AO cannot Arbitrarily Disallow Expenses for Want of Supporting Documentation, without Pointing out a Defect in Vouchers: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that AO cannot arbitrarily disallow expenses for want of supporting documentation, without pointing out the defect in the vouchers.

The aforesaid observation was made by the Delhi ITAT, when an appeal was filed before it by the assessee, as against the dated 23.08.2022, passed by the AO under Section 143(3) read with Section 144C (13) of the Income Tax Act, 1961.

The ground of the assessee’s appeal was that the AO/DRP, grossly erred on facts and in law, in making disallowance of Rs. 96,89,231/- on an ad hoc basis, being 10% of certain expenses, by holding that the appellant failed to substantiate its claim and the expenses remain unsubstantiated without appreciating the fact that all the documents/evidence were duly filed before the Ld. AO/DRP, the brief facts of the case were that the assessee, TPF Getinsa Eurostudios S.L., formerly known as Getinsa-Payma S.L., was a company incorporated in Spain, with a place of business in India.

The company established a project office in India. And, during the year under assessment, the Project Office of the Foreign Company was engaged in providing infrastructure consultancy services to the National Highway Authority of India (NHAI).

It so happened that the assessee had filed its return of income on 23.11.2018, declaring a total income of Rs.28,07,203/- and thereby claiming a refund of Rs.1,42,97,170/-. And, thereafter, the case of the assessee was selected for limited scrutiny and statutory notice under Section 143(2) of the Income Tax Act, 1961 was issued and duly served upon the assessee.

During the course of assessment proceedings, the AO raised queries with respect to details of various expenses, based on which, the assessee duly furnished the ledger account of all the expenses during the course of assessment proceedings. Also, during the course of assessment proceedings, no specific query was raised by AO to furnish vouchers.

After receipt of the draft Assessment Order disallowing 10% of the expenses on an ad-hoc basis, the evidence of expenses was furnished before the DRP under Rule 4 of the DRP Rules, 2009. Thereafter, the DRP, after calling the remand report, confirmed the action of the AO. And, it is being aggrieved by the same, that the assessee has preferred the instant appeal before the Tribunal.

With Sh. Gaurav Jain, Adv. & Sh. Sudarshan Roy, Adv. contenting on behalf of the Assessee, and Sh. Anshuman Pattnaik, the CIT DR, contenting on the Revenue’s Behalf, hearing these opposing contentions and thereby perusing the materials available on record, the ITAT observed:

“In the instant case, it can be said that TPF Spain has incurred costs on behalf of the assessee in terms of the salary of the expatriates for assisting the Assessee in executing services to NHAI. The assessee had only reimbursed the actual cost of such employees on the basis of time spent and the time cost of such employees, which was incurred by the head office. No markup has been charged by TPF Spain and there is no profit element in the said costs. Also, the provision of the act seeks to levy income tax in respect of the ‘income' of every person. The term ‘income’ has been exhaustively defined to include various types of gains, profits, accretion, value addition, etc. It is submitted that in the absence of any profit-related element, a receipt cannot be classified as income in the hands of the recipient of the money. In this scenario, any reimbursement cannot be treated as income, and therefore, cannot be subject to Income Tax.”

“The Hon’ble High Court of Karnataka in the case of Flipkart Internet P. Ltd v DCIT has held that the assessee would be eligible for a Nil tax deduction certificate under section 195(2) of the Act with respect to payments of salaries of the deputed expatriate employees which were in the nature of ‘pure reimbursements.  Reliance is being placed on the judgment of the Hon’ble Supreme Court in the case of DIT vs. A.P. Moller Maersk A S, wherein the Hon’ble Court while analysing the taxability of pro-rata IT costs recharged to Indian agents by a foreign shipping company, held that once the character of the payment was found to be in the nature of reimbursement of expenses, it could not be charged to tax in India. In this case, the foreign shipping company had furnished its calculation of total costs and their pro-rata division among the agents which was done without any mark-up.”, the Coram of Yogesh Kumar US (Judicial Member) and Dr. B. R. R. Kumar (Accountant Member) added.

Thus, finally, the ITAT concluded:

“Therefore, considering the aforementioned judicial precedents in the extant cases, we hold that no withholding of tax is warranted from the payments of Rs.2,18,66,000/-. The appeal of the assessee on this ground is allowed. In the result, the appeal of the assessee on all the grounds is allowed.”

To Read the full text of the Order CLICK HERE

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