Query - Mr A is an employee of XYZ foreign Company . He rendered his services to all the companies with in the same group. One of the group company is situated in India. So for performing his job he has to visit Indian Company. The important things in this regard is that the fees for rendering services to all the group companies have been paid by the Head office. The only expenses which the respective companies has to bear is the halting and traveling cost of Mr. A.
Now the question arose from this is whether Indian company is liable to deduct TDS on the reimbursement of Halting and traveling expenses incurred by Mr. A.
Formation of Questions-
1. Is reimbursement made to a consultant treated as his fees?
2. Is there any difference in respect of treatment of reimbursement made to resident consultant/foreign consultant?
Meaning of “Reimbursement”
The term "Reimbursement" has not been defined in the Act and hence its meaning has to be understood as in common parlance. As per Black’s Law Dictionary the term "reimburse" means to pay back, to make restoration, to repay that is expended, to indemnify or make whole. As per the Concise Oxford Dictionary the term "reimburse" means repay (a person who has expended money) or repays (a person’s expenses).
The above definitions make it clear that a pure reimbursement should not constitute a reward or compensation paid for a service rendered. Hence, a mere reimbursement of expenses cannot be construed as a "fee" for services rendered since what is achieved by a reimbursement is a mere repayment of what has been already spent and is not a reward or a compensation for services rendered.
Analysis of section 195, of the Act
All payments to non-residents, (including to non-resident Indians) other than salaries, which are chargeable to tax under the Act, 1961, are covered under Sec. 195.
Section 195 opens with the following words:
“195.(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT………..”
Now see what Section 195(2) reads:
“Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.”
The CBDT has also issued a Circular No. 152 [F.No. 484/31/74-FTD- II], dated 27-11-1974, which regurgitates what sub-section 2 above says:
“Where the person responsible for paying any such sum to a non-resident considers that the whole amount thereof would not be income chargeable under the Income-tax Act in the case of the recipient non-resident, he may make an application under section 195(2) to the Income-tax Officer for the determination of the appropriate portion of such payment which would be taxable and in respect of which tax is to be deducted under section 195(1).”
Now consider the Q & A No. 30 of CBDT Circular No 795 dated - 08.08.1995:
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
In case of Resident recipient:
If a single bill is raised for the professional fee inclusive of reimbursement of expenditure, in such a case TDS is to be made on gross amount.
TDS on reimbursement is not required to be made if separate bills are raised one is for professional fee and the other is for reimbursement of expenditure.
The above view is supported by a case law ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71 (ITAT).
Where as per CBDT circular No. 715 dated 8-8-1995, TDS should be on total payment including reimbursement of expenses. But ITAT in the above decision it was held that reimbursement of expenses for which bill is separately raised did not attract the provisions of section 194J, the above circular attracts only in case bill is raised inclusive of reimbursement of expenditure.
Thus It is felt that if the expenses are claimed through a separate statement there will be no requirement to deduct tax at source, provided the deductor is satisfied that the expenses claimed as reimbursement are only the actual expenses incurred. If there is an element of profit, that is to say that if the reimbursement is not of actual expenses, tax will have to be deducted at source even if the expenses are claimed through a separate statement.
In case recipient is Non Resident:
But this Circular should not be applicable in case of payment made to NRI, because:
1. Section 195, which is conspicuous by its absence in the Q & A above, was very much there on the Statute book when Circular No 795 was issued. So clearly, the intention of the law is to subject to TDS only the "income" portion of the payments made to non-residents, although the same courtesy is not extended to residents, as is clear from the wordings of Section 194C/J and Answer to Q. 30 above.
2. Section 195 applies to "income chargeable to tax" while sections 194C and 194J apply to "any sum paid".
Analysis of AO stands and Case Laws
TDS on expenses/costs reimbursed to a non-resident do not give rise to any chargeable income in the hands of a non-resident and going literally by the above principles section 195 should not get attracted for reimbursements.
Department stands: However, the issue is not as simple as that and Department has been taking a view that reimbursement is to be treated as part and parcel of fees/royalty, which lead to a matter to be deiced by court.
1. Bombay High Court has in the case of CIT vs. Tata Engineering and Locomotive Co. Ltd. (245 ITR 823) held that no part of reimbursement of expenses of foreign technician deputed by a foreign company could be treated as payment in lieu of fees and was not liable to deduction of tax at source.
2. In the case of CIT vs. Industrial Engg. Projects (P) Ltd. (202 ITR 1014) the Hon’ble Delhi High Court has held that reimbursement of expenses does not constitute income and accordingly not taxable. In this case, the assessee had an agreement with the foreign company to render certain services for a minimum fee of Rs. 1.2 lakhs per year. The agreement also provided that certain costs or expenses could be reimbursed. The court found that no excess amount over and above expenses incurred was received. It held that the reimbursement of expenses could not be regarded as revenue receipts.
3. Following the above decision, reimbursement of actual expenses were held not to be ‘income’ in case of Clifford Chance, United Kingdom (82 ITD 106) (Mumbai ITAT). In another case, Bombay Tribunal in the case of Arthur Anderson held that where the reimbursement is of actual expenses supported by bill no tax should be deducted.
Thus, in my view, if it is a case of pure reimbursements of incidental expenses duly supported by bills and the contract is unambiguous that the resident shall bear such expenses in addition to the fees section 195 would not apply.
But still to be in safer side I would recommend that:
1. we must apply to the AO for the exclusion of the travelling and halting expenses for deduction of TDS u/s 195.
2. in future one thing your Indian company can do is that it should incur travelling, halting expenses of the foreign consultants in the first place, rather than they incurring them first and then claiming reimbursement.