Withholding tax on deputed personnel payments upheld, but section 40(a)(ia) relief may apply if recipient already paid tax.
A payment described as reimbursement was held liable to tax deduction at source where, on the facts, it was in substance consideration for deputed senior technical staff working on the assessee's projects, so disallowance under section 40(a)(ia) was upheld. The claim that the recipient's memorandum did not cover manpower supply was treated as irrelevant. The second proviso to section 40(a)(ia) was recognised as a curative provision, and relief was directed to be examined if the assessee could show that the recipient had already returned the corresponding income, paid tax on it, and furnished the prescribed certificate. The matter was remitted for verification of those statutory conditions.
Issues: (i) Whether reimbursement of salary and travelling expenses paid to a sister concern for deputed personnel was liable to tax deduction at source and attracted disallowance under section 40(a)(ia) of the Income-tax Act, 1961. (ii) Whether the assessee could claim relief under the second proviso to section 40(a)(ia) where the recipient had paid tax on the corresponding income.
Issue (i): Whether reimbursement of salary and travelling expenses paid to a sister concern for deputed personnel was liable to tax deduction at source and attracted disallowance under section 40(a)(ia) of the Income-tax Act, 1961.
Analysis: The payment was not treated as a simple reimbursement. The deputed personnel were found to be senior and technical staff working for the assessee's projects, and the amounts covered salary as well as domestic and international travel expenses. The Court held that the nature of payment showed that tax was deductible under Chapter XVII-B, and the authorities below were justified in treating the amount as liable to withholding tax. The contention that the recipient company's memorandum did not include manpower supply was held to be irrelevant.
Conclusion: The disallowance under section 40(a)(ia) was upheld on this issue and was against the assessee.
Issue (ii): Whether the assessee could claim relief under the second proviso to section 40(a)(ia) where the recipient had paid tax on the corresponding income.
Analysis: The Court followed the principle that the disallowance mechanism is intended to protect revenue and should not operate where the corresponding income has already suffered tax in the hands of the recipient. It accepted the legal effect of the second proviso as a curative provision and relied on the requirement that the assessee produce the prescribed certificate and establish that the recipient had returned the income and discharged tax liability.
Conclusion: The matter was remitted to the Assessing Officer to verify compliance with the statutory conditions and grant the benefit, if established, in favour of the assessee.
Final Conclusion: The appeal succeeded only to the limited extent of the statutory relief linked to tax payment by the recipient, while the core disallowance on TDS default was otherwise sustained.
Ratio Decidendi: A payment described as reimbursement will still attract withholding tax where, on facts, it is in substance consideration for deputed technical or managerial personnel, but disallowance under section 40(a)(ia) should not survive if the recipient has already offered the income to tax and the statutory conditions for the beneficial proviso are satisfied.
TaxTMI 
AI Drafter ✕
TaxTMI 
