The Bombay High Court has held that the cross-charge paid by the taxpayer company (respondent) to its sister concern in terms of the cost-sharing agreement on a cost-to-cost basis, did not have any income/profit component embedded with it, and the said transaction was purely in the nature of reimbursement of expenditure incurred without any markup. Hence, the Court clarified that the said payment is not liable to TDS, as mere payment of service tax does not alter the inherent nature of the transaction to make it taxable income.
Further, the second proviso to Section 40(a)(ia) of the Income Tax Act, inserted by the Finance Act, 2012, is beneficial, declaratory, and curative in nature, operating retrospectively from 1st April 2005. No disallowance can be made under Section 40(a)(ia) where the payee has furnished its return of income, paid due taxes, and a Chartered Accountant’s Certificate to that effect has been furnished, as the payer cannot be treated as an assessee in default, added the Court.
The Division Bench comprising Justice M. S. Karnik and Justice S. M. Modak observed that the cross charge paid by the respondent to its sister concern, M/s. Pfizer Ltd. was pursuant to a cost-sharing arrangement and a supplementary agreement. This cost-sharing is on a cost-to-cost basis, without any component of income, and the said transaction is purely in the nature of reimbursement. Further, M/s. Pfizer Ltd. had deducted tax at source at appropriate rates on the payments made to third party vendors or employees wherever applicable and had not claimed any deduction for having incurred the expenditure in question.
Relying on the Supreme Court decisions in Union of India vs. Intercontinental Consultants [(2018) 4 SCC 669] and Technocrats Private Limited and Gujarat State Fertilizers and Chemicals Ltd. vs. Commissioner of Central Excise [(2017) 5 SCC 198], the Bench observed that no service tax should be charged on reimbursement of expenses when no service element is involved. The Bench held that payment of service tax would not make the said transaction taxable, given that the inherent nature of the payment itself is not income and is in the nature of reimbursement of expense incurred without markup.
The Bench observed that the second proviso to Section 40(a)(ia) was inserted by the Finance Act, 2012, with effect from 01.04.2013, and that this proviso is beneficial, declaratory, and curative in nature, and operates retrospectively from 1st April 2005, i.e., the date on which Section 40(a)(ia) was originally introduced.
The proviso creates a legal fiction whereby if a taxpayer 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 taxpayer shall be deemed to have deducted and paid such tax. The Bench observed that the payee (M/s. Pfizer Ltd.) had duly filed and considered the cross charges while filing its return of income, paid due taxes, and a Chartered Accountant’s Certificate to that effect was brought on record. Therefore, the respondent cannot be treated as an assessee in default and no disallowance can be made.
Briefly, the respondent company had e-filed its return declaring a total income of Rs. 19,62,50,782/-, which was subject to a scrutiny assessment, whereby the total income was assessed at Rs. 34,42,08,170/-. The discrepancy between the returned and assessed income primarily arose on account of disallowances made by the Assessing Officer (AO) under Sections 40(a)(ia) and 40(a)(i) of the Income Tax Act.
The respondent had paid cross charges of Rs. 14,51,77,000/- to M/s. Pfizer Ltd., its sister concern, towards the use of ‘Field Force Facility’ for marketing and promotion of products, and contended that these payments were merely in the nature of reimbursement of expenses without any markup and therefore not liable to TDS, and that M/s. Pfizer Ltd. had deducted the requisite TDS whenever required. The AO rejected this contention and disallowed the expenditure under Section 40(a)(ia) of the Income Tax Act.
On appeal, the CIT(A) held that the invocation of Section 40(a)(ia) was not justified as the payment was in the nature of reimbursement of costs without any mark-up, in terms of a cost-sharing agreement. On further appeal, the Income Tax Appellate Tribunal (ITAT), concurred with the findings of the CIT(A) that the payment contained no income element and no disallowance under Section 40(a)(ia) was warranted. The ITAT also noted that the CIT(A) had relied on the amendments introduced by the Finance Act, 2012 (first proviso to Section 201(1) and second proviso to Section 40(a)(ia)), holding them to be retrospective, and since the payee had filed its return, accounted for the income, and paid the due taxes, no disallowance could be made.
Appearances:
Advocate Simran Hadi and Suresh Kumar, for the Appellant/ Revenue
Advocate Paras Savla, Pratik Poddar, Harsh Shah and Rajnandini Shukla, for the Respondent
