amit arun associates
   
Home Contact Us Site Map
Home about us Latest News Contact us

Fixed Assets Verification Services

Payroll Processing Service

Employee Benefit Administration

Tax Consulting

Foreign Direct Investment

File GST & E-TDS Returns
 
 
 
 
 

TDS on Reimbursement of Expenses

Posted @ February 3, 2014, 3:24 am under (International Taxation Services)

There are mixed judgments on the issue of withholding tax on reimbursement of expenses. However, in our opinion, if the nature of reimbursements are claims of certain expenses incurred on behalf of subsidiary company, where no service fee is charged, then you can make payment without deduction of tax. Provided you are able to establishing before tax authorities that no amount has been charged over and above cost to Non resident.

Hence Indian Company can request non resident to provide third party invoices and challan against reimbursement claims. If client is able to arrange the same the CA certificate at nil TDS can be issued, otherwise certificate can be issued after deduction of applicable withholding tax as specified U/s 195 of the Income Tax Act, 1961. The aforesaid documentation will also be helpful in transfer pricing study prepared at the end of financial year.

Relevant Income Tax Rulings in support of above view:

The Income Tax Act, 1961 has no clear direction on whether TDS needs to be affected on reimbursement of expenses or not. There are conflicting views held by the various courts and Tribunals in the country on this issue. Where the cost of services is charged and recovered by way of reimbursement, even without any profit element TDS will be applicable as ruled in the case of Arthur Andersen & Co by the Mumbai tribunal reported in 94 TTJ 736 (Mum). There are also judgments which reflect that TDS under Section 195 will be applicable even on mere reimbursement of expenses. This view finds support in the decisions given by Cochin Refineries 222 ITR 354 (Kar) and HNS VSAT Inc 95 ITD 157 (Del ITAT) and also in Hindalco 278ITR 125 (AT).

Contrary views that TDS need not be affected, In the case of mere reimbursement of expenses, held in the case of reimbursement of out of pocket expenses to a noted Law firm. Clifford Chance 82 ITD 106(Mum). The most important Judgment in Mahindra & Mahindra’s case reported in 10 SOT 896 Mumbai ITAT has also held that reimbursement of expenses not having the character of income chargeable to tax under the provisions of the IT Act cannot be subject to Withholding tax.

There are mixed judgments on the issue of withholding tax on reimbursement of expenses. However, in our opinion, if the nature of reimbursements are claims of certain expenses incurred on behalf of subsidiary company, where no service fee is charged, then you can make payment without deduction of tax. Provided you are able to establishing before tax authorities that no amount has been charged over and above cost to Non resident.
 
Hence Indian Company can request non resident to provide third party invoices and challan against reimbursement claims. If client is able to arrange the same the CA certificate at nil TDS can be issued, otherwise certificate can be issued after deduction of applicable withholding tax as specified U/s 195 of the Income Tax Act, 1961. The aforesaid documentation will also be helpful in transfer pricing study prepared at the end of financial year.
 
Relevant Income Tax Rulings in support of above view:
 
The Income Tax Act, 1961 has no clear direction on whether TDS needs to be affected on reimbursement of expenses or not. There are conflicting views held by the various courts and Tribunals in the country on this issue. Where the cost of services is charged and recovered by way of reimbursement, even without any profit element TDS will be applicable as ruled in the case of Arthur Andersen & Co by the Mumbai tribunal reported in 94 TTJ 736 (Mum). There are also judgments which reflect that TDS under Section 195 will be applicable even on mere reimbursement of expenses. This view finds support in the decisions given by Cochin Refineries 222 ITR 354 (Kar) and HNS VSAT Inc 95 ITD 157 (Del ITAT) and also in Hindalco 278ITR 125 (AT).
 
Contrary views that TDS need not be affected, In the case of mere reimbursement of expenses, held in the case of reimbursement of out of pocket expenses to a noted Law firm. Clifford Chance 82 ITD 106(Mum). The most important Judgment in Mahindra & Mahindra’s case reported in 10 SOT 896 Mumbai ITAT has also held that reimbursement of expenses not having the character of income chargeable to tax under the provisions of the IT Act cannot be subject to Withholding tax.
 
It is a well-recognized principle under the Income tax law that, only income' can be subjected to tax, especially, in the case of provisions related to tax deduction at source. Thus, an importer, who is only reimbursing the expenses incurred by his parent company, let's say, is not required to deduct tax at source under Section 195 of the Income tax Act. One is happy that this principle has got indirectly confirmed, in the decision of the Delhi High Court, in the case of Intercontinental Consultants and Technocrats Pvt Ltd v. Union of India and Anr, reported in 2012-TIOL-966-HC-DEL-ST, service tax can be levied only on the value of services' rendered and not on claims of reimbursements', which cannot be treated as services rendered. So far so good.
 

 


Website Designing  Company Image Map
Contact us Disclaimer Privacy Policy Site Map