K D LITE DEVELOPERS PRIVATE LIMITED,MUMBAI vs. DY. COMMISSIONER OF INCOME TAX, TDS CIRCLE 1(3), MUMBAI, MUMBAI

The AO after serving notices and seeking reply of the assessee, determined that the assessee was in default and passed an order under section 201(1A) of the IT Act thereby determining an interest of Rs. 1,27,458/- payable by the assessee for the default on account of non deduction of TDS under section 194A of the IT Act.

Being aggrieved by the said order, the assessee filed appeal before Ld. CIT(A), however, the same was decided against the assesse.

Aggrieved with the above order, the assessee preferred appeal before us and the only ground raised by the assessee is with regard to challenging the order of Ld. CIT(A) in upholding the order of AO in considering the assessee as “assessee in default” for non deduction of TDS, without asserting the fact that the interest paid on loan from group entities are in the nature of reimbursement and therefore not liable for deduction of TDS.

The assessee is part of Ruparel Realty Group. Ruparel Realty Group consist of various concerns/entities. At present there are around 23 entities in the Ruparel Realty Group which consists of 15 Private Limited Companies, 7 Partnership Firms, 1 Proprietory Concern and family members forming part of it.

The objectives behind forming these different entities are: i. to have separate entity for each project or group of projects having common features like geographical location, interested groups, financer etc. ii. few entities are the results of the takeovers of the projects from the existing developers. So, to fasten the takeover processes, separate entity is formed so that existing entities and processes are not disturbed. iii. to have ease of accounting and thereby clarity in decision making. iv. to secure the finance from the lenders as the entity has to pledge the shares. If there is only one entity then securing finance from different lenders becomes difficult for the various reasons. v. to give share of the specific projects to the outsiders, wherever applicable. vi. many other reasons depending on case-to-case basis 3. All these entities are engaged in similar business activity of builders and developers. The group is mainly engaged in the business of re-development of slums (SRA Projects) and other old building structures. 4. All the companies and firms are family owned and have common shareholders and directors. 5. Area of the business operation of the group is Mumbai, Navi Mumbai and suburbs of Mumbai. The group is into real estate business since last more than 20 years. 6. The group needs finance for the various projects carried out by various entities of the group. The group has to mortgage various projects in order to borrow more money and fulfil , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED security objectives of Lenders / Financial Institutes which ranges from 2-3 times of loan amount. This also helps in minimizing the paper work and other compliances. The objective of the groups is to secure maximum possible finance by one or another way to keep the projects alive at minimum possible cost & compliance, is thus thereby achieved.

The entity in whose name the funds are borrowed becomes Principal Borrower with other entities standing as co– borrowers. Projects of both principal borrower and co borrowers are generally mortgaged. Therefore, the loans / funds are borrowed for the group (co-borrowers and other entities) as a whole for utilization in the various projects of the group. The funds are then transferred to various group entities as per project requirements.

The servicing and repayment of the loans also happen from cash flows of all such entities including but not limited to principal borrower and co-borrowers. However, the same has to be routed through the principal borrower.

The funds sanctioned by the lender are for utilization by not only the principal borrower but also the co-borrowers whose projects are mortgaged to secure the loan facility and for other general corporate purposes. The lender provides flexibility to utilize the facility amount through the principal borrower to other projects in the group to ensure completion and successful repayment of the loan from various such group entities.

The Principal Entity makes the payment of interest along with principal repayment to the principal lender after deduction of tax on interest, wherever applicable. This payment is for the entire facility which includes the funds utilized by the group also.

The funds are given to the various group entities within the group by the principal borrowers and co–borrowers on the basis of requirements in the project(s) as and when arise.

The funds given and taken amongst the various entities are in the nature of current account.

The interest reimbursement is calculated on the amounts given to and loans taken from the group entities at the rate of interest at which the Principal Lender has lent the loans. There is no mark up in the rate of interest while calculating the interest reimbursement amount from various entities of the group. 5 , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED

The interest paid and received on the amounts given and taken amongst the group entities are netted off and the resultant amount of interest paid (net) / interest received (net) are reflected in the Profit & Loss Account of individual entity. As per the method of accounting and stage of the completion of the project, the net interest is then included in the closing work in progress of project of the entity.

From the above it is evident that interest transactions between the group entities are pure reimbursement in nature. 16. The assessee has reimbursed interest amounting to a total of Rs. 1,59,32,156/- in the relevant A.Y. 2016-17 to its sister concerns. The details of the same has been tabulated below S. Name of the Sister Concerns Amount No. (Rs.) 1 Ruparel Developers India Pvt Ltd 59,065 2 Ruparel Estates India Pvt Ltd. 2,76,357 3 Ruparel Homes (I) Private Ltd. 1,33,38,962 Shree Sukhakarta Developers India Pvt 4 22,57,772 Ltd Total 1,59,32,156

The Ld. AO has determined an amount totalling to Rs. 1,27,458/- as an interest payable for failure to deduct TDS on the above-mentioned interest payments to its sister concerns. The details of the same has been tabulated below Sr. Name of the Amount TDS Interest No. Sister Concerns Due u/s 201(1A) Ruparel Developers 1 59,065 5,907 473 India Pvt Ltd Ruparel Estates 2 2,76,357 27,636 2,211 India Pvt Ltd. Ruparel Homes (I) 3 1,33,38,962 13,33,896 1,06,712 Private Ltd. Shree Sukhakarta 4 Developers India 22,57,772 2,25,777 18,062 Pvt Ltd Total 1,59,32,156 15,93,215 1,27,458 , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED Assessment proceedings dropped with respect to two of the group entities : Without prejudice to above we would further like to emphasize on the fact that similar proceedings were initiated against some of our group entities i.e.

HOME BUILDERS, 2. HOME BUILDERS AND INFRASTUCTURES PRIVATE LIMITED, and the said proceedings were dropped accepting the contention of the assessee the details of the said cases are hereby produced with the submissions. Evaluation of Section 194A r.w.s. 2(28A) of the IT Act. Section 194A: Interest other than "Interest on securities". (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income- tax thereon at the rates in force: Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section. Explanation. —For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. …….. (4) The person responsible for making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year. (5) The Central Government may, by notification in the Official Gazette, provide that the deduction of tax shall not be made or shall be made at such lower rate, from such payment to such person or class of persons, as may be specified in the said notification. Section 194A deals with deduction of TDS on interest other than interest on securities like Interest on Fixed Deposits, Interest on Loans and Advances other than banks.

This section is only applicable to a resident. Thus, the provisions of section 194A are not applicable in case of payment of interest to a non-resident.

Payments made to non-residents are also covered under TDS mechanism. However, tax in such a case is to be deducted as per Section 195.

The payer/Deductor shall deduct TDS if the amount of such interest paid or credited or is likely to be paid or credited in a financial year, exceed a. 10,000 where the payer is • Banking company or any bank or a banking institution • Co-operative society engaged in the business of banking • Post office (on deposit under scheme framed and notified by Central Government). b. 5,000 in any other case • From FY 2018-19 onwards no TDS will be deducted on interest earned upto INR 50,000 by senior citizens. The interest amount should be earned from the following: • Deposits with banks; • Deposits with post offices • Fixed deposit schemes • Recurring deposit schemes Analysing section 194A of the IT Act in the assessee’s case. As discussed, this Section of Income Tax Act is concerned with the deduction of interest accrued on sources other than securities.

In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct. Explanation. —For the removal of doubts, it is hereby declared that if any person including the principal officer of a company, — (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act, and where the assessee has also failed to pay such tax directly, then, such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default within the meaning of sub-section (1) of section 201, in respect of such tax. From the aforesaid provisions of section 191, it may be seen that in the case of income, in respect of which provision is not made under Chapter XVII of the Act, for deducting income-tax at source at the time of payment and in any case where income-tax has not been deducted in accordance with the provisions of the said Chapter, income-tax shall be payable by the assessee directly. Thus, even from the provisions of section 191 of the Act, it is clear that tax is deductible at source only in respect of income. With respect to the above, relevant extracts of the judgement of Karnataka High Court in the case of - Hyderabad Industries Ltd Vs ITO [1991] 188 ITR 749 (Karn) is hereby reproduced :

ITO Vs. Dr. Willmar Schwabe India (P) Ltd. [2005] 95 TTJ 53 (Del) In this case, one of the issues before the Hon. Bench of the Tribunal, was TDS in respect of reimbursement of conveyance expenses. As per agreement between the assesse company and Indochem Techno Consultants Ltd, a vehicle was to be provided by the assessee company to the said consultant for attending to its work and thus, the assessee company was to bear the vehicle expenses actually incurred by the said party. Bills for such expenses incurred by the said consultant were separately raised by him on the assessee company, in addition to bills for fees payable on account of technical services. It was held that since the amount of bills so raised was towards the actual expenses incurred by the consultant, there was no element of any profit or income involved in the said bills. It was, thus, a clear case of reimbursement of actual expenses incurred by the consultant and the same, therefore, was not of the nature of payment, requiring the assessee to deduct tax at source therefrom.

Mahindra and Mahindra Ltd VsDy.CIT [2009] 313 ITR (AT) 263 (Mum)(SB): 22 DTR (Trib) 361 (Mum)(SB). It was, inter alia, held in this case that reimbursement of expenses cannot be considered to be in the nature of income and therefore, it is not income by way of fees for technical services. It was further held that when a particular amount of expenditure is incurred and that sum is reimbursed as such, that cannot be considered as having any part of it in the nature of income. Any payment, in order to be brought within the scope of income by way of fees for technical services under section 9(1)(vii) should, be or have at least some elements of income in it. Such payment should involve some compensation for the rendering of any services which can be described as income in the hands of , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED the recipient. In other words, the component of income must be present in the total amount of fees paid for technical services to constitute an item falling under section 9(1)(vii). Where the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India and accordingly, there was no obligation to deduct tax at source therefrom under section 195 of the Act.

JDIT (Int.Tax) Vs. KRUPP UHDE GmbH [2009] 26 DTR (Trib) 289 (Mum): [2010]1 ITR 614 (Mum) It was, inter alia, held in this case that amounts received by the assessee towards reimbursement of expenses were not liable to tax as fees for technical services.

NathpaJhakri Joint Venture Vs ACIT [2010] 5 ITR (Trib) 75 (Mum) It was held in this case that reimbursement of expenses was not income in the hands of the non-resident and therefore, not liable to TDS under section 195 of the Act. It was further held that it is axiomatic that tax is charged on income and not on receipts. The reimbursement of expenses by the Indian assessee to the non-resident was not taxable in the hands of the non-resident. Only if the sum paid or credited is chargeable to tax in the hands of the payee, the assessee is liable to deduct tax at source. If the assessee payer did not move application under sub- section (2) of section 195 of the Act, it could not be held that the liability to deduct tax at source had automatically arisen. As the reimbursement of expenses was not taxable in the hands of the payee, the assessee was not liable to deduct tax at source.

Expeditors International (India) P. Ltd VsAddl.CIT [2010] 2 ITR (Trib) 153 (Del) It was, inter alia, held in this case that the amount paid by the assessee company to its parent company, on account of reimbursement of expenses incurred in respect of global accounts manager, could not be treated as payment of salary, so as to attract the deduction of tax at source. It was a case of reimbursement of common expenses incurred , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED by the parent company for the benefit of all the group concerns, including the assessee company, which do not attract any deduction of tax and disallowance could not be made by invoking the provisions of section 40(a)(iii) for non-deduction of tax from reimbursement.

Linklaters LLP Vs ITO (Int.Tax) [2011] 9 ITR (Trib) 217 (Mum) It was, inter alia, held in this case that reimbursements received by the assessee were in respect of specific and actual expenses incurred by the assessee and do not involve any mark up. Besides, there was reasonable control mechanism in place to ensure that these claims were not inflated and the assessee had furnished sufficient evidence to demonstrate the incurring of expenses. There was, thus, no reason to make any addition to income in respect of the reimbursement of expenses. We also rely on the below mentioned judgements related to reimbursement: IN THE SUPREME The Supreme Court in the case of Director COURT OF INDIA of Income-tax (IT) vs. A.P. Moller Maersk, Director Of held that cost reimbursed by Indian Income Tax (It) - agents for utilizing global I telecommunication facility cannot be vs treated as fees for technical services and A.P. Moller therefore not taxable. Maersk IN THE HIGH Held that, COURT OF 3. The Tribunal, however, held that, the JUDICATURE AT amount in question was by way of BOMBAY reimbursement of costs. The Tribunal INCOME TAX held that Assessee had paid such sums APPEAL NO. 652 towards administrative costs such as the OF 2017 employee cost, rent, finance and legal Pr. Commissioner corporate recharge etc. The Tribunal of Income Tax - 1 noted that, GSIPL had provided services Versus to the assessee by deploying its Goldman Sachs employees for such work and the cost (India) Finance was for reimbursement for such expenses Pvt Ltd besides other related expenditure. (GSIFPL) Revenue was unable to dislodge these findings of fact recorded by the Tribunal.

Proceeding dropped in case M/s. Home Builders and Infrastructure Pvt. Ltd. for AY 2020-21 (Assessee’s sister concern) 7. Proceeding dropped in case M/s. Home Builders and Infrastructure Pvt. Ltd. for AY 2021-22 (Assessee’s sister concern) 8. Proceeding dropped in case M/s. Home Builders for AY 2017-18 (Assessee’s sister concern) 9. Proceeding dropped in case M/s. Home Builders for AY 2018-19 (Assessee’s sister concern) 10. Proceeding dropped in case M/s. Home Builders for AY 2019-20 (Assessee’s sister concern) 11. IN THE ITAT MUMBAI BENCH 'C' Onward e-Services Ltd. v. Assistant Commissioner of Income-tax, Central Circle 37 IT APPEAL NOS. 97 AND 2974 (MUM.) OF 2010 [ASSESSMENT YEARS 2005-06 AND 2007-08] 12. IN THE ITAT MUMBAI BENCH ‘L-1’ NathpaJhakri Joint Venture v. Assistant Commissioner of Income-tax, Circle 23(1), Mumbai IT APPEAL NOS. 35 AND 105 (MUM.) OF 2007 [ASSESSMENT YEAR 2003-04] 13. IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I-2’, NEW DELHI M/s Expeditors International (India) v. DCIT, Circle-11(1), New Delhi :Asstt. Year: 2009-10 ITA No. 2260/Del/2015 :Asstt. Year: 2009-10 ITA No. 5994/Del/2017 :Asstt. Year: 2010-11 ITA No. 17/Del/2021 :Asstt. Year: 2010-11 ITA No. 3513/Del/2017 :Asstt. Year: 2011-12 ITA No. 18/Del/2021 :Asstt. Year: 2011-12 ITA No. 5538/Del/2018 :Asstt. Year: 2012-13 ITA No. 19/Del/2021 :Asstt. Year: 2012-13 14. IN THE ITAT MUMBAI BENCH 'B' Deputy Commissioner of Income-tax- 10 (1), Mumbai v. Mahanagar Gas Ltd. IT APPEAL NO. 1945 (MUM.) OF 2013 [ASSESSMENT YEAR 2009-10] 15. HIGH COURT OF DELHI Commissioner of Income-tax v. Industrial Engineering Projects (P.) Ltd. IT CASE NO. 211 OF 1991 16. HIGH COURT OF CALCUTTA Commissioner of Income-tax v. Dunlop Rubber Co. Ltd. IT REFERENCE NO. 250 OF 1974 17. In the Supreme Court of India Director of Income Tax vs AP Moller Maersk 23 , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED

IN THE HIGH COURT OF JUDICATURE AT BOMBAY Pr. Commissioner of Income Tax – 1 v. Goldman Sachs (India) Finance Pvt Ltd (GSIFPL) 19. HIGH COURT OF GUJARAT Principal Commissioner of Income Tax, Central, Ahmedabad v. Plastene India Ltd. R/TAX APPEAL NO. 1284 OF 2018 20. In case of Shree Siddhivinayak Infrastructure & Realty before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2017-18 (Assessee’s sister concern) 21. In case of Shree Siddhivinayak Infrastructure & Realty before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2018-19 (Assessee’s sister concern) 22. In case of Shree Siddhivinayak Infrastructure & Realty before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2019-20 (Assessee’s sister concern) 23. In case of Ruparel Infra & Realty Private Limited before The Commissioner of Income Tax, Appeal ADDL/JCIT (A)-2 Ahmedabad AY 2018-19 (Assessee’s sister concern)

Reimbursement of expenses does not partake the nature of income, in the hands of the payee of such expenses.

There is no Loss of Revenue to the Exchequer: The principal borrower has duly deducted and paid the TDS to the exchequer while making payment of interest to the lender, wherever applicable. As the exchequer has duly received the share of the amount and hence, there is no any revenue loss to the Government. Had if the individual group entities directly paid the interest to principal lender deducting the TDS at their individual level, the amount of TDS amount reaching to the Government would have been the same, as is done now. The process of making one entity as principal borrower and other as co- borrowers is for the purposes as stated here in before i.e. to secure maximum finance, less paper work and compliances, convenience, proper tracking of the repayment etc.

This is established and duly accepted practice by Income Tax Department over the years: As stated herein before, that we are into the real estate business since last more than 20 years. Our business expansion and loan transactions has majorly grown during last 8-10 years. During this tenure, we had number of income tax scrutinies and TDS enquiries of many group entities every year. Almost 5-6 scrutinies every year. This question of non-deduction of TDS on reimbursement of Interest is being asked and explained in almost all the cases.

On the other hand, Ld. DR objected to the submissions made by the Ld AR and relied upon the orders passed by the revenue authorities.

We have heard the counsels for both the parties and we have also perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities. From the records, we noticed that the assessee has submitted relevant documents to prove that the payment of interest is a reimbursement in nature. As per the language used by the Parliament in section 194A what is contemplated is the 'interest in the form ofincome'. In the present case the argument of the assessee is that it is only reimbursement of the interest paymentin respect of the funds utilized by the assessee towards borrowing facility of it's group entities. As per the facts on record the assessee-company is a sister concern of 'Ruparel Realty Group'. The assessee-company borrowed a sum of money from its group entities which is repayable on demand. The same is evident from the presentation in the Balance Sheet of the period under consideration. In the balance sheetfor year ending 31.03.2016,note no.6 under , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED the head 'short-term borrowings' the 'Loans repayable on demand'from the group companies is disclosed. In the interim period group companies has advanced a loan as 'Short Term Loan & Advances' under ‘Current Assets’ of same amount. From the above evidence, it can safely be concluded that the assessee-company was enjoying borrowing facilities from the bank through it's group entity companies and the funds have been advanced to the assessee. As per the contention of the assessee to the extent of the funds utilized in respect of bank borrowing in the name of the group entity companies, the interest cost isreimbursed. In fact, the assessee is paying only the interest to the bank but itis through the group entity companies. Thegroup entity companiesis not in lending business.

From the Balance Sheet of the assesse it has been observed that the assessee has shown the loan amount in the name of the group entity companies. If the credit limit has not been nottransferred in the name of the assessee but the credit facility is being enjoyed by the assessee through the group entity companies, then in such a situation the assessee cannot directly show the name of the bank but liability has to beshown on the name of the group entity companies.

Apart from above, Ld. AR also placed on record the copies of proceedings dropped in the case of assessee’s sister concern by the AO himself under the identical circumstances which are at paper book page No. 7 to 15 and also copy of orders passed by Ld. CIT(A) in assessee’s sister concerns which are also at paper book at page No. 85 to 245, wherein it has been held by the revenue themselves that “the reimbursement of expenses by the appellant to sister concerns are in the nature of pure reimbursement to principal borrower and it does not partake the nature of income, in the hands of the payee of such expenses”.

Therefore, in the light of the above legal proposition and also in view of our detailed discussion, it is held that the assessee is under no statutory obligation to deduct the , 5325, 5354, 5356 & 5357/MUM/2024 M/s. K D LITE DEVELOPERS PRIVATE LIMITED tax at source under section194A.Consequently, the interest payable for failure to deduct TDS under section 201(1A) of the Act does not arise. Therefore, the ground of appeal taken by the assessee is allowed and the addition made by the Assessing Officer is hereby directed to be deleted.

In the result, all the five appeals filed by the assessee are allowed.