ITAT ruling on TDS deduction for expense reimbursements and advertising expenses

The ITAT upheld the deletion of disallowance for non-deduction of TDS on reimbursement of expenses, following the decision that such reimbursements on a cost-to-cost basis without markup do not require TDS deduction. Additionally, the ITAT allowed the assessee's appeal regarding the disallowance of advertising and promotion expenses, remitting the matter for verification of compliance with the second proviso to Section 40(a)(ia) for retrospective application. The ITAT dismissed the Revenue's appeal and remanded the case to the AO for further verification.

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Issues Involved:
1. Deletion of disallowance for non-deduction of TDS under Section 194C of the Income Tax Act, 1961.
2. Disallowance of advertising and promotion expenses for non-deduction of TDS under Section 40(a)(ia) read with Section 194 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance for Non-Deduction of TDS under Section 194C:

Facts:
The assessee reimbursed expenses to group entities without deducting TDS. The AO disallowed these expenses under Section 40(a)(ia) of the Act, aggregating to Rs. 11,25,35,749/-. The CIT(A) deleted this disallowance, relying on the ITAT's decision for AY 2008-09, which held that the provisions of Section 40(a)(ia) are not applicable to reimbursement of expenses made to the assessee's sister concerns.

CIT(A) Decision:
The CIT(A) deleted the addition by following the ITAT's decision for AY 2008-09, stating that the reimbursement of expenses was on a cost-to-cost basis without any markup, and thus did not warrant TDS deduction.

ITAT Decision:
The ITAT upheld the CIT(A)'s decision, confirming that the issue is covered by the Tribunal's earlier decision in the assessee's own case for AY 2008-09 and 2009-10. The Tribunal reiterated that disallowance cannot be made for reimbursement of expenses on a cost-to-cost basis without any markup, as it does not constitute payment for any contract work.

2. Disallowance of Advertising and Promotion Expenses for Non-Deduction of TDS:

Facts:
The AO disallowed advertising and promotion expenses amounting to Rs. 1,89,16,055/- paid to Team Lease Service Pvt. Ltd. for non-deduction of TDS under Section 40(a)(ia). The CIT(A) confirmed this disallowance.

Assessee's Argument:
The assessee argued that the second proviso to Section 40(a)(ia), inserted by the Finance Act 2012, should be given retrospective effect. The proviso states that if the payee has filed its return of income and paid taxes on the income received, the payer should not be treated as an assessee in default.

Legal Precedent:
The assessee relied on the Hon'ble Delhi High Court's decision in CIT v. Ansal Landmark Townships Pvt. Ltd., which held that the second proviso to Section 40(a)(ia) is declaratory and curative, and should be applied retrospectively.

ITAT Decision:
The ITAT accepted the assessee's argument and noted that the assessee had provided details showing that the payee had filed its return of income, taken into account the sum received, and paid the tax due. The ITAT remitted the matter back to the AO for verification of the certificate and documents, including Form 26A and Annexure A, certified by a chartered accountant, to ensure the payee had appropriately offered the amount to tax.

Conclusion:
The ITAT dismissed the Revenue's appeal concerning the deletion of disallowance for non-deduction of TDS on reimbursement of expenses. It allowed the assessee's appeal for statistical purposes, remitting the matter back to the AO for verification of compliance with the provisions of Section 40(a)(ia) and the corresponding amendments and notifications. The order was pronounced in the open court on 16-03-2018.

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