TDS on Provision of Expenses

TDS obligation arises while making provision at the time of quarterly closure and not when actual exp. is booked

N THE ITAT BANGALORE BENCH 'A'

IBM India (P.) Ltd.

v.

Income-tax Officer (TDS) LTU, Bangalore*

N.V. VASUDEVAN, JUDICIAL MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER

IT APPEAL NOS. 749 TO 752, 1588 TO 1591 (BANG.) OF 2012

MAY  14, 2015 

Section 201, read with Sections 4, 40(a)(i) and 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Consequence of failure to deductor pay (provision in books of account) - Assessment years 2006-07 to 2009-10 - Whether it is clear from statutory provisions of TDS that liability to deduct tax at source exists when amount in question is credited to a 'suspense account' or any other account by whatever name called, which will also include a 'provision' created in books of account - Held, yes - Whether assessee having admitted its default under section 40(a)(i) and section 40(a)(ia) could not in proceedings under section 201(1)/1(A) argue no default under chapter XVII-B - Held, yes - Whether statutory provisions of withholding tax clearly envisage deduction of tax at source de hors charge under section 4(1), hence assessee was liable to deduct tax on provision for expenses created in books of account - Held, yes [Paras 27, 30 & 32] [Partly in favour of revenue]

Circulars and Notifications: CBDT Circular No. 3 of 2010, dated 2-3-2010; CBDT circular No. 550, dated 1-1-1990

FACTS

■		The assessee was a wholly owned Indian subsidiary of a U.S. based company IBM. As per the mercantile system of accounting, the assessee made provision for certain expenses in its books of account. As per the global group accounting policy, each of the entity of IBM group worldwide had to quantity its expenses every quarter, within 3 days of the end of every quarter.
■		In respect of expenses for which invoices had been submitted or the payments had become due in respect of the expenses, the same were accounted for and if TDS was found to be applicable on these expenses, the same was accounted for. However, in respect of expenses on which only service/work had been provided/performed by the vendors, but for which the invoices had not been furnished or in respect of which the payments had not fallen due for payment to the vendors, a provision for such expenses was made in the books of account recognising the liability that had been incurred.
■		Such expense provisions were however created on reliable estimates of the payment that was expected to be made on the settlement dates in future, that fell in the next accounting year. In the subsequent financial years, the provision entries were reversed and on receipt of invoices in respect of the respective expenses, the same were recorded as liabilities due to the respective parties, at which point in time taxes were withheld at source and paid to the Government in the due course.
■		During the year under consideration, the assessee debited the expenses to the profit and loss account and the provisions were credited to a provision account and not to the vendor accounts as these had not fallen due for payment. While filing return of income, the assessee disallowed the amounts in the computation of income because in terms of section 40(a)(i) and section 40(a)(ia), the above amounts were not allowable as deduction.
■		The Assessing officer held that the above procedure followed by the assessee was contrary to the accounting policy because once the expenditure was booked in the profit and loss account, it could not be reversed. The assessee had to deduct tax on the provision so created by the assessee in the books of account. However, the assessee could not produce the details of payment of TDS and therefore, the taxpayer would be treated as an assessee-in-default under section 201(1) in respect of taxes not deducted at source in respect of provision for expenses made in the books of account. The Assessing Officer also levied interest under section 201(1)(A) on taxes not paid to the credit of the Central Government.
■		Order under section 201(1) & 201(1A) were upheld in principle by the Commissioner (Appeals).
■		On appeal to the Tribunal:

HELD

■		The contention of the revenue that the assessee having admitted its default under section 40(a)(i) and 40(a)(ia), cannot in proceedings under section 201(1), be heard to say that there was no default under chapter XVII-B is correct. The disability under section 40(a)(i) and 40(a)(ia), and the liability under section 201(1) cannot be different and they arise out of the same default. Once there is a disallowance under section 40(a)(i) and 40(a)(ia) , it is not possible to argue that there was no liability under chapter XVII-B and therefore the provisions of section 201(1) will not be attracted. [Para 27]
■		It is clear from the statutory provisions of TDS that the liability to tax at source exists when the amount in question is credited to a 'suspense account' or any other account by whatever name called, which will also include a 'provision' created in the books of account. Therefore it is not possible for the assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered. [Para 30]
■		With regard to the argument of the assessee that there is no accrual of expenditure as per the mercantile system of accounting and that the payee is not identified, the conclusions of the Commissioner (Appeals) on this aspect is agreeable. The Commissioner (Appeals) has rightly held that under the mercantile system of accounting accrual of liability for any expenditure is not dependent on receipt of invoice from the person to whom payment for expenditure has to be made and that accounting practice followed by the assessee was contrary to the mercantile system of accounting. The claim of the assessee that it creates provision in the books of account on an estimated basis in some cases, on a historical basis in other and using some sort of arithmetical or geometric progression in some other cases was not acceptable. The assessee had not established this plea with concrete evidence. The conclusion of the Commissioner (Appeals) that the assessee has full knowledge of what is due to its vendors, sub-contractors, commission agents etc., therefore there was no necessity to create provision was justified in the facts and circumstances of the instant case. [Para 31]
■		Section 190(2) provides that 'Nothing in section 190 shall prejudice the charge of tax on such income under the provisions of section 4(1).'The statutory provisions therefore clearly envisage collection at source de hors the charge under section 4(1). The sum collected by way of tax collection at source is appropriated as tax paid by the payee only on assessment in the hands of the payee. Section 195 however uses the expression 'Chargeable to Tax'. In the instant case, it is not the case of the assessee that payments made to non-residents are not chargeable to tax nor has the assessee been able to demonstrate as to how payment made to non-resident is not chargeable to tax. The assessee is a person making payment and the simple obligation cast upon him is to deduct a sum specified by the Act from and out of the payment and remit to the credit of the Central Government. The person making payment after deduction of tax at source gets a valid discharge in law for the entire amount paid. [Para 32]
■		As rightly contended by the revenue, the CBDT Circular No. 3 of 2010 is a specific circular applicable in the case of Banks and issued under peculiar circumstances. The assessee cannot take shelter under the said Circular.[Para 33]
■		The argument of the assessee that TDS provisions operate on income and not on payment, in the facts and circumstances of the instant case, is erroneous. Section 194H and section 194-I deal with TDS obligation on payment of commission and rental income. These payments by its nature are specific and the entire payment is attributable to commission or rent and therefore the commission and rent paid is treated as 'income' and therefore the expression income by way of commission or rent is found in these sections. Moreover as person responsible for making payment, it is the duty of the assessee to deduct tax at source. Sections 194C, 194-J, 194-H and 194-I do not use the expression 'chargeable to tax'. It is not the case of the assessee that the payments are not chargeable to tax in the hands of the payee. The assessee deducted tax on the provision made for various expenses in the subsequent financial years when the provision entries were reversed. The assessee therefore cannot take a plea that the payments in question are not chargeable to tax and therefore there was no obligation on its part to deduct tax at source.[Para 34]
■		The assessee's reliance on decisions in the case of Bangalore ITAT ruling in Dy. CIT v. Telco Construction Equipment Co. Ltd. [IT Appeal No. 478 (Bang.) of 2012, dated 7-3-2014] Bovis Lend Lease (I) (P.) Ltd. v. ITO [2010] 36 SOT 166 (Bang.) Pune ITAT ruling in Dy. CIT v. Yeota Merchants Co-op. Bank Ltd. [IT Appeal No. 805 of 2011, dated 31-8-2012, Karnataka High Court ruling in Bharti Airtel Ltd. v. Dy. CIT [2015] 372 ITR 33/228 Taxman 219 (Mag.)/[2014] 52 taxmann.com 31 and Delhi High Court ruling in UCO Bank v. Union of India [2014] 369 ITR 335/[2015] 228 Taxman 141/[2014] 51 taxmann.com 253 are all distinguishable. Therefore, the ratios laid down in the aforesaid decisions will not be any assistance to the plea of the assessee. [Paras 35 to 39]
■		Thus, the appeals that relate to challenge of levy of interest under section 201(1A) are dismissed. The appeals, in so far as it relates to holding the assessee as an 'assessee-in-default' under section 201(1) are however allowed. [Para 42]