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Allowability of Compensation Paid

Ethirajan Parthasarathy

“A” supplies Raw material to “B”. It so happens that ouput of “B” by using “A”s supply turns out to bad / nonsaleable. To maintain good relationship and keeping commercial expediency in view, “A” agrees to pay compensation to “B” calculated at sale value of defective output. It is proven that “B” output has become non-saleable because of raw material supplied by “A”.

Questions :-

a) Whether “A” can claim deduction u/s 37 of IT Act of Compensation to B

b) Whether “A” is liable to deduct any TDS

Can 'A' Deduct Compensation to 'B' for Defective Output Under Section 37? TDS Applicability Uncertain. 'A' supplies raw materials to 'B', but the output produced by 'B' using these materials is defective and unsaleable. To maintain a good business relationship, 'A' compensates 'B' based on the sale value of the defective output. The discussion raises two questions: whether 'A' can claim a deduction under section 37 of the Income Tax Act for this compensation, and whether 'A' must deduct TDS. The reply suggests that the deduction under section 37 is applicable, but there is uncertainty regarding the applicability of TDS. (AI Summary)
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