Section 195 read with section 40(a)(i) – A payment may be treated as reimbursement, and consequently not be subject to TDS u/s 195, if it satisfies twin tests of: (a) one-to-one correlation between outflow and inflow of recipient; and (b) receipt and payment being of identical amount

FACTS
The assessee was the branch in India of a Singapore Company (Singapore HO). The Singapore HO was a subsidiary of a German parent company. The assessee was engaged in providing technical support services and testing facility to Asia-Pacific customers of the German parent – although it appears that such services were pursuant to an understanding with the Singapore HO. The assessee operated on cost-plus basis and recovered all its costs (including reimbursement) with a mark-up of 10%. The assessee was treated as a PE of the Singapore HO and was charged to tax on mark-up.

The assessee had made certain payments to Singapore HO which the HO had defrayed towards seminar, IT, training, printing expenses and staff welfare expenses for the assessee branch and which were claimed as deductions from income. Further, the branch had not deducted tax from the said payments on the ground that said payments were reimbursement of expenses. The A.O. disallowed payments u/s 40(a)(i). The DRP upheld the order of the A.O.

The aggrieved assessee appealed before the Tribunal.

HELD

•  Section 195 applies only if amount is chargeable to tax in the hands of recipient. Chargeability presupposes some profit element. If the recipient merely recovers the amount spent by it, without any profit element, such recovery is reimbursement and not a sum chargeable to tax.

•  Two conditions should co-exist to fall within reimbursement. First, one-to-one direct correlation between the outgo of the payment and inflow of the receipt must be established. Second, receipt and payment should be of identical amount.

•  The first condition is satisfied when at the time of incurring the amount is directly identifiable as payment made for the benefit of the other.

•  The second condition is satisfied when repayment of the amount originally spent is made without any mark-up.

•  The assessee had provided back-to-back invoices of identical amounts in respect of payments made towards seminar, training and printing expenses. Accordingly, such payments were in the nature of reimbursement of expenses. Consequently, the assessee was not required to deduct tax from the same u/s 195.

•  As regards IT expenses, it was observed that payments were made on monthly basis. The assessee had contended that payments were apportionment of head office expenditure to the assessee at cost. While the burden of proving ‘reimbursement’ is on the assessee, the assessee had not placed any agreement or evidence on record in support of its contention. Hence, the payments could not be said to be in the nature of reimbursement of expenses. Therefore, the matter was remanded to the A.O. for examining the true nature of the payment.

Note – It is not clear why ‘make available’ argument was not advocated in respect of monthly reimbursements.