Payment of cross‑charges without mark-up under cost‑sharing agreement held to be pure reimbursement; no disallowance under section 40(a)(ia) of the Act – Bombay High Court

In brief

The Bombay High Court, in a recent decision¹, dismissed the Revenue’s appeal and upheld the order of the Income-tax Appellate Tribunal (Tribunal), deleting the disallowance under section 40(a)(ia) of the Income-tax Act, 1961 (the Act), for non-deduction of tax at source (TDS) on cross-charges paid by the taxpayer to its sister concern under a cost-sharing agreement. The court held that the charges represented pure reimbursements of actual costs, without any mark-up or embedded income component, and therefore not liable for TDS.

The court further affirmed that the amendments to sections 40(a)(ia) and 201(1) of the Act by the Finance Act, 2012 are beneficial, declaratory and curative in nature, and operate retrospectively from 1 April 2005. Accordingly, where the payee has duly offered the income to tax and paid taxes, supported by a Chartered Accountant’s certificate, the payer cannot be treated as an assessee in default.