2012 (9) TMI 1065 - AT - Income Tax

Deduction of TDS on VISA/MasterCard payments allowed as business expense

The ITAT Mumbai dismissed the appeal by the Assessing Officer, upholding the FAA's decision to allow the deduction of the TDS amount incurred on payments ... Allowability of expenditure incurred pursuant to a contractual liability - treatment of Tax Deducted at Source paid on behalf of payee as business expenditure - discharge of liability undertaken under agreement - binding effect of co-ordinate bench precedentsAllowability of expenditure incurred pursuant to a contractual liability - treatment of Tax Deducted at Source paid on behalf of payee as business expenditure - Whether the amount of TDS paid by the assessee on payments to Visa and MasterCard, being payable under the agreement between the parties, is allowable as a deduction from business income. - HELD THAT: - The Tribunal found on the record that the assessee, by express agreement with Visa and MasterCard International, was required to bear the tax liability and to gross up service charges to cover tax. Payment of TDS was thus made in discharge of a contractual liability and formed part of the consideration for services. Following the principle in CIT v. Standard Polygraph Machines Pvt. Ltd. and the consistent decision of a co ordinate bench of the Tribunal in earlier assessment years, the amount so paid is not a payment of the assessee's advance tax but a business expense incurred pursuant to the contract and therefore deductible. The Tribunal rejected the Assessing Officer's view that the TDS was exclusively the tax liability of Visa/MasterCard and not an allowable expenditure of the assessee.The addition of Rs. 21,61,004 made by the AO was held to be not sustainable and the disallowance was deleted; the claim was allowed as a business deduction.Final Conclusion: The Revenue's appeal is dismissed. The Tribunal upholds the First Appellate Authority's decision that TDS paid under the contractual arrangement with Visa/MasterCard is an allowable business expenditure. Issues involved:The judgment involves the following Issues:1. Allowability of TDS amount as a deduction in the hands of the assessee.2. Interpretation of TDS payments made to VISA and MASTER Card as a business expense.Issue 1: Allowability of TDS amount as a deduction:The appellant appealed against the CIT(A)'s order, contending that the TDS amount of Rs. 21,61,004 on payments to VISA and MASTER Card should not be allowed as a deduction in the hands of the assessee. The AO had added this amount to the income of the assessee company, stating that it was not incurred wholly and exclusively for business purposes.Issue 2: Interpretation of TDS payments as a business expense:The assessee-company, engaged in credit card operations, claimed expenses towards non-reimbursement TDS for Master Card and VISA Card under 'operating expenses'. The AO questioned this claim, stating it was not a liability of the assessee. The FAA, however, held that as per the agreement between the parties, the TDS payments were part of a contractual liability and allowable as a deduction from business expenses.In the judgment, the ITAT Mumbai considered the arguments presented by both parties. The AO acknowledged that the assessee had a contractual obligation to bear the tax liability as per the agreement with VISA and Master Card agencies. The ITAT Mumbai opined that payments made as a result of contractual obligations are allowable expenditures. Additionally, the ITAT Mumbai noted that a previous decision by the 'I' Bench of ITAT had ruled in favor of the assessee on a similar issue.The ITAT Mumbai referred to a case involving Standard Polygraph Machines P. Ltd., where it was held that amounts paid by the assessee to discharge a liability under an agreement were allowable deductions. The ITAT Mumbai also cited decisions by the Madras High Court and Karnataka High Court supporting the view that payments made in discharge of contractual liabilities are allowable expenses.Ultimately, the ITAT Mumbai dismissed the appeal filed by the Assessing Officer, upholding the FAA's decision to allow the deduction of the TDS amount in question. The judgment was pronounced on 18th September 2012.