TDS Implication on Reimbursement of Employees salary in Companies

Some employees on the payroll of group firms (including management and non-management cadre) work for the Parent company. We can recover the cost of such personnel from the Parent firm by raising a debit note on an actual cost basis. Let us discuss TDS Implication on Reimbursement of Employees in brief.

TDS Implication on Reimbursement of Employees- Section 194 C of Income Tax Act, 1961(ACT)

Any person responsible for paying any sum to a resident for the performance of any work (including the supply of labour for the performance of any work) in accordance with a contract shall deduct an amount equal to—at the time of crediting such sum to the contractor’s account or at the time of payment in cash, by the issue of a cheque or draught, or by any other mode, whichever is earlier, deduct an amount equal to—at the time of crediting such sum to the contractor’s account or at-

• One percent, if the payment or credit is made to an individual or a HUF;
• Two percent, if the payment or credit is made to a person other than the person indicated above, of such sum as income-tax on income comprised therein.

“Section 194C & Section 194J pertaining to any payment paid obviously or, we cannot deduct reimbursement out of the gross amount of bill for the purpose of tax deduction at source,” the CBDT clarifies in response to question 30 of explanatory notification no. Circular No. 715, dated 8-8-1995.

TDS Implication on Reimbursement of Employees- Section 194 J of Income Tax Act1 1961

“Any person who is responsible for paying to a resident any of the following: 

• Fees for professional services, 
•  Fees for technical services, or 
•  any remuneration, fees, or commission, by whatever name called, to a director of a company, other than those on which tax is deductible under section 192, or 
•  royalty, or 
• any sum as per clause (va) of section 28.

Shall deduct an amount equal to 10% of such sum as income-tax on income comprised therein at the time of crediting such sum to the payee’s account or at the time of payment thereof in cash or by any other mode, whichever is earlier.

Explanation 2 of Clause (vii) of Subsection (1) of Section 9 of the ACT gives the definition of fees for technical services, as “any consideration (including any lump sum consideration) for the rendering of any managerial, technical, or consultancy services (including the provision of services of technical or other personnel.

The legal position and interpretation of the preceding sections and circulars

The meaning of the term “work” is not explicitly defined in the Income Tax Act, 1961. However, we can find its definition u/s 194C in an inclusive manner to cover five categories of services. Further, to work contract service, according to the “Rule of Literal Interpretation” when construing statutes. The cardinal rule is to construe its provisions literally. Further, grammatically giving the words their ordinary and natural meaning unless the statute in the context intends otherwise.

According to the Oxford dictionary, we can define work as “activity involving mental or physical effort done to achieve a result”, “work as a means of earning income, employment”. “the place where one is having employment”, and “the period of time one spends in paid employment”. As a result, the literal and grammatical meaning of work is an activity that an individual did for a reward/income.

Because no element of income is involving in the debit note by group companies in the transaction above, the transaction should not be subject to TDS provisions. The same interpretation would apply to Section 194J.

Applicability of Law

The law wants to develop a mechanism in TDS provisions of advance collection of income tax on the individual’s income rather than to deduct tax for every transaction.

In the case of Commissioner of Income Tax-III v. Gujarat Narmada Valley Fertilizers Co. Ltd., the Gujarat High Court ruled in favour of the Commissioner of Income Tax-III. On the 25th of June, 2013, the wordings of the court are “This court also supports its reasoning by the text of Section 194C (TDS for “work”) and Section 194J (TDS of income from “professional services”). Neither provision requires the person making the payment to deduct anything other than as per “income” from contractual payments such as those made for reimbursement of expenses. As a result, the law requires only amounts that meet the definition of “income” to be subject to TDS in such cases.”

Related Case Laws

In the case of ITO v. Dr. Willmar Schwabe India (P) Ltd [2005], the Delhi bench of ITAT in “The CBDT Circular No. 715, 8th August 1995. Relying upon the AO in support of his case on this issue was applicable only in cases where bills represent the gross amount. Which includes professional fees as well as reimbursement of actual expenses and the same, therefore, was not applicable.”

The same interpretation is used in the following cases:

• CIT XI vs M/s DLF Commercial Project Corporation (Delhi) and;
•  Industrial Engineering Projects Pvt. Ltd. (Delhi); 
•  CIT v. Tejaji Farasram Kharawalla Ltd., [1968] 67 ITR 95. (SC).

Takeaway

Based on above discussion, we can say that there is no element of profit is involving in the debit note. Moreover, it do not include any TDS implications on reimbursement of employees’ salaries in Group companies.

It was further held that no TDS deduction on the actual cost component, which is salaried reimbursement, is required. 

It is because the non-resident company had already deducted TDS under Section 192 when making payments to seconded employees.

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