Payment made by Mahindra to dealers towards free car services on its behalf shall be liable to deduction of tax at source

Facts of the case:

1. Assessee was engaged in the business of manufacturing automobile, vehicles, tractors, etc. On the purchase of vehicle, the purchaser would get free service coupons through which he was entitled for availing certain no. of free car services from a dealer.
2. Assessee had made payment of Rs. 35.49 crores to its dealers towards service coupons without deduction of tax
3. Assessing officer was of view that the said payment is pursuant to contract & shall be liable for deduction of tax under Section 194C of the Income Tax Act, 1961 (“the Act”). Accordingly, AO made the proceedings by making disallowance of said payment u/s 40(a) (ia) of the Act.
4. On appeal, the Commissioner (Appeals) upheld the disallowance made by Assessing officer. Aggrieved, Assessee filed an appeal with the Tribunal.

Held by ITAT Mumbai:

1. Free services had been provided by the dealers in order to discharge the obligation of assessee towards the customers to provide such services, therefore, payment made to dealer is not in the nature of reimbursement of expenses incurred by dealers, rather payment of consideration pursuant to a contract.
2. Reliance has also been placed upon similar view taken by ITAT Mumbai in the case of sister concern of Assessee viz. Mahindra Navistar Automobile Ltd. vs. Dy. CIT (2016). Therefore, it is held that provisions of Section 40(a) (ia) of the Act have been rightly levied.

Conclusion

Rendering of services on behalf of another company clearly envisages the relationship of principal and agent and accordingly, amount paid in lieu of discharging such services shall be liable to deduction of tax under contractual services.

Mahindra & Mahindra Ltd. V. Deputy Commissioner of income tax (Mumbai)