In a recent case, a professional service provider raised concerns about the applicability of TDS on the reimbursement of expenses incurred in connection with services rendered during a depot audit. Separate invoices were raised for out-of-pocket expenses, but despite this, TDS was deducted. The issue centered around whether these reimbursements should attract TDS, particularly in light of the provisions introduced by Section 194R of the Income Tax Act?
Observations
Before insertion of Sec. 194R
- In the instant case, reimbursement of expenses has been made to a chartered account who has incurred expenses in the course of rendering professional services. In this connection, it is pertinent to refer Question No. 30 of CBDT Circular 715 dated 08-08-1995 where it has been clarified that sections 194C and 194J refer to any sum paid and therefore TDS u/s 194C and 194J is applicable on gross amount of bill including reimbursement of expenses.
- However, in the instant case, separate invoice has been raised for out of pocket expenses. Various decisions has rendered wherein it has been held that no TDS shall be deducted in case of reimbursement of expenses for which separate bills were raised and the provisions of Section 40(a)(ia) is not applicable to such payments. In this regard, reference is drawn to decision of Hon’ble Delhi ITAT in the case of ITO –vs-. Dr. Willmar Schwabe India (P) ltd (2005) 3 SOT 71 (Del) wherein it has been held that reimbursement of out of pocket expenses for which bill was separately raised by consultant did not attract sec. 194J. Further, the CBDT Circular No. 715, dated 08-08-1995 was applicable only in the cases where bills are raised for the gross amount inclusive of professional fees as well as reimbursement of actual expenses.
- Similar view has been taken in the following cases:
Zephyr Biomedicals -vs.- JCIT [2020] 122 taxmann.com 124 (Bombay HC),
Om Satya Exim Pvt. Ltd –vs- ITO (ITA No.1335/Ahd/2010) dated 13-05-2011
ACIT -vs.- Grandprix Fab P. Ltd., (2010) 128 TTJ 60 (Del)
Thus, before the introduction of Section 194R, there was substantial judicial support for not deducting TDS on reimbursements, provided the expenses were invoiced separately.
After insertion of Sec. 194R –
Section 194R, which came into effect on July 1, 2022, brought a significant change in the treatment of benefits or perquisites arising from business or profession. It mandates that any person providing a benefit or perquisite to a resident must deduct tax at 10% of the value of such benefit or perquisite.
In this regard, reference is drawn to provisions of Sec. 194R of the Act which reads as under:
(1) Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten percent of the value or aggregate of value of such benefit or perquisite:
Provided that ……………………
Provided further that the provisions of this section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees.
In this connection, CBDT vide Circular No. 12 of 2022 dated 16-06-2022 has issued guidelines outlining in detail, what constitutes benefit/ perquisites which shall be subject to TDS. As per question No. 7 of the aforesaid circular, TDS u/s 194R is applicable on reimbursement of out of pocket expenses where the invoice is in name of service provider.
Question 7: Whether reimbursement of out of pocket expense incurred by service provider in the course of rendering service is benefit/perquisite?
Answer: Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.
………
Let’s assume that a consultant is rendering service to a person “X” for which he is receiving consultancy fee. In the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to “X”. Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company “X”. In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company ” X”, it is benefit or perquisite provided by “X” to the consultant.
However, sometimes the invoice is obtained in the name of service recipient (say Mr. X) and accordingly, if paid by the service provider (say Mr. Y), is reimbursed by Mr. X. The expense paid by Mr. Y (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to Mr. X and the invoice is in the name of Mr. X, then the reimbursement made by Mr. X being the service recipient will not be considered as benefit/perquisite for the purposes of section 194R of the Act.
If the invoice is not in the name of Mr. X and the payment is made by Mr. X directly or reimbursed, it is the benefit/perquisite provided by Mr. X to Mr. Y for which deduction is required to be made under section 194R of the Act.
Subsequently, CBDT has issued further clarifications vide Circular No. 18 of 2022 dated 13-09-2022 to provide additional guidelines to remove difficulties. The said is Circular is in continuation of Circular No. 12 of 2022 issued earlier on 16-06-2022.(Both the circulars are attached for your reference). Vide Question No. 2 of Circular No. 18 of 2022 dated 13-09-2022, CBDT has given further clarification which is enumerated hereunder:
Question 2: Refer question No 7 of the Circular No. 12 of 2022– If under the terms of the agreement, the expense incurred by the service provider is the cost of service recipient and such cost is reimbursed by the service recipient to service provider, how is it benefit/perquisite if the bill is not in the name of service recipient?
Answer: In answer to question No 7 of the Circular No. 12 of 2022, it has been clarified that any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.
Now, if service provider incurs some expense in the course of rendering service to service recipient and the bill is in the name of service provider, then in substance (irrespective of the terms of the agreement) this expense is the liability of the service provider and not of service recipient. It is service provider who gets input credit of GST included in the expenses incurred by him. If it was the liability of the service recipient, then GST input credit would have been allowed to him (service recipient) and not to service provider. Hence, the answer to question No 7 in the Circular No. 12 of 2022. Correctly clarifies that in such a situation reimbursement of such an expense is benefit/perquisite on which tax is required to be deducted under section 194R of the Act.
Subsequently, it has been brought to the notice that in GST, if service provider incurs an expense as “pure agent”, then GST input credit is allowed to service recipient and not to service provider. ……………. Under the GST Valuation Rules 2017 “pure agent” is given the following meaning.
“pure agent” means a person who
a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;
b) neither intends to hold nor holds any title to the goods or services or both, so procured or provided as pure agent of the recipient of supply;
c) does not use for his own interest such goods or services so procured; and
d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.
The GST valuation rules provide that expenditure incurred as a pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. ………. However, in the abovementioned case of “pure agent”, if all the conditions are satisfied, the GST input credit is allowed to the recipient and it is not considered as supply of the pure agent, it is clarified that amount incurred by such “pure agent” for which he is reimbursed by the recipient would not be treated as benefit/perquisite for the purpose of section 194R of the Act
The above Circular clarifies that if any expenditure is incurred by the service provider, in the course of rendering service to Service recipient and the invoice is in the name of service provider and service provider gets the GST input tax credit then the same shall be treated as benefit/perquisite on which tax is deductible u/s 194R. The incidental expenses will be included in the value of taxable supply under GST law in view of 15(2)(c) of CGST Act 2017 which reads as under:
(2) The value of supply shall include:
…………………
(c) Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services
The service provider is not claiming any reimbursement of expenses incurred as a pure agent as supplier is not procuring any additional goods or services on behalf of service recipient and is itself consuming the services availed, thus the same will not be excluded for GST purpose as per Rule 33 of CGST Valuation Rules.
Further it is worthwhile to note that Question No. 3 of Circular No. 18 of 2022 dated 13-09-2022 further clarifies that if out of pocket expenses (reimbursement) are already part of the consideration in the bill on which tax is deducted under the relevant provisions of the Act, other than section 194R, in accordance with the Circular No 715 dated 8th August 1995, it is clarified that there will not be further liability for tax deduction under section 194R of the Act.
Conclusion
Therefore in our case, tax is not deductible u/s 194J since separate bills has been raised, tax has to be deducted u/s 194R of the Act.
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