (ia) of clause (a) of section 40 by the Finance Act, 2012 whereby the appellant shall not be deemed to be in default to deduct and pay tax under the provisions of Chapter XV II-B of the Act.‖
Facts of the case.
3. The assessee is a company engaged in business of an execution of engineering procurement , construction and commissioning of power plants in Power sector. It filed its return of income on 28/09/2010 showing income of Rs. 166803/- under section 115 JB of the income tax act, 1961. During the course of assessment proceedings on the basis of the details filed by the assessee, The Ld. assessing officer noted that assessee has debited the salary expenses and travelling expenses paid to M/s Jindal Power Limited for the workforce and find that company has sent the employees on deputation to serve the assessee company. Therefore, according to the Ld. AO payment to M/s Jindal Power Ltd was made for carrying out the work of supplying the personnel and for rendering of certain services to the assessee company. Therefore, according to the Ld. assessing officer, tax should have been deducted under the provisions of section 194C of the income tax act, 1961.
4. The assessee submitted that it is in nature of reimbursement as actual cost to the company M/s Jindal Power Ltd has been reimbursed and the recipient company has duly deducted tax at source on payment made to those employees u/s 192 of the Act While making payments to the concerned employees. It was further submitted that the issue is covered in favour of the assessee by several judicial precedents, which are noted by the Ld. assessing officer in para No. 5 of his order.
5. The Ld. assessing officer held that the provisions of section 194C are clearly attracted to the facts of the cases as assessee has not deducted TDS from the payments made to M/s Jindal Power Ltd in view of the various debit notes issued for salary and travelling of the personnel deputed by them to serve the assessee company which is a task carried out by that company. Therefore, the Ld. assessing officer disallowed a sum of Rs. 3, 49, 30, 243/- paid to that company on account of salary of Rs. 3 086 6545 and travelling expenditure of Rs. 4 063698/-u/s 40a (ia) of the income tax act. Consequently, assessment order under section 143 (3) of the income tax act was passed determining the total income of the assessee of Rs. 35097046/– compared to the returned income of Rs. 166803/- incorporating the above disallowance of Rs. 34930243/-. The assessee aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. CIT (A).
Proceedings before the Ld. CIT (A)
6. The assessee contended the same argument before the Ld. CIT (A), which were contended before the Ld. AO. Assessee further submitted that the assignment of duties was on a temporary basis and expenditure was only in the nature of reimbursement of actual expenses incurred. Further, the tax deduction at source on the employee was discharged by M/s Jindal Power Ltd and therefore there was no payment in the nature of a contract payment made by the appellant to that company.
7. The Ld. CIT (A) held that there is no agreement specifying the expenses to be incurred and whether any fee was to be paid to M/s Jindal Power Ltd for deputing the personnel. He held that this composite amount which is being stated as reimbursement and therefore tax should have been deducted thereon u/s 194C of the income tax act. He further held that in his view provisions of section 194J would be applicable to the facts of the case as all senior management person qualified to render the professional and technical services were deputed by the sister concern of the assessee. Therefore he confirmed the disallowance under section 40a (ia) of the income tax act. Therefore, vide order dated 18/11/2013 appeal of the assessee was dismissed. Assessee, aggrieved with the order of the Ld. CIT (A) preferred an appeal before us.
Arguments of the Ld. authorized representative
8. The Ld. authorized representative submitted a brief synopsis of his written argument which contends as under:-
a. The appellant employed personnel requisitioned from Jindal Power Ltd on different dates to work on project executed by the appellant company. On deputation, such employees were to discharge the duties of employment under the supervision and control of the appellant company. For administrative reasons the salary and expenses of such employee have been paid by the Jindal Power Ltd which have been misconstrued as being in the nature of contract payment under section 194C for work carried out by Jindal power limited. Its memorandum of articles does not have supply of manpower as its object of business. Deputation of employees to sister concern is merely assignment of duties of its employees on temporary basis and lending manpower is not aimed as earning resources such as the expenses of the staff reimbursed is actual and no profit is marked in the case of the contractual payment. Necessary disclosure of such fact of the payment and of salary cost reimbursement can be duly found in schedule 16 part B of Annual audited accounts. Further, for administrative convenience all obligations in regard to deduction of tax on such amount paid to employees are discharged by Jindal power limited. Necessary certificate of deduction is also issued by Jindal power Ltd. Therefore, it was contended that apart from the reimbursement no other payment made by the appellant company to Jindal power Ltd and therefore, on the amount of reimbursement no tax is required to be deducted. He further relied on the decision of the coordinate bench in case of Monsanto Biotech India Ltd in ITA No. 5842/2012 dated 30/11/2012 where in similar issue was decided. He further referred to the decision of the Hon‘ble Bombay High Court in case of CIT versus OCB engineers 32 Taxmann.com 271 wherein the Bombay High Court has held that assessee paid certain amount to sister concern by way of the reimbursement of salaries because their employees were deputed to the assessee there was no requirement to deduct tax at source from the said payments. He further submitted that in the case of the appellant salaried employees were deputed on different dates as per the requirement of the project carried out by the appellant company of which details name of the personnel, designation, monthly salary, time for the deputation period is furnished to the assessing officer in as many as in 6 out of 20 cases the persons have been deputed in the middle of the month. He further relied upon the decision of the Hon‘ble high court in case of CIT versus vector shipping services Private Ltd. He further relied on the decision of the coordinate bench in ITAT in assistant Commissioner of income tax versus Karma energy limited 191 ITR 552, to submit that when the expenditure have already been paid no tax deduction at source is required to be made. In the end he relied upon the decision of the Hindustan Coca-Cola beverages private limited versus CIT 293 ITR 226 that no disallowances called for under section 40a (ia) in case of non-deduction of tax at source.
b. With respect to the ground No. 4 and 5 he says that that assessee has not been deemed to be an ‘assessee in default’ to deduct tax under Chapter XVII B of the income tax act, 1961 and therefore the disallowance may please be deleted.
c. In the end, he submitted that assessee has though not deducted tax at source, but same has been paid by the recipient of the income and is already considered the same in its income, no disallowance can be made in the hands of the assessee.
Submission of the revenue.
9. The Ld. departmental representative vehemently contested the facts of the case and submitted that when the assessee has incurred certain expenditure for the purpose of carrying out its own work from sister concern. It is covered under the provisions of section 194C of the act and the tax should have been deducted thereon. He further submitted that it is not the payment of the salary but it is the payment for work or fees for technical services or contract services by the assessee to the Jindal Power Ltd. He further submitted that merely because the tax has been deducted by the employer of the employees who were deputed, it does not absolve the assessee from deduction of tax at Therefore, it was submitted that the Ld. assessing officer has correctly disallowed the above expenditure.
Reasons and decision
10. We have carefully considered the rival contentions and perused paper book submitted by the assessee where the evidences of various payments have been provided. It is an undisputed fact that assessee has made payment to its sister concern for the staff deployed by that sister concern for the work of the assessee. Assessee has paid the amount of salary as well as the travelling expenses incurred by those persons to the sister concern and on this sum, no tax has been deducted by the assessee. The claim of the assessing officer is that the provisions of section 194C are hit and the claim of the CIT (A) for confirming the disallowance is that it is fees for technical services also.
11. Now the first contention of the assessee is that the memorandum and articles of Association of the assessee as well as the company does not provide that they are engaged in the business of manpower services. According to us, such an argument is not germane to the concept of tax deduction at source. According to the provisions of section 194C of the income tax act any payment made for the work carried out is subject to tax deduction at source under section 194C of the income tax act. Further, according to provisions of section 194J of the income tax act any payment made for fees for technical services is also subject to tax deduction at source. Therefore, the argument of the assessee that memorandum of Association of the recipient company does not cover the clause of the manpower supply does not help the case of the assessee. In any case the recipient of income is engaged in the provision of services in power sector which is part of the object of that company and same is also the business of the assessee company.
12. Further, we have perused the page No. 12 of the paper book wherein the letter dated 9 July 2009 is issued by Jindal power Ltd to the assessee company wherein it has been stated that that reimbursement of salary, wages, rents, transportation and other expenses incurred by that company during the financial year 2009 – 10 on behalf of the assessee is required to be reimbursed. Along with that letter at page No. 13 details of the persons who are deputed by jindal power Ltd are mentioned. The list of such persons shows that there are 20 persons who have been deputed by the recipient company to the assessee and the statement is titled as statement of sharing of the employees cost for deputation period. The 20 employees mentioned in those list are in the designation of junior executive, executive, assistant manager, deputy manager, manager, senior manager, senior deputy general manager, assistant general manager, assistant vice president, senior general manager, vice president, and also Executive Director. The total of the salary of these persons are stated to be Rs. 3086 6545/. The Department of these persons is EPC , which is the main function of the assessee company. Looking to the profile of the company and also the profile of the persons who have been deputed it is important to note that out of 20 people 10 persons were drawing salary of more than Rs. 10 lakhs per annum , 5 persons were drawing salary more than Rs. 20 lakhs and two persons were drawing salary of more than Rs. 50 lakhs per annum. Therefore it is apparent that the persons deputed by the recipient of the income are not routine employees, but are highly qualified and technical employees who are providing the ‗head and brain‘ to the assessee company. Thereafter at page No. 60 of the paper book assessee has submitted the actual reimbursement of travelling expenses for the whole year of Rs. 4063698 payable to Jindal power Ltd by the assessee company, which is claimed as reimbursement of the expenditure. The total expenditure incurred by the assessee is pertaining to the travelling expenditure of these persons in India and outside country. The bills are with respect to the Senator Travels private limited which have been reimbursed by the assessee company to that company. In view of this, it is apparent that when the persons deputed by the Jindal Power Ltd to the assessee company were of the level of executive and going up to the level of Executive Director, it cannot be said to be the reimbursement of salary expenditure when it is coupled with several expenditure of domestic and international travelling for the business of the company. Further, it is also important that all these persons were throughout working for the company as well as with Jindal power Ltd. In view of this, it is apparent that those persons were working for the projects of the company and Ji ndal Power Ltd has been paid by the assessee as remuneration for getting work done from Jindal Power Ltd. Therefore, according to us, the Ld. CIT (A) has correctly adjudicated that tax is required to be deducted under section 194J of the income tax act, as it is a fees for technical services paid by the assessee to Jindal power Ltd, in the form of reimbursement of salary as well as travelling expenses.
13. Assessee has also stated that there is an agreement between the parties which is placed at page no 12 of the paper book. We have perused the same. It is a letter dated 9/7/2009 written by Jindal Power limited to the assessee with a direction to pay the salary, wages, rent, transportation and other expenses incurred by that company for the F Y 2009-10 on behalf of assessee. There is no reference about the quality of staff that is required to be provided, what are the terms and conditions of the deputation would be there, where this staff would be deployed etc. Even otherwise this letter, which is claimed to be an agreement, is after incurring of the cost by that company. Therefore, it is apparent that there is no understanding between the parties about this Further in some of the employees there is sharing of the cost where as in some of the employees there is no share of cost to Jindal Power limited. In view of this it cannot be said that it is a pure reimbursement of expenses which does not require TDS.
14. The assessee also could not establish that what kind of staff it has of its own to execute the kind of work it is earning revenue for. It has earned the revenue of Rs 190942881/- for the year where the total cost of salary reimbursed is Rs. 30866545/- which is almost 20 % of the work billing. Hence in absence of the facts that how the work are executed by the assessee whether it fully by the staff on loan or it has its own staff also, it is not possible to accept the contention that reimbursement of salary coupled with other reimbursement of international and domestic travel is reimbursements of expenses simplicitor escaping withholding tax liability.
15. The next contention of the assessee is that all these expenses have already been paid and therefore the tax requirement deduction applies only in case of payment outstanding at the end of the year and not whatever has been paid during the year. Now this argument does not stand in view of the decision of the Hon‘ble Supreme Court In the case of Palam Gas Services CIT  394 ITR 300/247 Taxman 379/81 taxmann.com43, the Supreme Court concluded that section 40(a)(ia) covered not only those cases where the amounts were payable but also where it was paid.
16. Now coming to the facts of the various decisions relied upon by the assessee, the 1st decision relied upon by the assessee is with respect to the coordinate bench in United hotels Ltd versus income tax officer wherein it has been held that in absence of any contract between assessee and the deputed personnel what was reimbursed was actual salary of deputed personnel and hence for each deputed person the amount received by it was income chargeable under the head salary and could not be termed as fees for technical services. In that particular case, the staff was deputed only for some part of the time and what the assessee is paid was mere reimbursement of the salary for that particular time. In the particular case of the assessee, the work was carried on by some of those staff for the whole year. In that particular case, it was also contended that those personnel were the defecto employees of the assessee and not the consultant to the assessee. Further, in that particular case, the tribunal held that the amount paid was Here in the present case the amount was not paid as a salary but reimbursement of multiple costs incurred for employment of those persons in the form of salary, wages, rents, transportation, and other expenses, which is apparent at page No. 12 of the paper book. Therefore, the decisions relied upon by the Ld. authorized representative do not apply to the facts of the case.
17. The second decision relied upon by the Ld. authorized representative was with respect to the Monsanto Biotech India private limited wherein it has been held that on the issue of reimbursement of the expenditure provisions of section 194C does not apply and therefore no disallowance can be made. In that particular case, the AO has not disputed that the impugned amount was in the nature of reimbursement expenses on cost-to-cost basis. In the present case, the Ld. assessing officer has disputed that this amount is paid for the purpose of work carried out by the recipient of the income. In view of this, the about decision does not apply to the facts of the case.
18. With respect to decision of Honourable Bombay High court in 32 Taxmann. com 271 in CIT V OCB Engineers there was a finding of fact that the payments made by the respondent assessee to its sister concerns was reimbursement for the salaries of the employees who have been deputed by the sister concerns to work with the respondent assessee. The impugned order records that it is not the case of the revenue that the assessee had made any payment for consideration extraneous to any allegation that the amounts paid to its sister concerns were over and the above the salaries due to the employees. In the present case, firstly, the lower authorities have not given such a finding of fact but in fact, they have disputed that it is for carrying out work/ professional fees. Further in the present case there is payment of domestic and international travelling expenses. Therefore on facts the issues are distinguishable.
19. Similarly we have also perused the other case laws cited before us, but we are not convinced for the reasons given that on the sum tax should not have been deducted as it is reimbursement of expenses. Therefore, we confirm the finding of the Ld. CIT (A) that the disallowance under section 40 a (ia) has been correctly made as the tax should have been deducted under chapter XVII-B of the income tax act on payments made by the assessee to Jindal Power Ltd.
20. In view of this ground No. 1-4 of the appeal of the assessee are dismissed.
21. Now we come to the last contention of the assessee that when the assessee has paid certain expenditure to the recipient of the income and when the recipient of income has paid tax on that particular income. The assessee cannot be held to be an assessee in default and no disallowance under section 40 a (ia) should have been made. The above issue is already been dealt with by the Hon‘ble Delhi High Court in case of CIT versus Ansal Landmark Township (P) Limited 61 com45 (Delhi) as under:-
“9. It is seen that the second proviso to Section 40(a)(ia) was inserted by the Finance Act, 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-section (1) of Section 201 of the Act, then, in such event, “it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso”.
10. It is pointed out by learned counsel for the Revenue that the first proviso to Section 201(1) of the Act was inserted with effect from 1st July 2012. The said proviso reads as under:
“Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) The recipient has paid the tax due on the income declared by him in such return of income;
And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.”
11. The first proviso to Section 201(1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfillment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a)(ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies.
12. Relevant to the case in hand, what is common to both the provisos to Section 40(a)(ia) and Section 201(1) of the Act is that as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax.
13. Turning to the decision of the Agra Bench of ITAT in Rajiv Kumar Agarwal’s case (supra), the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40(a) (ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under:
‘On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a “fair, just and equitable” interpretation of law— as is the guidance from Hon’ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an “intended consequence” to disallow the expenditure, due to non-deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a) (ia), as we see it, is aimed at ensuring that expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an “intended consequence” to punish the assessees for non-deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.’
14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a)(ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits
15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in Rajiv Kumar Agarwal’s case (supra).
22. Therefore in view of the above decision of the Hon‘ble Delhi High Court we do not have any difficulty in accepting the argument of the Ld. authorized representative that if the tax has been paid by the recipient of the income on the income in holding the transactions and no disallowance should be made in the hands of the assessee. In view of this we set aside this issue back to the file of the Ld. assessing officer to allow the benefit of the 2nd proviso to the section 40 a (ia) of the income tax act and if the assessee is able to satisfy the Ld. assessing officer that the recipient of the income has offered the income in its return of income on furnishing the section 139 of the income tax , incorporated such income in its return of income , has paid the due tax thereon and he furnishes requisite certificate as prescribed therein that no disallowance be made. Therefore, if the assessee would like to have the benefit of this particular proviso by furnishing requisite certificate is an mentioned in the provisions of section 201 of the income tax act, the appellant may furnish to the ld AO same within 60 days of the order and the Ld. assessing officer may consider the claim of the assessee in accordance with the law. In view of this ground No. 5 of the appeal of the assessee is accepted and allowed.
23. In the result appeal of the assessee is partly allowed.
Order pronounced in the open court on 04/10/2017.