TDS Liability on Foreign-Leg LFC Payments Sustained: ITAT Patna Rules Against State Bank of India
Overview of the Case
The Income Tax Appellate Tribunal, Patna Bench, recently adjudicated an appeal preferred by State Bank of India against the order passed by the Addl/JCIT(A)-3, Hyderabad under Section 250 of the Income Tax Act, 1961, pertaining to Assessment Year 2016-17. The central controversy revolved around whether the assessee could be treated as an assessee in default under Section 201(1) for failing to deduct tax at source on Leave Fare Concession (LFC) payments made to employees where the travel involved a foreign leg.
The Tribunal, after examining the submissions advanced by the assessee and the binding precedent laid down by the Supreme Court, declined to disturb the appellate order, subject to the final outcome of SLP No. 16734/2023 pending adjudication before the Supreme Court.
Background: How the Dispute Arose
During Financial Year 2015-16, State Bank of India reimbursed LFC claims filed by certain employees whose travel routes included a foreign segment. The Assessing Officer received specific information indicating that such payments had been made without any deduction of tax at source.
Acting on this information, the Assessing Officer initiated proceedings under Section 201(1) and Section 201(1A) of the Income Tax Act, 1961. By an order dated 31.03.2023, the Assessing Officer formally declared the assessee to be in default with respect to non-deduction of TDS on LFC payments aggregating to ₹9,65,024/-.
The basis for this action was the Supreme Court's landmark ruling dated 04.11.2022 in State Bank of India vs. ACIT, Civil Appeal No. 8181 of 2022, which had categorically held that LTC involving a foreign leg falls outside the scope of Section 10(5) of the Income Tax Act, 1961.
First Appellate Proceedings Before Addl/JCIT(A)-3, Hyderabad
The assessee challenged the Assessing Officer's order before the Addl/JCIT(A)-3, Hyderabad. The first appellate authority acknowledged the Supreme Court's ruling that LTC payments involving a foreign travel component do not qualify for exemption under Section 10(5), rendering them subject to tax deduction at source.
Accordingly, the Addl/JCIT(A) confirmed the Assessing Officer's determination and dismissed the assessee's appeal. However, the appellate authority attached two important riders to its order:
- Recovery action was to be undertaken only after taking into account the final outcome of SLP No. 16734/2023 pending before the Supreme Court.
- The assessee was directed to submit employee-wise computation of income along with applicable TDS rates, enabling the Assessing Officer to rectify the order and reduce any excess demands, if applicable.
Grounds of Appeal Raised Before ITAT Patna
Dissatisfied with the first appellate order, the assessee filed an appeal before the ITAT Patna. The following key grounds, among others, were raised: