No obligation to deduct TDS on amounts paid as reimbursement of expenses

Suraj R. Agrawal

Brief of the Case

Delhi High Court in the case of CIT vs. DLF Commercial Project Corp held that There is no obligation to deduct TDS on amounts paid as “reimbursement of expenses” because it do not have the character of income.

A) Facts of the case:

a. Assessee is in the business of developing land for commercial, residential, retail, industrial parks, information technology parks, SEZ, etc.

b. During AY 2007-08, the assessee filed its return reporting an income of ₹1,67,95,360.

c. AO added a sum of ₹ 19,09,83,236/- under Section 40(a)(ia) of the Act for non-deduction of TDS on reimbursement expenditure paid to M/s DLF Land Ltd.

d. The latter entity had deducted TDS on the payments made by it as a facilitator on behalf of the assessee.

e. CIT(A) & ITAT ruled in favour of the assessee and deleted this amount.

f. The assessee entered into an agreement dated 01.04.2007 with the said company to carry out activities like maintenance of books of accounts and getting the accounts audited, maintenance of secretarial records, filing with various statutory authorities etc. M/s DLF Land Ltd. was entitled to service charges @ 5% of the total expenditure incurred.

B) Issue put before Delhi High Court:

Did the Income Tax Appellate Tribunal (ITAT) fall into error in its findings with respect to the addition on account of reimbursement of interest within Section 40(a)(ia) on the issue of non-deduction of TDS on the payments made on reimbursement of service charges?

C) Contentions of Appellant:

• The payment was made for the purposes of reimbursement of expenses handled by M/s DLF Land Ltd. on behalf of the assessee, and the assessee had duly deducted TDS on the service charges paid to M/s DLF Land Ltd. by the assessee.
• Since the reimbursement of expenses was not taxable, learned senior counsel submits that the assessee was not required to deduct TDS on the entire amount.

D) Contention by Revenue:

• The assessee ought to have deducted TDS on the total amount reimbursed by it to M/s DLF Land Ltd., and the TDS actually deducted by the assessee towards M/s DLF Land Ltd.^‟s service charge does not suffice
• Therefore, the CIT(A) and ITAT were wrong in deleting the addition of ₹ 19,09,83,236/- made by the AO.

E) Ruling of Honorable Delhi High Court:

• This Court holds that the CIT(A) and the ITAT rightly set aside the AO^‟s order, ruling that the assessee was not required to deduct TDS on reimbursement expenses paid to M/s DLF Land Ltd.
• The assessee has correctly relied upon this Court^‟s ruling in Industrial Engineering Projects Pvt. Ltd., (supra).
• A Division Bench of this Court in that case specifically held that “reimbursement of expenses can, under no circumstances, be regarded as revenue receipt”
• M/s DLF Land Ltd. had deducted TDS on the payments made by it under various heads on behalf of the assessee.
• The assessee deducted TDS on the service charge paid by it to M/s DLF Land Ltd. Neither provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of expenses, other than what is defined as “income”.

• The ITAT^‟s ruling in this regard is upheld.
• Both questions of law are answered in favour of the assessee and against the revenue.

F) Key Take Away

Section 194C (TDS for “work”) and Section 194J (TDS of income from “professional services”- the latter expression defined expansively by Section 194J (3) Explanation (a)). Neither provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of expenses, other than what is defined as “income”. The law thus obliges only amounts which fulfil the character of “income” to be subject to TDS in such casesǢ for other payments towards expenses, the deduction to those entitled (to be made by the payeee) the obligation to carry out TDS is upon the recipient or payee of the amounts.

(Author can be reached at  CASurajRA@icai.org)

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