Reimbursement under a cost-sharing arrangement is not subject to TDS, and curative provisos protect compliant payee transactions.

Cross-charges paid on a cost-to-cost basis under a cost-sharing arrangement, with no markup or profit element, were treated as reimbursement of expenditure rather than consideration for income-bearing services, so no tax deduction at source was required and disallowance under Section 40(a)(ia) was not justified. The service tax charged on the transaction did not change its reimbursement character. In any event, where the payee had filed its return, included the amount, paid the due tax, and furnished the prescribed accountant's certificate, the beneficial and curative provisos to Sections 201(1) and 40(a)(ia) prevented the payer from being treated as an assessee in default, and disallowance could not be sustained.

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Issues: (i) whether cross-charges paid under a cost-sharing arrangement, without markup or profit element, were purely reimbursement and therefore not liable to tax deduction at source under Section 40(a)(ia) of the Income-tax Act, 1961; (ii) whether, in view of the first proviso to Section 201(1) and the second proviso to Section 40(a)(ia), disallowance could be made where the payee had filed its return, accounted for the amount, paid due tax, and furnished the prescribed accountant's certificate.

Issue (i): whether cross-charges paid under a cost-sharing arrangement, without markup or profit element, were purely reimbursement and therefore not liable to tax deduction at source under Section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The payment arose from a cost-sharing agreement under which services and facilities were shared on a cost-to-cost basis. The relevant expenditure was classified as staff cost, travelling, advertising and promotional expense, and other miscellaneous expense. The recipient had deducted tax at source where applicable on third-party payments and had not claimed any deduction for the expenditure in question. On these facts, the payment was held to be reimbursement of expenditure without any income or profit component. The charging of service tax did not alter the intrinsic character of the payment, and the nature of the transaction remained reimbursement rather than consideration for income-bearing services.

Conclusion: The payment was not liable to tax deduction at source and no disallowance under Section 40(a)(ia) was warranted on this ground, in favour of the assessee.

Issue (ii): whether, in view of the first proviso to Section 201(1) and the second proviso to Section 40(a)(ia), disallowance could be made where the payee had filed its return, accounted for the amount, paid due tax, and furnished the prescribed accountant's certificate.

Analysis: The provisos were treated as beneficial, declaratory, and curative in nature. Their effect is that where the payee has filed its return under Section 139, included the relevant income, paid the due tax, and the prescribed certificate is furnished, the payer is not to be treated as an assessee in default and is deemed to have deducted and paid the tax for the purposes of Section 40(a)(ia). The factual position satisfied these conditions, and the proviso operated retrospectively.

Conclusion: No disallowance could be sustained on this ground either, in favour of the assessee.

Final Conclusion: The Revenue's challenge failed because the impugned cross-charge was a reimbursement without income element and the statutory relief under the provisos also applied, so the disallowance was not sustainable.

Ratio Decidendi: A reimbursement paid on a cost-to-cost basis without any income or profit element is not subject to tax deduction at source under Section 40(a)(ia), and where the payee has returned the income, paid tax, and furnished the prescribed certificate, the payer cannot be treated as an assessee in default by reason of the retrospective, curative provisos to Sections 201(1) and 40(a)(ia).

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