Brief facts: Some employees (management as well as non-management cadre) who are in the payroll of group companies are working for Parent company. Group companies recover cost of such employees from Parent company by raising debit note on actual cost basis.

Issue: Whether reimbursement of salary paid by Parent company to group companies would be liable to TDS deduction?

POSITION UNDER INCOME TAX ACT, 1961 “ACT”

Section 194C of ACT

“Any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract 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-

(i) One percent where the payment is being made or credit is being given to an individual or a HUF;

(ii) Two percent where the payment is being made or credit is being given to a person other than person mentioned in (i) above, of such sum as income-tax on income comprised therein.”

CBDT vide answer to ques. 30 of explanatory notification no. Circular No. 715, dated 8-8-1995 clarifies that “Section 194C & Section 194J refer to any sum paid obviously, reimbursement cannot be deducted out of gross amount of bill for the purpose of tax deduction at source.”

Section 194J of ACT

“Any person, not being an individual or a Hindu Undivided family, who is responsible for paying to a resident any by way of-

(a) Fees for professional services, or

(b) Fees for technical services, or

(bb) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or

(c) royalty, or

(d) any sum referred to in clause (va) of section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by any other mode, whichever is earlier, deduct an amount equal to 10% of such sum as income-tax on income comprised therein”
Explanation 2 of clause (vii) of sub section (1) of section 9 of the ACT, defines “fees for technical services, means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) “

The legal position and the interpretation of above sections & circular is explained as under:

The meaning of term “work” has not been expressly defined in the ACT. However it has been defined u/s 194C in an inclusive manner to cover five categories of services along with work contract service as per “Rule of Literal Interpretation” while construing statutes the cardinal rule is to construe its provisions literally and grammatically giving the words their ordinary and natural meaning unless the statute in the context intend to provide otherwise.

Work as per the Oxford dictionary has these meanings “Activity involving mental or physical effort done in order to achieve a result”, “Work as a means of earning income; employment”, “The place where one is employed”, “The period of time one spends in paid employment”. Hence it can be said that literal and grammatical meaning of work is activity which is to be done for some consideration/income.

Since in the transaction referred in facts above, there is no element of income is involved in the debit note raised by group companies, the transaction should not be liable to TDS provisions. Same interpretation would apply to Sec 194J as well.

The intention of law in TDS provisions is to develop a mechanism of advance collection of income tax on income of persons and not to deduct tax on each & every transaction. The same intention is also accepted by Judiciary of India as well. Hon’ble High court of Gujarat in the case of Commissioner of Income Tax-III v. Gujarat Narmada Valley Fertilizers Co. Ltd. Dated 25th June, 2013 where it is pronounced that “This court is also supported in its reasoning by the text of Section 194C (TDS for “work”) and Section 194J (TDS of income from “professional services”. 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 cases”

Same interpretation is also followed in these cases as well, 1) CIT XI vs M/s DLF Commercial project corporation (Delhi); 2) Industrial Engineering Projects Pvt. Ltd. (Delhi); 3) CIT v. Tejaji Farasram Kharawalla Ltd., [1968] 67 ITR 95 (SC)

On the issue of Circular No. 715, dated 8-8-1995, Delhi bench of ITAT in the case of ITO v. Dr. Willmar Schwabe India (P) Ltd [2005] while deciding the scope of circular held that “The CBDT Circular No. 715, dt. 8th Aug., 1995, relied upon by the AO in support of his case on this issue 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 and the same, therefore, was not applicable to the facts of the present case, where bills were raised separately by the consultants for reimbursement of actual expenses incurred by them”

On the basis of above discussion it is concluded that since as per facts there is no element of profit involved in the debit note raised by group companies. The transaction is not liable for TDS deduction.

*****

Disclaimer: Group companies while making payment to employees should consider TDS provisions while making payment of salary to employees.

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