TaxTMI 
TaxTMI 
2026 (3) TMI 1349
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....llowing substantial questions of law:- "(i) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT erred in confirming the decision of Ld. CIT(A), deleting the disallowances of cross charges of Rs. 14,51,77,000/- for non-deduction of TDS u/s 40(a)(ia) holding that these charges represent mere reimbursement without appreciating the fact that these payments were made for rendering business auxiliary services through invoices inclusive of the service tax and therefore, includes profit component and thus cannot be said to be pure reimbursement charges not liable for deduction of TDS? (ii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT erred in confirming the decision of Ld. CIT(A), deleting the disallowances of cross charges of Rs. 14,51,77,000/- for non-deduction of TDS u/s 40(a)(ia) holding that these charges represent mere reimbursement without appreciating the fact that the assessee has stopped itself from taking a stand that these payments are mere reimbursement as it has taken a contrary stand before the service tax authority that the payments were made for providing business auxilia....
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..... Furthermore, the ITAT also noted that the CIT(A) had relied on the amendments introduced by the Finance Act, 2012, namely the first proviso to Section 201(1) and the second proviso to Section 40(a)(ia), and had held them to be retrospective and applicable to the relevant assessment year, ruling that since the payee had filed its return, accounted for the income, and paid the due taxes, no disallowance under Section 40(a)(ia) could be made, which finding the ITAT concurred with. The appeal of the Revenue was thus dismissed by the ITAT vide order dated 01.09.2017. (vi) The legality and validity of the order of the ITAT dated 01.09.2017 ("impugned order", for short) has been challenged before this Court on the afore-quoted substantial questions of law. 4. Mr. Suresh Kumar, learned counsel for the Appellant-Revenue submitted that the ITAT erred in confirming the order of the CIT(A), deleting the disallowance of the cross-charge of Rs. 14,51,77,000/- without appreciating that the payments were made for rendering business auxiliary services through invoices inclusive of service tax and, therefore, contained a profit component and could not be treated as being purely in the ....
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....ayee has furnished its return of income, paid due tax and a Chartered Accountant's certificate to that effect has been furnished, which conditions stand satisfied in the Assessee's case, and thus the Assessee cannot be treated as assessee in default. (vi) That, there is no loss of revenue as Pfizer Ltd. had already deducted TDS wherever applicable, while making payments to the third party vendors and employees. It is the stand of the Assessee that these facts are not disputed and the Revenue has not challenged the finding of CIT (A) that no disallowance can be made on account of the retrospective applicability of the amendment brought about in Section 40(a)(ia) vide Finance Act, 2012. 6. Learned Counsel for the Respondent-Assessee relied on the following judgments in support of the arguments advanced: (i) Commissioner of Income-tax vs. Siemens Aktiongesellschaft [2009] 177 Taxman 81 (Bombay). (ii) The Commissioner of Income Tax-3 vs. M/s. Emerson Process Management (India) Pvt. Ltd. ITXA No. 237 of 2012 (Bombay). (iii) The Pr. Commissioner of Income Tax-1 vs. Goldmansach (India) Finances Pvt. Ltd. ITXA No. 1742 of 2016 (Bombay). ....
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....ttedly not claimed any deduction for having incurred the expenditure in question. This was the basis on which the CIT(A) came to a conclusion that in the absence of any element of income in the said payment of cross-charge without mark-up, there was no requirement of deducting tax at source. The said finding was upheld by the ITAT. 10. It is the contention of Revenue that the said transaction has an income-component, owing to the fact that service tax was charged on the same. Whether levy of service tax is a factor determining the nature of the transaction, when the transaction itself is not in the nature of income, is the moot question. Learned Counsel on behalf of the Assessee submits that when the inherent nature of the payment itself is not income, mere levy of service tax would not change the nature of such a payment. The order passed by the ITAT quotes the relevant portion of the cost sharing agreement and the supplementary agreement. The payment of cross-charge by the Assessee to M/s. Pfizer Ltd. was pursuant to the said cost-sharing arrangement detailed in the agreement. The cost-sharing is on cost-to-cost basis, without any component of income and the said transaction i....
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....make the said transaction taxable, given that the same is in the nature of reimbursement of expense incurred without markup, as has been established. Furthermore, in view of the amendment introduced vide Finance Act, 2012, we also agree with the submission of the Learned Counsel for the Assessee that the Assessee in the present case cannot be treated as an assessee in default. 14. Now let us discuss the amendment introduced to Section 40(a)(ia) and Section 201(1) vide the Finance act, 2012. Section 40(a)(ia), reads thus: "Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of any assessee- ..... (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subseque....
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....ax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso". 10. It is pointed out by learned counsel for the Revenue that the first proviso to section 201(1) of the Act was inserted with effect from July 1, 2012. The said proviso reads as under: "Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident- (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed." 11. The first proviso to section 201(1) of the Act has been inserted to benefit the assessee. It also states that where a person fails to deduct tax at sourc....
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....ial to the assessee and curative in nature. The leading judgment on this point was of the Division Bench of Delhi Court in the case of CIT Vs. Ansal Land Mark Township P Ltd. The Court held that Section 40(a)(ia) is not a penalty and insertion of second proviso is declaratory and curative in nature and would have retrospective effect form 1.4.2005 i.e the date from the main proviso 40(a)(ia) itself was inserted. Several High Courts have adopted the same lines." 17. The upshot of the above afore-cited decisions is that, although the proviso was inserted by the Finance Act, 2012 with effect from 1 April 2013, the same was held to be beneficial, declaratory, and curative in nature. The proviso creates a legal fiction whereby if an assessee fails to deduct tax at source, but the payee has furnished the return of income under Section 139, included the relevant income, and paid the due taxes, then the assessee shall be deemed to have deducted and paid such tax. This position aligns with the first proviso to Section 201(1), which provides that in such circumstances the payer shall not be treated as an assessee in default. The courts emphasized that the legislative intent is to....