2025 (8) TMI 1438 - AT - Income Tax

Assessee's appeals dismissed as additions under s.40(a)(ia) upheld for failure to deduct TDS under s.194C

Muthoot Fincorp Limited Versus JCIT, Special Range, Thiruvananthapuram

Muthoot Fincorp Limited Versus JCIT, Special Range, Thiruvananthapuram - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether payments characterized as composite contract payments including reimbursements attract tax deduction at source under section 194C and consequent disallowance under section 40(a)(ia) for failure to deduct TDS. 2. Whether amounts treated as mere reimbursements of expenditure (and billed separately) negate the obligation to deduct tax at source under the relevant withholding provisions. 3. Whether the principle of consistency (following an earlier assessment outcome in a related assessment year) bars reassessment/addition in a subsequent year where facts and law are reassessed. 4. Whether the second proviso to section 40(a)(ia) (as inserted by Finance Act, 2012 with effect from 01.04.2013) operates retrospectively to protect payees/payers in assessment years prior to its effective date, and whether benefit of that proviso can be claimed in absence of prescribed certificate/ application. 5. Whether subsequent payment of tax by the recipient or actual payment of the disputed sums by the payer prevents invocation of section 40(a)(ia). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 194C and disallowance under section 40(a)(ia) where payments under an agreement are composite in nature Legal framework: Section 194C mandates deduction of TDS on payments to contractors; section 40(a)(ia) disallows expenditure where TDS required to be deducted is not deducted. Safeguards for payee exist by way of sections 197/197A for lower/ no deduction certificates. Precedent treatment: Principle in Transmission Corporation (A.P.) Ltd. (Apex Court) establishes that withholding provisions enforce tax on gross sums even if whole sum does not represent taxable income; failure to deduct attracts section 40(a)(ia) automatically. Authorities cited (Privy Council and Supreme Court decisions) support strict compliance with statutory modes. Interpretation and reasoning: The agreement between payer and service provider (five-year agreement) treated the payments as for management/consultancy services on a composite basis; statutory mandate under section 194C requires deduction on gross sums as per legislative intent. The payer failed to produce evidence that the payments were bifurcated contractually into non-taxable reimbursements and taxable fees such that no obligation to deduct arose. The Tribunal applies the well-established rule that where law prescribes a manner (deduction on gross sums), it must be followed; unilateral bifurcation by recipient/payee does not discharge payer's statutory obligation. Ratio vs. Obiter: Ratio - failure to deduct TDS on gross composite payments under an enforceable contract attracts disallowance under section 40(a)(ia). Obiter - reference to procedural safeguards (sections 197/197A) as protective mechanisms for payee if certificate obtained. Conclusions: Disallowance under section 40(a)(ia) on the composite payments upheld; obligation to deduct on gross amounts stands where contract does not legally separate taxable and pure reimbursable components. Issue 2 - Characterization of amounts as mere reimbursements and effect on TDS obligation Legal framework: Tax law requires substantive proof to treat amounts as reimbursements not liable to TDS; withholding sections do not generally permit unilateral bifurcation absent contractual/ documentary basis and/or certificate under sections 197/197A. Precedent treatment: CBDT Circular No. 715 (Q&A) and judicial decisions emphasize that TDS is to be imposed on gross bills including reimbursements where the contractual structure indicates composite payment; recipient's accounting of income does not absolve payer from deduction duty. Interpretation and reasoning: The assessee failed to discharge onus of proving that amounts were pure reimbursements - separate billing alone is insufficient without contractual clarity or AO-accepted bifurcation. The Tribunal notes statutory intent that obligation to deduct exists unless appropriate certificate/ determination is obtained; absent such steps, payer remains liable. Ratio vs. Obiter: Ratio - mere labeling/bifurcated billing does not eliminate obligation to deduct TDS; payer must establish factual and legal basis for reimbursements to avoid withholding. Obiter - guidance that sections 197/197A provide remedy to payee to obtain prior determination. Conclusions: Payments could not be treated as mere reimbursements for withholding purposes; TDS obligation on gross sums remains and disallowance is justified. Issue 3 - Application of principle of consistency where an earlier assessment year accepted the payee/payer position Legal framework: Consistency in tax assessments is desirable but cannot trump correct application of substantive law; res judicata principles do not automatically apply across assessment years in tax proceedings. Precedent treatment: Tribunal and courts have held that acceptance in one year does not preclude re-examination in another year if facts or law warrant it; revenue may revisit obligations to apply correct legal position. Interpretation and reasoning: The assessee relied on an earlier assessment outcome (AY 2008-09) where AO did not make addition; however, the Tribunal finds no identical factual foundation established for automatic application of consistency. Principle of consistency cannot override statutory prescription and settled legal position regarding TDS obligations. The Tribunal requires factual parity and proper proof to apply consistency; absent that, reassessment/addition is permissible. Ratio vs. Obiter: Ratio - prior acceptance does not bind subsequent assessments absent identical facts and established legal finality; consistency cannot defeat statutory withholding obligations. Obiter - factual foundation is necessary to invoke consistency. Conclusions: Principle of consistency in the facts of the matter does not preclude addition; reliance on earlier assessment was insufficient to negate section 40(a)(ia) disallowance. Issue 4 - Retrospective operation of second proviso to section 40(a)(ia) and requirement of certificate/ application Legal framework: The second proviso to section 40(a)(ia) (inserted by Finance Act, 2012 with effect from 01.04.2013) deems tax to have been deducted where certain conditions (including filing of return by recipient) are met; statutory amendments are prospective unless clearly remedial/curative. Precedent treatment: Court(s) (Kerala High Court) and decisions distinguish remedial/curative amendments (which may be read retrospectively) from provisions conferring new benefits which are prospective. Prudential Logistics and related reasoning confirm prospective operation where effective date is specified and provision is not curative. Interpretation and reasoning: The proviso was inserted with a clear effective date from 01.04.2013 and confers an additional benefit; it is not shown to be curative or remedial so as to warrant retrospective operation. Moreover, the proviso's benefit requires compliance (certificate/ application) which was not done; absence of such application/certificate precludes reliance on the proviso even prospectively. Ratio vs. Obiter: Ratio - second proviso to section 40(a)(ia) is prospective (effective 01.04.2013) and its benefit cannot be claimed for earlier years; benefit also conditional on prescribed procedural compliance (certificate/application). Obiter - references to Allied Motor and 43B jurisprudence explain limits of retrospective construction. Conclusions: The second proviso does not apply retrospectively to negate disallowance in the year under consideration; further, no procedural certificate/application was filed to avail the proviso's benefit. Issue 5 - Effect of recipient's subsequent payment of tax or payer's payment status on section 40(a)(ia) disallowance Legal framework: Section 40(a)(ia) operates automatically on payer's failure to deduct TDS; subsequent actions by recipient (payment of tax) or payer (having paid amounts) do not negate statutory consequence unless statutory safeguards/procedures are complied with. Precedent treatment: Distinction drawn between compensatory proceedings under section 201(1) and disallowance under section 40(a)(ia); case law shows subsequent payment by recipient does not absolve payer from disallowance under section 40(a)(ia). Interpretation and reasoning: The Tribunal holds that the categorical language of section 40(a)(ia) attracts disallowance on payer's default irrespective of recipient's later tax payment; section 201(1) jurisprudence is not germane to section 40(a)(ia) consequences. Ratio vs. Obiter: Ratio - recipient's subsequent tax compliance or payer's payment of disputed sums does not prevent disallowance under section 40(a)(ia). Obiter - elucidation of difference in object between sections 201(1) and 40(a)(ia). Conclusions: Subsequent payment of tax by recipient or payment of the amounts by the payer does not preclude disallowance under section 40(a)(ia). Overall Conclusion The Tribunal upholds the addition/disallowance under section 40(a)(ia) for failure to deduct tax at source on the disputed payments; alternative contentions (reimbursement characterization, consistency with earlier year, retrospective effect of proviso, recipient's tax payment) are rejected for the reasons above. The appeals are dismissed.