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Reimbursement of Expenses - Sec. 195

12 September 2010

Dear Sir

M/s Raj Exporters has purchased a Machinery from US. The purchase was made on Ex Factory basis. Raj Exporters have incurred US 1000 for cleaning and dismantling of the machinery which was paid to labour by our agent in US who is not having any PE in India. The actual amount was Reimbursed to foreign agent .

1. Is it liable for TDS.

2. If liable for TDS what is the rate of TDS.

3. When the remitter can apply for lower TDS to AO.

Regards

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4 Replies

CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 12 September 2010

Dear Rajendra Prasad,

My comments on the subject are as follows:

Prima facie the transaction would not attract section 195 due to the fact that income of the non resident is not taxable in India. Basically for applicablity of section 195, two conditions are must, (a) payer must be a resident (b) payee must be a non resident wherein such sum received is taxable in India.

It is to be noted that in the given case if the terms of contract to purchase machinery also included clearing and dismantling of such machinery, then reimbursement of expenses incurred would not attract section 195. (See CIT vs. Navabharat Ferro Alloys Ltd. (2000) 244 ITR 261 (AP))

Section 195 will be applicable in cases where machine was already installed in India and some repair work was carried out by foreign agent and such remittance would be in the nature of 'income deemed to arise or accrue in India' (section 9)

Conclusion:

The amount reimbursed to the agent can as well be capitalised to the cost of the asset which is well within the parameters of Accounting Standards (AS 10)

Question of application u/s 195 (2) to the AO should not arise.

Rahul Agarwal (Future CA) (217 Points)
Replied 13 September 2010

Its a kind of sham transaction

where if the co had directly made payment to the labour then it would had attracted provisions of section 194J and TDS would have been deducted.

Now when the payment is being made by the Agent, its becoming a reimbursement for the Co.

Since it is liable to reimburse the amount paid by the agent on behalf of the Co.

Hence my contention is that TDS should have been deducted by the agent on behalf of the Co. while making the payment otherwise the expense will be disallowed by the Assessing officer.

Hence immediately TDS should be deposited to avoid any discrepancies later on.

Lets us what other members have to say!!!!

CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 13 September 2010

Mr Rahul Agarwal,

Where does the question of applicability of section 194J arise? Read the question again, agent is not a resident, TDS provisions not applicable to him. QUestion is based in some other context, ur comments on the same, not satisfactory to me.

Thank u, don mind.