Pure reimbursement of expenses without income element does not trigger TDS under cost recharge arrangements.

Pure reimbursement of expenses under a cost allocation and recharge arrangement does not attract tax deduction at source where the payment contains no income element and is not consideration for carrying out work or rendering services. On that basis, reimbursement of employee costs, rent, corporate recharges and support function expenses was held outside section 194C, and the related disallowance under section 40(a)(ia) was not sustainable. The stated rationale also noted that tax had already been deducted at source by the paying company on third-party payments where required.

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Issues: Whether reimbursement of expenses paid to a group company was liable for tax deduction at source under section 194C of the Income-tax Act, 1961, so as to attract disallowance under section 40(a)(ia).

Analysis: The payment was made under a cost allocation and recharge arrangement for expenses actually incurred by the group company and allocated to the assessee. The amount represented pure reimbursement of costs such as employee expenses, rent, corporate recharges and support function costs, with no income element embedded in the payment. Since the reimbursement did not constitute consideration for carrying out work or rendering services, there was no obligation to deduct tax at source. The view was also supported by the fact that tax had already been deducted at source by the paying company wherever required on payments made to third parties.

Conclusion: The reimbursement was not liable to TDS under section 194C, and the disallowance under section 40(a)(ia) was rightly deleted. The issue was decided in favour of the assessee.

Ratio Decidendi: Pure reimbursement of expenses, without any income element, does not attract tax deduction at source and cannot form the basis of disallowance under section 40(a)(ia).

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