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Reimbursement of expense taxable

CA rahul (BCOM(H) ACA) (725 Points)

29 October 2014

A comapny paying reimbursement of expense like reimbursement of entairnment exp,coveyance exp and books and periodical exp basis on the submission of bill company considered as non taxable component for tds computation. As per the income tax act is there is any Exemption limit upto which reimbursement of the above mention expenses are not taxable.

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2 Replies

TKKKKKK (PRACTICING CA) (3268 Points)
Replied 29 October 2014

There are different judgements on this topic.

TDS provision should be applicable on income factor. Reimbursement for expense has not this factor because it is not income of receiving persons.

Read some points.

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.

Still do some googling..