Assessee wins appeal on TDS disallowance under section 40(a)(ia) for food supply and business promotion expenses

ITAT Jaipur allowed assessee's appeal on TDS disallowance under section 40(a)(ia). For food supply bills, tribunal held that supply of food packets constituted goods supply subject to GST, not catering services, hence section 194C TDS provisions did not apply. Regarding business promotion expenses and employee rewards, tribunal relied on Ratnagiri Impex precedent establishing that hotel facilities to customers don't constitute 'work' under section 194C, making TDS deduction unnecessary. AO's disallowance was reversed as transactions fell outside TDS requirements.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the Assessing Officer (AO) erred in disallowing Rs. 22,54,737/- under section 40(a)(ia) of the Income Tax Act, 1961 (the Act) on account of non-deduction of Tax Deducted at Source (TDS) on catering expenditure for supply of food packets, despite submission of Form 26A and evidence that the deductee had declared the income and paid tax.

(b) Whether the AO erred in disallowing Rs. 2,09,794/- under section 40(a)(ia) on account of non-deduction of TDS on business promotion expenses, including hotel bills, e-vouchers, and conference attendance expenses, claimed as business promotion but contested as liable for TDS under section 194C of the Act.

(c) Whether the Dispute Resolution Panel (DRP) erred in not providing specific directions to the AO or Transfer Pricing Officer (TPO) under section 144C of the Act, leaving the AO to ascertain disallowance based on evidence already presented.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Disallowance under section 40(a)(ia) for non-deduction of TDS on catering expenditure

Relevant Legal Framework and Precedents: Section 194C of the Act requires deduction of TDS on payments to contractors for carrying out any work, including supply of labor. Section 40(a)(ia) mandates disallowance of expenses where TDS is not deducted as required. The proviso to section 40(a)(ia) and section 201(1) provide relief if the deductee has declared the income and paid tax.

Court's Interpretation and Reasoning: The AO treated the supply of food packets as catering service falling under section 194C, disallowing 30% of the expenditure. The DRP agreed that section 194C applied but directed AO to verify if the deductee had declared the income and paid tax, which could negate disallowance under the proviso.

The AO, however, did not consider the deductee's tax compliance and disallowed the entire amount. The Tribunal examined invoices and found that the transaction was for supply of food packets (goods) and not catering services (services). The supply was subject to GST and was on principal-to-principal basis without any contract for work or service.

Key Evidence and Findings: Invoices showed supply of food packets, not catering services. Form 26A and computation of income submitted by the assessee demonstrated that the deductee had declared the income and paid tax. The AO's failure to verify these facts was noted.

Application of Law to Facts: Since the transaction was supply of goods and not a contract for carrying out work or service, section 194C was not applicable. Further, as the deductee had declared the income and paid tax, the proviso to section 40(a)(ia) applied, preventing disallowance.

Treatment of Competing Arguments: Revenue argued that supply of food packets amounted to catering service under section 194C. The Tribunal rejected this, emphasizing the nature of transaction as supply of goods and the presence of GST, which negates the applicability of section 194C.

Conclusion: The disallowance of Rs. 22,54,737/- under section 40(a)(ia) was not justified and was deleted.

Issue (b): Disallowance under section 40(a)(ia) for non-deduction of TDS on business promotion expenses

Relevant Legal Framework and Precedents: Section 194C applies to payments for carrying out any work, including catering, advertising, broadcasting, carriage of goods, manufacturing or supplying a product as per customer specification. Circular No. 715/1995 and judicial precedents such as the decision of the Bangalore ITAT in Ratnagiri Impex (P.) Ltd. v. DCIT and Bombay High Court in East India Hotels Ltd. v. CBDT restrict the scope of section 194C to specific service contracts and exclude hotel accommodation payments from its ambit.

Court's Interpretation and Reasoning: The AO disallowed 30% of business promotion expenses amounting to Rs. 2,09,794/- on the ground of non-deduction of TDS under section 194C. The DRP directed AO to re-verify the evidence, noting the expenses were business-related and not employee perquisites.

The Tribunal examined the ledger and invoices, noting that the major part of the expenses related to hotel room bookings, attendance at a conference, and e-vouchers. It was found that hotel room booking payments are not liable for TDS under section 194C, supported by the Bangalore ITAT decision in Ratnagiri Impex and the Bombay High Court ruling in East India Hotels Ltd.

Key Evidence and Findings: The expenses included Rs. 4,87,740/- for hotel bookings, Rs. 31,574/- for conference attendance reimbursements, and Rs. 1,80,000/- for Amazon vouchers. The Tribunal noted that hotel accommodation payments are treated as rent under section 194-I, not as work under section 194C. Conference fees below threshold limits and reimbursements to employees are not liable for TDS under section 194C.

Application of Law to Facts: The payments did not fall within the ambit of section 194C as they were not for carrying out any work or service contract. Circular No. 715 clarified that hotel accommodation payments are subject to TDS under section 194-I, not 194C. The Tribunal applied these principles to hold that the disallowance was not justified.

Treatment of Competing Arguments: Revenue relied on circulars and the AO's findings to justify disallowance under section 194C. The Tribunal distinguished the nature of expenses and relied on binding precedents to reject the applicability of section 194C to hotel bookings and related expenses.

Conclusion: The disallowance of Rs. 2,09,794/- under section 40(a)(ia) was deleted.

Issue (c): Alleged error by DRP in not providing specific directions under section 144C

Relevant Legal Framework and Precedents: Section 144C requires the DRP to provide specific directions to the AO or TPO after considering objections by the assessee. The purpose is to ensure clarity and avoid arbitrary assessments.

Court's Interpretation and Reasoning: The assessee contended that the DRP erred by leaving the AO to ascertain disallowance without specific directions. The Tribunal noted that since the substantive issues were decided on merits, this technical ground became academic.

Conclusion: No separate determination was necessary on this ground as the substantive issues were resolved in favour of the assessee.

3. SIGNIFICANT HOLDINGS

On the applicability of section 194C to supply of food packets, the Tribunal held:

"Considering that aspect of the matter ground no. 1 raised by the assessee is allowed."

The Tribunal emphasized the distinction between supply of goods and provision of catering services, noting the presence of GST on the supply of food packets as a key factor negating the applicability of section 194C.

On business promotion expenses, the Tribunal held:

"Respectfully following the judgement as referred herein above direct the ld. AO to delete the addition of Rs. 2,09,794/-."

This was based on the precedent that hotel accommodation payments are not covered under section 194C but under section 194-I, and that other expenses such as conference fees and vouchers were not liable for TDS under section 194C.

The Tribunal further observed:

"Since we have considered ground no.1 & 2 on merits of the issue ground no. 3 being the technical ground becomes academic."

Core principles established include:

• The nature of a transaction (supply of goods vs. provision of service) is crucial to determine applicability of TDS provisions.
• Section 194C applies narrowly to contracts for carrying out work or services and does not extend to supply of goods or hotel accommodation payments.
• The proviso to section 40(a)(ia) protects the deductor from disallowance if the deductee has declared the income and paid tax.
• DRP directions under section 144C must be followed, but failure to provide specific directions may become academic if substantive issues are decided.

Final determinations:

(i) Disallowance of Rs. 22,54,737/- on catering expenditure under section 40(a)(ia) was deleted.

(ii) Disallowance of Rs. 2,09,794/- on business promotion expenses under section 40(a)(ia) was deleted.

(iii) The technical ground regarding DRP directions was rendered academic.

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