2016 (3) TMI 282 - AT - Income Tax

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

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 ... Exemption under section 10(5) - Leave Travel Concession limited to travel within India - Employer's obligation to deduct TDS on payments not exempt - assessee in default under sections 201(1)/201(1A) - Interim judicial order cannot be applied retrospectively to earlier transactions - Computation / rate for TDS deduction on deemed taxable reimbursementExemption under section 10(5) - Leave Travel Concession limited to travel within India - Reimbursement claimed as Leave Travel Concession/LFC for journeys that included foreign travel is not exempt under section 10(5). - HELD THAT: - The Tribunal examined section 10(5) and held that the exemption is confined to travel to any place in India; there is no contention in the statute that travel abroad may be treated as partially exempt by reference to an earlier Indian leg of a multi-destination itinerary. Although an employer may not know the final plan at the time of advance, once bills are settled the employer has or obtains knowledge that the employee travelled abroad and the claim relates to foreign travel; such reimbursement therefore falls outside the statutory exemption. The Tribunal agreed with the findings of the lower authorities that the legislature intended the provision to encourage domestic tourism and not to permit foreign travel claims to be sheltered under section 10(5). [Paras 8, 9]Claimed LTC/LFC reimbursements for journeys involving foreign destinations are not exempt under section 10(5).Employer's obligation to deduct TDS on payments not exempt - assessee in default under sections 201(1)/201(1A) - Assessee-bank was correctly held to be an assessee in default for non-deduction of TDS on reimbursements that were not exempt. - HELD THAT: - Given that reimbursements relating to foreign travel do not qualify for exemption under section 10(5), the employer had an obligation to deduct tax at source when settling the LTC/LFC bills. The Assessing Officer issued notices under sections 201(1) and 201(1A) for failure to deduct; in the absence of an explanation or reply from the assessee, the AO treated the assessee as in default and levied interest under section 201(1A). The Tribunal found no error in treating the bank as in default where it had settled bills that were not covered by the exemption but did not deduct TDS. [Paras 2, 6, 9]The Assessing Officer rightly treated the assessee as in default under sections 201(1)/201(1A) for not deducting TDS on non-exempt reimbursements.Interim judicial order cannot be applied retrospectively to earlier transactions - The assessee could not rely on a later interim order of the Hon'ble Madras High Court (and the consequent internal circular) in respect of claims and reimbursements settled in 2012. - HELD THAT: - The bank placed reliance upon a circular issued after an interim order of the Hon'ble Madras High Court dated 16.2.2015, which directed bankers not to deduct TDS on certain LTC/LFC reimbursements on or after that date. The Tribunal noted that the journeys and bill settlements in the present cases took place in 2012, long before the interim order; accordingly the circular and the interim order could not be invoked as a defence for non-deduction at the relevant time. The Tribunal therefore rejected the contention that the later interim order absolved the assessee of liability for earlier transactions. [Paras 5, 7, 9]Reliance on the 16.2.2015 interim order and the consequent circular is not available for reimbursements settled in 2012; such reliance is therefore rejected.Computation / rate for TDS deduction on deemed taxable reimbursement - Direction of the CIT(A) to recalculates the TDS liability at 10% is confirmed. - HELD THAT: - While the Assessing Officer had applied a flat rate of 30% in computing the tax for deduction, the Commissioner (Appeals) directed recalculation at 10%. The Tribunal found no infirmity in the CIT(A)'s direction and confirmed the reassessment of the TDS liability to be computed at the rate directed by the CIT(A). [Paras 4, 9]The Tribunal confirms the CIT(A)'s direction to recalculate the TDS liability at 10%.Final Conclusion: The appeals are dismissed. Reimbursements for journeys that included foreign travel are not exempt under section 10(5), the bank was rightly treated as in default for failure to deduct TDS on those non-exempt payments, reliance on a later interim order/circular is unavailable for 2012 transactions, and the CIT(A)'s direction to recalculate TDS at 10% is upheld. 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.