The issue whether TDS provisions apply on reimbursement of expenditure has been a contentious issue. No doubt there are conflicting judgements on this aspect but more often than not the Courts have held in favour of the assessee that there is no requirement to withhold tax in case of reimbursement of expenditure.
The recent example is of the Hon’ble Delhi High Court wherein the Hon’ble Court in the case of CIT v DLF Commercial Project Corporation ITA No. 627 of 2012 and 207 of 2013 has held that the provisions of TDS do not apply to reimbursement of expenditure.
The facts of the case were that the assessee paid an amount of Rs 19,69,83,236/- as reimbursement of expenditure to DLF Land Ltd. on which tax was not deducted at source and Rs 98,49,106/- as service charges on which tax was duly deducted and deposited. The assessee had a contract with DLF Land Ltd. whereby DLF Land Ltd. had agreed to carry out activities like maintenance of books of accounts and getting the accounts audited, maintenance of secretarial records, filing with various statutory authorities etc. for the assessee. For arranging these services DLF Land Ltd. incurred the aforesaid expenditure which was duly reimbursed by the assessee. The learned Assessing Officer disallowed the amount of Rs 19,69,83,236/- under section 40(a)(ia) of the Act on account of non-deduction of tax at source. It was contended by the assessee that DLF Land Ltd. while making the payment of expenditure to third parties had duly deducted tax at source.
The Hon’ble Court held that the provisions of TDS do not apply to reimbursement of expenses since there is no income element in reimbursement of expenses. In arriving at the aforesaid conclusion, the Hon’ble Court derived support from the Gujarat High Court’s decision in CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd. 217 Taxman 114 (Guj.). A special leave petition (SLP) preferred by the revenue against the Gujrat High Court’s decision was dismissed by the Supreme Court on 17.1.2014 (in SLC CC No. 175 of 2014). The Court also stressed on the text of Section 194C and Section 194J. It was observed that neither provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of expenses, other than what is defined as “income”. The law thus obliges only amounts which fulfill the character of “income” to be subject to TDS.
The key issue which found favour with the Court seems to be that the DLF Land Ltd. had deducted tax at source from the third parties and therefore on reimbursement of the same by the assessee to DLF Land Ltd. there should not be deduction of tax at source.
This decision comes as a huge relief to tax payers and should end litigation on this subject.