2016 (3) TMI 282 - AT - Income Tax

LTC payments for foreign travel not exempt from TDS under Income Tax Act

M/s State Bank of India Versus DCIT (TDS), Kanpur

The Tribunal upheld the decision that Leave Travel Concession (LTC) payments involving foreign travel are not exempt under section 10(5) of the Income Tax ... Qualification for exemption u/s 10(5) - LTC paid to the employees involving foreign travel - TDS on the payment of LTC to the employees - Held that:- As per provisions of section 10(5) of the Act, only that reimbursement of travel concession or assistance to an employee is exempted which was incurred for travel of the individual employee or his family members to any place in India. Nowhere in this clause it has been stated that even if the employee travels to foreign countries, exemption would be limited to the expenditure incurred to the last destination in India In the instant case the employees of the assessee have travelled outside India in different foreign countries and raised claim of their expenditure incurred therein. No doubt, the assessee may not be aware with the ultimate plan of travel of its employees, but at the time of settlement of the LTC/LFC bills, complete facts are available before the assessee as to where the employees have travelled, for which he has raised the claim; meaning thereby the assessee was aware of the fact that its employees have travelled in foreign countries, for which he is not entitled for exemption under section 10(5) of the Act. Thus, the payment made to its employees is chargeable to tax and in that situation, the assessee is under obligation to deduct TDS on such payment, but the assessee did not do so for the reasons best known to it. We have also carefully examined the Circular placed by the ld. counsel for the assessee during the course of hearing, in which a reference was made to the interim order of the Hon’ble Madras High Court dated 16.2.2015. Through the interim order, the Hon’ble Madras High Court has permitted the bankers not to deduct TDS on or after 16.2.2015 on the amount paid/reimbursed to the employees of the bank in respect of LTC/HTC availed where the employee has visited a foreign city/country, irrespective of the fact whether the LFC bills were submitted and paid prior to 16.2.2015; meaning thereby this Circular was passed consequent to the interim order of the Hon’ble Madras High Court. But in the present case, the journey was undertaken in the year 2012 and the bills were settled during that year; meaning thereby at the relevant point of time when the bills were settled, there was no order of the Hon’ble Madras High Court and the assessee was under obligation to deduct TDS on the reimbursement of expenditure incurred by the assessee on foreign travel. In the light of these facts, we are of the considered opinion that the Revenue has rightly held the assessee to be in default, as the assessee has not deducted TDS intentionally on the reimbursement of expenditure incurred on LTC/LFC. Moreover, the ld. CIT(A) has directed the Assessing Officer to recalculate the liability of TDS at 10%. - Decided against assessee Issues:1. Exemption of LTC involving foreign travel under section 10(5) of the Income Tax Act.2. Liability for TDS on LTC payments to employees.3. Interpretation of rules regarding foreign travel as part of LTC package.4. Application of correct tax rate for TDS.5. Validity of the Circular from the Dy. Managing Director of State Bank of India.Issue 1: Exemption of LTC involving foreign travel under section 10(5) of the Income Tax Act:The case involved the assessee's appeal against the CIT(A)'s decision regarding the exemption of Leave Travel Concession (LTC) payments involving foreign travel under section 10(5) of the Income Tax Act. The Assessing Officer contended that since the Act only exempts travel expenses within India, the assessee was liable for TDS on LTC payments with foreign destinations. The Tribunal upheld this view, emphasizing that the Act does not extend the exemption to foreign travel. Despite the employee's ultimate travel plans being unknown to the employer, the Tribunal held that the employer should have been aware of the foreign travel when settling LTC bills, obligating TDS deduction. The Tribunal rejected the argument that the Circular from the Dy. Managing Director of State Bank of India exempted the assessee from TDS liability, as the journey occurred before the Circular's issuance.Issue 2: Liability for TDS on LTC payments to employees:The Assessing Officer issued notices to the assessee for not deducting TDS on LTC payments to employees with foreign travel. As the Act only exempts travel expenses within India, the Tribunal affirmed the assessee's default in not deducting TDS on such payments. The Tribunal emphasized the employer's obligation to deduct TDS based on complete travel details available during LTC bill settlement, even if the foreign travel was not initially known. The Tribunal also noted that the Circular exempting TDS issued after the journey did not apply retroactively to the assessee's case.Issue 3: Interpretation of rules regarding foreign travel as part of LTC package:The Tribunal analyzed the provisions of section 10(5) of the Act, emphasizing that the exemption was intended to encourage domestic travel and not foreign trips. It highlighted that the Act does not limit the exemption to the last destination in India, thus denying exemption for foreign travel expenses. The Tribunal concluded that the assessee's employees' foreign travel claims were taxable, and TDS should have been deducted accordingly.Issue 4: Application of correct tax rate for TDS:The Tribunal acknowledged the assessee's contention regarding the incorrect application of a flat 30% rate for TDS calculation. While the CIT(A) directed recalculating TDS at 10%, the Tribunal upheld this decision, ensuring the correct tax rate application for TDS on LTC payments.Issue 5: Validity of the Circular from the Dy. Managing Director of State Bank of India:The assessee relied on a Circular from the Dy. Managing Director of State Bank of India and an interim order from the Madras High Court to argue against TDS liability. However, the Tribunal found that the Circular's exemption from TDS did not apply retroactively to the assessee's case, as the journey occurred before the Circular's issuance. Therefore, the Tribunal dismissed the appeals and confirmed the CIT(A)'s decision regarding TDS liability on LTC payments involving foreign travel.