There have been a number of occasions when some of my clients and some other entities have sought my opinion regarding the issue whether tax is required to be deducted at source, in respect of reimbursement of expenses, under the provisions of Chapter XVII-B of the Income-Tax Act, 1961 (the Act). In this context, it may be stated that the income-tax authorities have been insisting that in view of Answer to Question No.30, as provided in Circular No.715, dated 8.8.1995, issued by the CBDT [215 ITR (St) 12], tax is to be deducted at source out of the gross amount of the bill, including the reimbursements.
Tax is to be deducted at source, out of the gross amount of the bill, including reimbursements, because reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source. In order to overcome the aforesaid view of the CBDT, it is advisable that a separate bill is prepared in respect of reimbursement of expenses incurred by the person raising the bill for such expenses.
In this regard, a reference may also be made to the judgment of Delhi Bench of the Tribunal in the case of ITO Vs. Dr.Willmar Schwabe India (P) Ltd.  95 TTJ 53 (Del). One of the issues before the Hon. ITAT in the above case was TDS in respect of reimbursement of expenses where the consultant had raised a separate bill for such expenses. In this case, as per agreement between the assessee company and M/s.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 2 to bear the vehicle expenses actually incurred by the said party. Bills for such expenses incurred by the said consultant were separately raised on the assessee company, in addition to bills for fees payable on account of technical services. It was held by the Hon. Tribunal that since the amount of bills so raised was towards the actual expenses incurred by the consultant, there was no element of any profit 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 covered by section 194J, requiring the assessee to deduct tax at source.
It was further held that CBDT Circular No.715, dated 8.8.1995, relied upon by the Assessing Officer (AO) in support of his case on the aforesaid issue was applicable only in cases where bills were raised for the gross amount, inclusive of professional fees as well as reimbursement of actual expenses and the same, therefore, was not applicable to the facts of the present case, where bills were raised separately by the consultant for reimbursement of actual expenses incurred by them.
In order to address the issue whether tax is required to be deducted at source, in respect of reimbursement of expenses, it will be necessary to keep in mind the following two aspects, viz : (i) Tax is deductible at source under Chapter XVII-B of the Act, only in respect of payment of income or other sum made by the person responsible for such payment and (ii) Reimbursement of expenses does not partake the nature of income in the hands of the payee of such expenses.