The Ruling in brief

The Bangalore Bench of the Tax Tribunal has held in the case of IBM India Private Ltd. that once a provision is created for an expense, the obligation for Tax Deduction at Source (‘TDS’) would get attracted irrespective of the fact that no invoice has been received or no claim made by the vendor.

Ruling Debrief

Stand of the Taxpayer

The Taxpayer contended that

(i) in respect of liabilities for which vendor invoices have not been received and where expenses are not due for payment, it was not liable to deduct tax merely on account of the fact that a provision for the same has been created in the books.

(ii) The Taxpayer argued that as the payees were not identifiable and the exact sum due for payment was not determinable at the provision stage, the obligation for Tax deduction did not arise. It was pointed out by the Taxpayer that the payee had to be mentioned in the TDS return that a Taxpayer has to file.

(iii) Explaining its accounting methodology, the Tax payer contended that the provision for expenses was reversed in the subsequent year and the Tax was deducted at source from payments [in relation to which the provision was created] made to vendors in the subsequent year. It was therefore contended that there was no default on the part of the Taxpayer in discharging Tax deduction obligations.

(iv) The Taxpayer also argued that since there was no charge to tax in the hands of the payee, as there was no payment obligation for Taxpayer, the question of applicability TDS provisions did not arise.

(v) Further, reliance was also placed on a Circular No.3/2010 which clarified that Banks need not deduct tax on interest accruals made on daily monthly basis as the same did not result in a “constructive receipt” in the hands of the depositor.

The Taxpayer however had also voluntarily added back the provision amounts as a “dis-allowable expense” under section 40(a). [A disallowance under section 40(a) is attracted when a Taxpayer has not complied with its Tax deduction obligation on payments/accruals].

Revenue’s Stand

(i) The Revenue contended that the action of the Taxpayer in disallowing the expense voluntarily was in itself an admission of default in compliance with Tax deduction obligation.

(ii)  The Revenue also relied on an express provision under Tax deduction provisions which required that TDS obligation to be met even on provisions made in the books.

(iii) Further, on account of failure on the part of the Taxpayer to file certain details called for at the lower stages, an adverse inference was also drawn to the effect that the Taxpayer was aware of the payees against which the liability was created and therefore there was no reason to charge the  expense to a  ‘provision’  account.

Tribunal’s view

On behalf of the Department, it was admitted that the Taxpayer has filed details of Tax deducted in the subsequent year, when the provision for expenses were paid out. On this basis, the Taxpayer was absolved of liability for default of TDS obligation  [under section 201 (1)].

However, the Tribunal ruled that the Taxpayer should have deducted tax at the time of provision itself, since the Tax deduction provision expressly provide for deduction to be made even in a scenario where provisions are created.

On the given facts, the Tribunal also did not agree to the Taxpayer’s stand that the payee’s were not identifiable at the time of creating the provisions. The Tribunal therefore upheld the levy of interest [u/s. 201(1A)] for the delay in the discharge of the TDS obligation.

The Tribunal also rejected the Taxpayer’s contention that TDS obligations arise only on showing that there was a charge to tax in the hands of payee. Reliance on Circular No.3/2010 was also held as misplaced, since the same was specifically issued in the context of interest provisioning made by banks for ‘macro monitoring’ purposes only.

 

Our Comment

The ruling highlights :

(i) Risks that a  Taxpayer faces even on mundane compliance issues like meeting TDS obligation

(ii) The administrative hassles that Taxpayer is put to by mandating TDS compliance even for provisions made in accounts

(iii) Impact of accounting practices on determination of Tax consequences

(iv)  Need to prepare ahead for consequences arising out of voluntary disclosures made in Tax filings and audit reports

While a strict and literal interpretation of the TDS provision does lead to the conclusion that the Tribunal reached, the ruling highlights the genuine hardships that Taxpayers are faced with, while discharging TDS obligations, particularly in the context of year end provisions.

The fairness of calling upon a Taxpayer to “deduct” tax even on provisions, when payments may not even be due to the vendors, is also an aspect on which a judicious view can be expected to be taken only at the High Court level, as Tribunals would generally confine their view to the express provision of law.

From a practical standpoint though, the only mitigating option for the Taxpayer would appear to be to identify the payees behind the provisions as far as practicable and take advantage of the extended time-limit (one month as against normal period of seven days) for remitting taxes on year end provisions, to avoid disallowance and penal interest.