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

[DR.MARIAPPAN GOVINDARAJAN]

In my view claim of deduction under section 37 of Income Tax Act is applicable.

I am also doubt whether TDS is applciable in this case.

AI Summary

Deductibility under section 37: compensation for defective output may be treated as deductible business expenditure, TDS applicability unclear. Whether compensation paid by a supplier to a processor for defective, non saleable output caused by the supplier's raw material is deductible as ordinary business expenditure under section 37 of the Income Tax Act; advisor indicates such a deduction is available on the facts, while the applicability of tax deduction at source to the compensation remains uncertain and requires further analysis.