TAX OPINION ON DEDUCTION OF TDS ON REIMBURSEMENT OF EXPENSES TO NRI

This is a question on which no clear direction is available and keeping in line with the general trend of tax judgments there are conflicting views held by the various courts and Tribunals in the country.

When it comes for section 194 C/J , Tax has to be deducted on payment of “ANY SUM” to the recipient covered under the section, whereas u/s 195 mandate the deduction of TDS on payment of “INCOME” to NRI.

 In the case of mere reimbursement of expenses, TDS need not be effected as ruled in the case of reimbursement of out of pocket expenses to a noted Law firm .Clifford Chance 82 ITD 106(Mum). The most important recent Judgment in Mahindra & Mahindra’s case reported in 10 SOT 896 Mumbai ITAT has also held that reimbursement of expenses not having the character of income chargeable to tax under the provisions of the IT Act cannot be subject to WHT  (WITH HOLDING TAX) .

However where the cost of services is charged and recovered by way of reimbursement, even without any profit element TDS will be applicable as ruled in the case of Arthur Andersen & Co by the Mumbai tribunal reported in 94 TTJ 736 (Mum) .

There are also judgments which reflect that TDS under Section 195 will be applicable even on mere reimbursement of expenses. This view finds support in the decisions given by Cochin Refineries 222 ITR 354 (Kar) and HNS VSAT Inc 95 ITD 157 (Del ITAT) and also in Hindalco 278ITR 125 (AT).