High Court ruling on Deys Medical (U.P.) case for reimbursement on percentage-based payments and disallowance under Section 40(a)(ia)

Case Details

• Case Title: Deys Medical (U.P.) Private Limited vs Principal Commissioner of Income Tax, Central-2, Kolkata

• Court: High Court at Calcutta

• Appeal Number: ITAT 160 of 2024

• Assessment Year: 2005–06

• Date Pronounced: 18 February 2026

• Judge: Justice Rajarshi Bharadwaj and Justice Uday Kumar

FACTS OF CASE

• The appeal is directed against the order of the Income Tax Appellate Tribunal, Kolkata Bench “B”, dated November 29, 2023, relating to the assessment year 2005-06.

• The appellant is a unit of the Dey’s Medical Stores Group, involved in the manufacture of products including Keo Karpin Hair Oil and certain medicines.

• The Group comprises the appellant, Dey’s Medical Stores Private Limited and Dey’s Medical Stores (Manufacturing) Limited.

• The appellant operates manufacturing facilities in Allahabad, Uttar Pradesh, and utilizes the infrastructure, marketing and sales promotion services of the group companies on a reimbursement basis.

• Pursuant to agreements dated April 1, 2004 and July 14, 2004, the appellant reimbursed expenses towards advertisement, sales promotion, marketing staff, handling, storage and collection, calculated as fixed percentages of net sales realization.

• The total amounts involved were Rs. 2,86,88,459/- towards sales promotion, advertisement and marketing expenses and Rs. 48,19,050/- towards handling, storing and collection expenses.

ISSUE

• Whether the payments described as reimbursement of expenses were liable for tax deduction at source.

• Whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 was justified when the amounts were quantified as percentages of net sales realization.

• Whether disallowance could be made when the recipient companies had included the amounts in their income and paid applicable tax.

TRIBUNAL DECISION

• The appellant had contracted agreements with the group companies for advertisement, sales promotion and related activities.

• These activities were covered under the definition of work contract under Section 194C.

• The payments were predetermined percentages of sales and not actual sums spent by the payee companies.

• The amounts were not reimbursement but contract payments made in the garb of reimbursement.

• Since no tax was deducted at source, disallowance under Section 40(a)(ia) was rightly invoked by assessing officer.

REVENUE STAND

• The appellant failed to deduct tax at source on payments amounting to Rs. 3,35,07,509.

• The payments were calculated as fixed percentages of turnover and had no direct correlation with actual expenditure incurred.

• Reimbursement is dependent on actual expenditure already made and cannot be a fixed percentage of sales.

• The payments were contractual in nature and covered under Section 194C.

• Strict adherence to statutory provisions was necessary to maintain the integrity of the tax collection process.

APPELLANT STAND

• The payments were purely reimbursements for expenses incurred by the group companies on behalf of the appellant.

• The expenses were common in nature and apportioned rationally as percentages of net sales based on historical data.

• The reimbursements did not constitute income or expenditure attracting tax deduction at source under Section 194C or any other provision.

• The recipient companies deducted tax at source on their own payments and included the reimbursed amounts in their taxable income.

• The insistence on item-by-item correlation ignored commercial rationale and business realities.

• The disallowance upheld by the Tribunal was arbitrary, erroneous and perverse in fact and law.

Also read our article : https://www.statvixadvisors.com/section-393-1-of-the-income-tax-act-2025-payment-to-resident

HIGH COURT DECISION

• The Tribunal’s reasoning was well-founded and comprehensive.

• The payments were contractual consideration for advertising, sales promotion, handling and storage services.

• Genuine reimbursement requires post-facto payment linked to specific, documented expenses supported by bills or vouchers.

• Payments determined as fixed percentages of net sales are not reimbursement but contractual payments.

• The obligation to deduct tax at source rests with the payer at the time of payment or credit.

• Subsequent inclusion of the amounts in the income of the recipients and payment of tax does not absolve the appellant of statutory obligation.

• The payments squarely fall within the scope of Section 194C and failure to deduct tax justified disallowance under Section 40(a)(ia).

• The questions framed were answered in favour of the revenue.

• The appeal was dismissed, the Tribunal’s order was affirmed, the application was disposed of and there was no order as to costs.

KEY POINTS

• Merely describing a payment as reimbursement does not determine its tax treatment; the substance of the transaction prevails over its form.

• A reimbursement must represent actual expenditure incurred, supported by proper bills, vouchers and a direct nexus between cost and recovery.

• Payments determined as a percentage of turnover or net sales are indicative of contractual or service consideration, not reimbursement.

• Where services such as advertising, sales promotion, marketing, handling or storage are provided under an arrangement, the payments fall within the scope of work contracts attracting TDS obligations.

• The statutory responsibility to deduct tax at source lies with the payer at the time of payment or credit, irrespective of subsequent tax compliance by the recipient.

• Payment of tax by the recipient or inclusion of the amount in its income does not absolve the payer from TDS default.

• Group company arrangements and cost-sharing mechanisms must comply strictly with TDS provisions, even if commercially justified.

• Absence of item-wise correlation and documentary evidence weakens the claim that payments are reimbursement.

•  Disallowance under Section 40(a)(ia) is a consequence of non-compliance, not dependent on revenue loss.

  Frequently Asked Questions (FAQs)

1. What was the principal controversy before the High Court?

The principal controversy was whether amounts paid by the assessee to its group companies, described as reimbursement of advertisement, sales promotion, marketing and handling expenses, were in fact reimbursements or contractual payments attracting deduction of tax at source and consequent disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.

2. On what basis were the impugned payments computed?

The payments were computed as fixed percentages of the assessee’s net sales realization and not with reference to actual expenditure incurred and supported by bills or vouchers.

3. Why were the payments not accepted as reimbursement of expenses?

The payments were not accepted as reimbursement because reimbursement necessarily presupposes repayment of actual expenditure already incurred, whereas the impugned amounts were predetermined as a percentage of sales without correlation to specific expenses.

4. Under which provision were the payments held to be liable for TDS?

The payments were held to be contractual in nature and covered under Section 194C of the Income Tax Act, 1961, being consideration for advertisement, sales promotion, handling and storage services.

5. Did inclusion of the amounts in the income of the recipient companies affect the assessee’s liability?

No. The inclusion of the amounts in the income of the recipient companies and payment of tax by them did not absolve the assessee of its statutory obligation to deduct tax at source at the time of payment or credit.

6. What was the consequence of failure to deduct tax at source?

Failure to deduct tax at source resulted in disallowance of the expenditure under Section 40(a)(ia) of the Income Tax Act, 1961.

7. What was the final decision of the High Court?

The High Court upheld the order of the Tribunal, affirmed the disallowance of the impugned expenses under Section 40(a)(ia), and answered the questions of law in favour of the revenue.

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