The Bangalore Bench of Tribunal in the case of IBM India Private Ltd. vs ITO: ITA No. 749 to 752/Bang/2012 & 1588 to 1591/Bang/2012 (Bang) held that the assessee was liable to deduct tax at source on provision for expenses made in the books of account on quarterly basis on the ground that statutory provisions dealing with collection and recovery of tax envisage collection, irrespective of charge under Section 4(1) of the IT Act.

In that case, the assessee, wholly owned subsidiary of US Company, followed mercantile system of accounting and made provision for certain expenses in its books of accounts in view of the global group accounting policy where under each of the entity of IBM group worldwide had to quantify its expenses every quarter.

In respect of expenses where service/ work had been provided/ performed by the vendors, but invoices had not been received or in respect of which the payments had not fallen due for payment to the vendors, provision for such expenses was made on the basis of reliable estimates in the books of account recognizing the liability that was incurred. The expenses were debited to the profit and loss account and the provisions credited to a provision account. In the subsequent financial year, the provision entries were reversed and on receipt of invoices in respect of the respective expenses, the same were recorded as liabilities due to the respective parties, at which point in time taxes were withheld at source and paid to the Government in the due course. At the time of creation of provision it was not possible for the assessee to identify parties or if parties were identified, to arrive at the exact sum on which TDS was to be withheld. According to the assessing officer, in respect of the provision so created by the assessee in the books of accounts, TDS was deductible in terms of Chapter XVII-B of the IT Act and accordingly he treated the assessee as assessee in default in respect of TDS not deducted on the provision created in the books of account. On appeal, the CIT (A) in principle upheld the order of the assessing officer. On further appeal, the Tribunal, after examining the statutory provisions of the IT Act, held as under:

  1. The Tribunal, rejecting the argument of the assessee that in the absence of there being any accrual of expenditure in accordance with the mercantile system of account, the TDS obligations did not get triggered, held that the liability to deduct TDS exists when the amount in question is credited to a “suspense account” or any other account by whatever name called, which will also include a “provision” created in the books of accounts.
  2. The Tribunal further observed that various Sections 194C, 194J, 194H, 194I, etc., as applicable to the case, did not use the expression “income”, and instead used the expression “sum” and tax deduction is required on the “sum so paid”. The said section do not use the expression “chargeable to tax”, unlike Section 195 applicable on payment of sum to non-residents. Since the assessee was the person responsible for making payment to residents, it was the duty of the assessee to deduct tax at source.
  3. With regard to the argument of the assessee that in the absence of there being no charge under section 4 (1) of the IT Act in the hands of the payee, TDS provisions are not triggered, the Tribunal referring to the provisions of section 190 and Chapter XVII of the IT Act dealing with collection and recovery of tax, held that the statutory provisions envisage collection at source de hors the charge under section 4(1) of the IT Act. The sum collected by way of tax collection at source is appropriated as tax paid by the payee only on assessment in the hands of the payee.

Comments: While it may be argued that the Tribunal failed to appreciate that provisions of Sections 194C, 194J, 194H, 194I, etc., provides for tax deduction from income of nature referred to in the respective sections and it cannot be said that TDS provisions apply de-hors chargeability of income in the hands of the recipient and that the identity of the payee is necessary to apply the antiabuse provisions relating to tax deduction at source from income credited to suspense account or any other account, as such crediting is deemed to be credit to the account of the payee, the aforesaid decision would result in severe practical difficulties and disputes with service providers, not to mention the problems that may arise in claiming credit of tax by recipient of incomes on account of mismatch between amount credited and actually paid.