The Income Tax Appellate Tribunal, Mumbai Bench “D”, in Maersk India Private Limited v. Joint Commissioner of Income Tax, Central Circle 4(3), examined the applicability of tax deduction at source to reimbursement of common legal expenses, the timing of deduction under section 40(a)(ia), and the allowability of year-end provisions under section 37(1) of the Income-tax Act, 1961.
The appeal, bearing ITA No. 5856/Mum/2025, related to Assessment Year 2022–23 and arose from an order passed by the Commissioner of Income Tax (Appeals), NFAC. The Bench comprised Shri Vikram Singh Yadav, Accountant Member, and Shri Siddhartha Nautiyal, Judicial Member. The order was pronounced on 24 July 2026.
Background of the Dispute
Maersk India Private Limited is engaged in providing shipping agency services in India to Maersk A/S, Denmark, and also renders support and crewing services to associated enterprises. For Assessment Year 2022–23, the company declared a total income of ₹21.68 crore.
During assessment, the Assessing Officer made a disallowance under section 40(a)(ia) in respect of ₹4,12,065 paid to the Container Shipping Line Association, or CSLA, towards reimbursement of legal and counsel fees. The Assessing Officer treated the payment as professional fees liable to TDS under section 194J and disallowed 30 per cent of the expenditure, amounting to ₹1,23,620.
A further disallowance of ₹39,105 was made in relation to professional fees of ₹1,30,350 paid to Mr. Soumiachandran K.N. The Assessing Officer also disallowed ₹1,27,44,990 under section 37(1), representing the balance of year-end provisions after the assessee had voluntarily disallowed 30 per cent under section 40(a)(ia).
Reimbursement to Shipping Association Did Not Attract TDS
The assessee explained that CSLA was a mutual association of container shipping lines which had incurred legal and professional expenses for the common benefit of its members. The actual expenditure was thereafter allocated among participating members, with the assessee bearing its proportionate share.
The Tribunal found that the documentary evidence demonstrated that the legal expenses were initially incurred by CSLA and subsequently apportioned among its members. The assessee had merely reimbursed its share of the actual expenditure, and the Revenue had not established that CSLA recovered any amount over and above the expenditure incurred.
The Tribunal also noted that CSLA had deducted tax at source while making payments to the concerned legal professionals. The statutory obligation to deduct tax was, therefore, discharged at the stage at which payment was made to the actual recipients.
Importantly, the Tribunal held that the accounting description adopted by the assessee could not determine the true character of the transaction. Merely recording the expenditure under the head “Professional Fees” did not convert a pure reimbursement into a payment for professional services.
Since the reimbursement contained no profit or income element in the hands of CSLA, the Tribunal held that the TDS provisions were not attracted and deleted the disallowance of ₹1,23,620.
Book Entry Cannot Override the Real Nature of a Transaction
The ruling reiterates that the tax treatment of a payment must be determined from its substance and the supporting evidence rather than merely from the nomenclature used in the books of account.
Where an association incurs common expenses on behalf of its members, deducts tax at source while paying the actual service providers and subsequently recovers only the members’ proportionate share, such recovery may constitute pure reimbursement. In the absence of an income element in the recipient’s hands, a separate obligation to deduct tax may not arise for the member making the reimbursement.
Deduction Allowed in the Year of TDS Payment
In relation to the professional fee of ₹1,30,350 paid to Mr. Soumiachandran K.N., the Tribunal observed that the assessee had deducted and deposited tax at source. Once the assessee had itself treated the payment as liable to TDS, it could not subsequently contend that tax deduction was unnecessary.
The Tribunal clarified that section 40(a)(ia) does not permanently deny the expenditure. Where tax is deducted and deposited subsequently, the expenditure may be claimed in the year in which the statutory conditions are fulfilled. The assessee was accordingly permitted to claim the deduction in the relevant subsequent assessment year, subject to verification by the Assessing Officer. This ground was allowed for statistical purposes.
Year-End Provisions Remanded for Fresh Verification
The major disputed addition concerned year-end provisions of ₹1,82,07,129 towards professional and technical expenses. The assessee had voluntarily disallowed ₹54,62,139 under section 40(a)(ia), while the Assessing Officer disallowed the remaining ₹1,27,44,990 under section 37(1) by treating the provisions as contingent liabilities.
Before the Tribunal, the assessee produced a detailed chart identifying the parties, the amounts provided and the underlying claims or disputes. These included commercial disputes, recovery proceedings, cheque dishonour matters, detention and demurrage claims, labour disputes, customs proceedings, contractual disputes and other pending litigations.
However, the Tribunal noted that this detailed break-up and the supporting documents had not been furnished before the Assessing Officer or the CIT(A). The lower authorities had, therefore, not been given an opportunity to verify whether the liabilities had crystallised during the relevant financial year.
The Tribunal admitted the additional evidence but clarified that furnishing a break-up did not automatically establish the allowability of the provisions. The assessee was required to prove through cogent documentary evidence that each provision represented an ascertained business liability which had accrued during the year.
Accordingly, the issue was restored to the Assessing Officer for de novo adjudication. The Assessing Officer was directed to examine the chart and supporting records, determine whether each liability had accrued and satisfied section 37(1), and pass a fresh speaking order after providing the assessee a reasonable opportunity of hearing.
Key Legal Principles
The ruling establishes that pure reimbursement of actual expenditure, without any income or profit component in the hands of the recipient, does not ordinarily attract TDS. The true character of a payment must be determined from the underlying transaction and evidence rather than the ledger head under which it is recorded.
The decision also clarifies that disallowance under section 40(a)(ia) may operate as a timing adjustment where tax is deducted and deposited in a subsequent year. In relation to year-end provisions, the assessee must establish that the liability had accrued, was capable of reasonable estimation and was supported by contemporaneous evidence. A general or unsupported provision cannot be allowed merely because it has been recorded under the mercantile system.
Decision
The ITAT allowed the ground concerning reimbursement of common legal expenses, allowed the professional-fee ground for statistical purposes with liberty to claim deduction in the appropriate subsequent year, and remanded the question of year-end provisions to the Assessing Officer for fresh examination.
Consequently, the appeal was partly allowed for statistical purposes.