Book Entry Can't Decide Transaction Nature, Reimbursement Of Expenses Not Liable For TDS: ITAT Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 1 July held that the nomenclature given to a payment in the books of account cannot determine the true nature of a transaction and that tax deduction at source (TDS) provisions do not apply where a payment is only reimbursement of expenditure without any income element in the hands of the recipient.

A Bench comprising Judicial Member Siddhartha Nautiyal and Accountant Member Vikram Singh Yadav allowed an appeal filed by Maersk India Private Limited against the disallowance made under Section 40(a)(ia) of the Income Tax Act (which disallows certain expenses where tax was required to be deducted but was not deducted). It observed:

“In our considered opinion, the nomenclature adopted in the books of account cannot determine the true character of the transaction. The real nature of the payment has to be seen from the facts on record and the documentary evidence available on record. The material placed before us shows that the assessee merely reimbursed its share of the common legal and professional expenditure incurred by CSLA. The recovery by CSLA from its members was only towards common expenditure and not towards any professional services rendered by CSLA to the assessee.”

The dispute arose after a payment made by Maersk India to Container Shipping Line Association (CSLA). The Assessing Officer had disallowed 30% of the payment under Section 40(a)(ia), holding that the amount represented professional fees on which TDS was required to be deducted under Section 194J of the Income Tax Act (which relates to TDS on professional fees). The Assessing Officer had also relied on the fact that Maersk India had recorded the payment under the head “Professional Fees” in its books of account.

Maersk India contended that CSLA is an association of container shipping lines which had incurred legal and professional expenses for the common benefit of its members. It submitted that CSLA had apportioned the actual expenditure among its members and that Maersk India had reimbursed only its proportionate share. It further submitted that CSLA had already deducted TDS while making payments to legal professionals and that the reimbursement did not contain any element of profit or income.

The Tribunal accepted the contention and found that the documentary evidence established that the payments were only reimbursements of common legal expenses. It held that the Revenue had failed to establish that CSLA recovered any amount over and above the actual expenditure incurred.

Further, the Bench observed that the accounting description of a payment cannot override its real character. Since the reimbursement did not contain any income element in the hands of CSLA and TDS had already been deducted by CSLA while making payments to legal professionals, Maersk India was not required to deduct TDS on the reimbursement.

Accordingly, the ITAT deleted the disallowance made under Section 40(a)(ia) of the Income Tax Act.

Appearance for the Appellant (Assessee): Shri Manish Kanth, Advocate

Appearance for the Respondent (Revenue): Shri Prasma Prakash Tewari, Senior Departmental Representative