S/s. 195, 40(a)(i) – Reimbursement of expenses to holding company is not an income under the Act and hence not chargeable to tax; Expenses routed through holding company for payment to third party not in the nature of reimbursement of expenses and liable to withholding by evaluating tax implications in the hands of the third party.

S/s. 195, 40(a)(i) –  reimbursement of expenses to holding company is not an income under the Act and hence not chargeable to tax;  expenses routed through holding company for payment to third party not in the nature of reimbursement of expenses and liable to withholding by evaluating tax implications in the hands of the third party.

The Taxpayer, an Indian company, was a subsidiary of a company incorporated in Netherlands (Parent Company). During the relevant AY, the Taxpayer made two types of payments to the Parent Company on which taxes were not withheld on the ground that the same amounted to reimbursement of expenses, viz :

(i) Payment in respect of common expenses borne by the Parent Company for various group companies in respect of accounting services, legal and professional services, communication, R&D etc.

These expenses were incurred by the Parent Company for and on behalf of the Taxpayer and other group companies and the same were recovered/allocated on the basis of arm’s length principle based on agreed parameters. As per the Auditor’s Certificate, allocation of such expenses was done without any income element. (Common expenses)

(ii) Payments in respect of expenses for training services availed by the Taxpayer from independent third party and for which the payment was routed through the Parent Company.

Such training services were arranged by the Parent Company which paid to the third party trainers and later on recovered the amount from the Taxpayer on actual basis. (Training expenses)

The tax authority was of the view that taxes were required to be withheld on the above payments and in the absence of tax withholding, such payments/ expenses were not allowed as deduction while computing taxable income of the Taxpayer under the Act.

The CIT(A) upheld the action of the tax Authority.

Held
• The payments towards common expenses incurred by the Parent company for and on behalf of the Taxpayer and group entities, amounted to reimbursement of expenses. Such reimbursement of expenses was not chargeable to tax in the hands of parent company and, hence, was not subject to withholding of taxes u/s. 195 of the Act.

• In connection with training expenses, it held that the payments were not reimbursement of expenses but remission of amount by the Taxpayer to the Parent company for finally making the payment to third party service provider and, hence, was a payment to third party through the hands of the parent company. Accordingly, provisions of withholding of taxes under Act will apply as if the Taxpayer has made the payment to such independent third party service provider.