TaxTMI 
TaxTMI 
2026 (2) TMI 1063
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....on 40(a)(ia) of the Income Tax Act, 1961 (hereinafter referred to as "the said Act"). 2. The appellant is a unit of the Dey's Medical Stores Group, involved in the manufacture of products including Keo Karpin Hair Oil (cosmetic products) and certain medicines. The Group comprises the appellant, Dey's Medical Stores Private Limited ("Cosmetics Manufacturing Company") and Dey's Medical Stores (Manufacturing) Limited ("Medicine Manufacturing Company"). 3. The appellant operates manufacturing facilities in Allahabad, Uttar Pradesh, set up in compliance with government incentives and utilizes the infrastructure, marketing and sales promotion services of the Cosmetics and Medicine Manufacturing Companies on a reimbursement basis for expenses incurred. 4. The facts in a nutshell are that the appellant, pursuant to agreements dated April 1, 2004 and July 14, 2004, reimbursed the Cosmetics Manufacturing Company and the Medicine Manufacturing Company substantial sums towards various expenses incurred on its behalf. Specifically, the appellant reimbursed Rs. 1,89,60,902/- towards advertisement expenses and Rs. 57,08,489/- towards marketing staff expenses to the Cosmetics ....
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.... The appellant submits that in Zephyr Biomedicals v. Joint CIT reported in (2020) 428 ITR 398, it was held: "14....what is important is that the Income-tax is a tax payable in respect of "total income" of the previous year of every person. Further, such Income-tax shall have to be deducted at source or paid in advance, where it is so deductible or payable under any of the provision of the Income-tax Act. From this, it follows that unless the paid amount has any "income element" in it, there will arise no liability to pay any Income-tax upon such amount. Further, in such a situation, there will also arise no liability of any deduction of tax at source upon such amount." 10. It is further submitted that both the Cosmetics Manufacturing Company and the Medicine Manufacturing Company carried out the relevant activities using their infrastructure and personnel not only for their own products but also for the appellant's products. The expenses incurred were common in nature and were apportioned rationally as percentages of net sales, based on proven historical data. This method of apportionment represents a scientifically accepted and recognized approach accounting for th....
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....y of the tax collection process. Therefore, the amounts reimbursed should be disallowed to uphold revenue principles and to serve as a deterrent against tax evasion and non-compliance with TDS provisions by the appellant. 18. It is further submitted that the Ld. CIT(A) erred in deleting the addition on account of sales promotion expenses by inappropriately accepting the business purpose claimed through the associate company, without verifying the genuineness or commercial expediency of such expenditures. 19. The reasons which weighed with the Tribunal in arriving at the aforementioned conclusion are as follows: "5. Per contra, Ld. CIT, DR while supporting the order of Ld. AO has submitted that assessee had a contracted agreement with DMSML and DMSPL to carry out its work like advertisement, sales promotion of products manufactured by it. This is covered under the definition of works contract under section 194C on which TDS is applicable. Since no TDS was made while making payment to the two companies, disallowance of expenses under section 40(a)(ia) was invoked by Ld. AO. 5.1. According to him, assessee worded these payments "reimbursement of expenses" being....
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....sales promotion, handling, and storage-activities that are explicitly covered under the provisions governing payments for contracted work. This distinction is crucial, as it directly influences the applicability of the statutory provisions under which the disallowance was made. 22. The core issues before this Court revolve around the legality and appropriateness of the Tribunal's approach, particularly whether invoking Section 40(a)(ia) was justified given the true nature of these payments and the manner in which they were calculated. A key point of contention is whether these payments, which were determined as fixed percentages of the net sales rather than actual expenses incurred, fall within the scope of Section 194C. Additionally, the Court considers whether the disallowance was warranted in a scenario where the recipients of these payments had duly accounted for and paid taxes on the amounts they received, thereby raising questions about the timing and manner of TDS deduction. 23. This Court is of the opinion that the Tribunal correctly applied the provisions of Section 40(a)(ia) in conjunction with Section 194C. The payments under scrutiny were not reimbursements for ex....
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....aid truck operators/owners answered to the description of "sub-contractor" for carrying out the whole or part of the work undertaken by the contractor (i.e., the appellant) for the purpose of Section 194C(2) of the Act." 26. This Court also draws support from well-established legal principles that distinguish genuine reimbursements from contractual payments. Genuine reimbursements are typically post-facto, directly linked to specific expenses incurred and supported by appropriate evidence. Conversely, payments that are predetermined percentages of sales, with no direct connection to actual costs incurred, are more akin to commissions or service fees, which are subject to TDS obligations under the relevant provisions. This distinction is vital in determining the applicability of TDS provisions and ensuring compliance with statutory mandates. 27. Additionally, this Court underscores that the primary obligation to deduct TDS rests with the payer at the time of making the payment or credit, regardless of whether the payee subsequently deducts TDS on their own downstream transactions. The legislative intent behind these provisions is to establish a robust mechanism for revenue col....