Sales-Linked Payments to Group Firms Attract TDS u/s 194C | HC

Case Details: Deys Medical (U.P.) (P.) Ltd. vs. Principal Commissioner of Income-tax - [2026] 184 taxmann.com 101 (Calcutta)

Judiciary and Counsel Details

• Rajarshi Bharadwaj & Uday Kumar, JJ.
• J.P. Khaitan, Pratyush Jhunjhunwala, Ms Sruti Datta & Ms Sakshi Singhi, Advs. for the Appellant.
• Prithu Dudhoria & Ms Sukanya Dutta, Advs. for the Respondent.

Facts of the Case

The assessee, a company, was a unit of the Dey’s Medical Stores Group and involved in manufacturing products. It used the Group Companies’ infrastructure, marketing, and sales promotion services on a reimbursement basis for incurred expenses. Such expenses were apportioned as a percentage of net sales based on historical data and treated as reimbursements.

The assessee did not deduct tax at source (TDS) on such payments. AO disallowed the reimbursement expenses under section 40(a)(ia) for failure to deduct TDS. On appeal, the CIT(A) deleted the disallowance, but the Tribunal partially restored it. The aggrieved assessee filed the instant appeal before the Calcutta High Court.

High Court Held

The High Court held that the Tribunal rightly emphasised that the payments did not correspond to actual, verifiable expenses incurred by the recipients. Genuine reimbursements are characterised by their nature as payments made post-facto, directly linked to specific, documented expenses supported by bills, vouchers or other tangible evidence.

In contrast, the payments in question lacked such detailed documentation. Instead, they appeared to be structured as fixed commissions or service fees, amounts that are inherently not reimbursements but contractual consideration for services rendered.

While commercial arrangements often involve apportioning costs based on historical data or arm’s-length negotiations, such practices cannot override the statutory requirement to deduct TDS at the time of payment or credit when the transactions are contractual in nature and fall within the scope of Section 194C.

Therefore, the Tribunal’s reasoning was sound, well-reasoned and supported by the record evidence. The payments in question, being contractual and not genuine reimbursements, squarely fall within the scope of Section 194C. The failure to deduct TDS in these circumstances justifies the disallowance under Section 40(a)(ia). The assessee’s arguments to the contrary lack merit and do not withstand scrutiny.

List of Cases Reviewed

• Shree Choudhary Transport Company v. ITO [2020] 118 taxmann.com 47/426 ITR 289/272 Taxman 472 (SC) (para 26) followed
• ITAT Appeal No. 1703/Kol/2018, dated 29-11-2023 (para 31) affirmed

List of Cases Referred to

• Zephyr Biomedicals v. Jt. CIT [2020] 122 taxmann.com 124/[2021] 276 Taxman 305/428 ITR 398 (Bombay) (para 9)
• Shree Choudhary Transport Company v. ITO [2020] 118 taxmann.com 47/426 ITR 289/272 Taxman 472 (SC) (para 25).