Payments to contractors


Shri Hemant M. Bhanushali Versus The Dy. Commissioner of Income-tax PDF Print E-mail
Written by ITAT MUMBAI   

Shri Hemant M. Bhanushali Versus The Dy. Commissioner of Income-tax

 

No. - ITA No.2336/Mum/2011

Dated - April 13, 2012

 

Shri G.E.Veerabhadrappa, Shri Vivek Varma, JJ.

 

Appellant by : Shri Kishore K.Poddar  

Respondent by : Shri Paven Ved

 

 

ORDER  

Per Vivek Varma, JM :  

The appeal is against the order passed by CIT(A) 33, Mumbai, dated 21.02.2011, wherein the CIT(A) has sustained the addition of ` 2,74,91,238/- on account of non deduction of TDS u/s 40(a)(ia) of the Income Tax Act.

 

2. The facts as seen from the orders of the revenue authorities and submitted before us are that the assessee being an individual has been carrying on the business of truck, lorry and container running from and to various ports, yards, godowns, factories etc., as per the requirements of customers.

 

3. The assessee filed his return of income at Rs. 8,20,360/-, which was assessed at Rs. 9,86,620/-. This assessment was set aside by the CIT u/s 263 to redo the assessment afresh with certain directions. The new assessment was completed u/s 143(3) read with section 263 on 31.12.2009. Addition on account of non-deduction of TDS u/s 40(a)(ia) is the subject matter of the new assessment. In the course of assessment proceedings, the AO noticed:  

 

4.4 From the above, it can be seen that assessee’s first bifurcation statement stated that amount liable for TDS at Rs. 10,65,573/- and in the second one offered Rs. 7,08,105/- as amount on which TDS is applicable. The contentions of the assessee made in both the statements are not acceptable for the following reasons (as extracted):

 

1. That assessee had done its business through various sub contractors as it can be seen from the motor fleet hire charges of Rs. 3,14,41,096/- paid to various sub contractors. Since payments are made to sub contractors and assessee’s accounts were audited under section 44AB in the preceding financial years, proviso to sub-section (2) of section 194C of the I.T. Act, 1961. It has admitted before the CIT-23 that bills amount not exceeding Rs. 20,000/- were to the extent of Rs. 2,80,05,170/- and the names of the sub contractors are as mentioned in the statement referred to above. However, out of the total amount of Rs. 2,80,05,170/- paid to the sub contractors mentioned the details filed were paid more than Rs. 50,000/- in a year and aggregate payment is Rs. 2,41,46,740/-. These 103 sub contractors were continuously transporting goods for and behalf of assessee as can be seen from the bill numbers issued by the subcontractors to the assessee. It has been clarified by the CBDT in Circular No. 715 that if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be separate contact and all GRs relating to that period or quantity will be aggregated for the purpose of TDS. Since these 103 subcontractors have transported goods regularly and continuously for assessee, the GRs of these contractors should be aggregated. Therefore, as per first proviso to clause (i) of sub section (3) of section 194C of the I.T. Act and as per Circular No. 715 assessee is liable to deduct tax on the said sum of Rs. 2,41,46,740/-. Since the assessee is covered by proviso to clause (i) of sub section (3) and sub section (2) of section 194C assessee was liable to deduct tax on the above said sum of Rs. 2,41,46,740/. Since no tax has been deducted on this sum the same is required to be added back to the total income under clause (ia) of clause (a) of section 40 of the I.T. Act, 1961.

 

Apart from the above assessee has himself worked out an amount Rs. 9,56,750/- where bills amount are exceeding Rs. 20,000/- but turnover is less than Rs. 50,000/- in a year. Assessee has relied on Bhoruka Roadlines Ltd. for not deducting the tax on this amount. Assessee has not furnished any iota of evidence in support of claim and no documentary evidence to show that the facts of the said case are applicable, have been furnished during the course of assessment proceedings. Therefore, as per clause (i) of sub section (3) of section 194C, assessee was also liable for deduction of tax on this amount of Rs. 9,56,750/-. Since assessee has not deducted tax at source, as per clause (ia) of clause (a) of section 40 the amount of Rs. 9,56,750/- is not allowable while computing the total income. Assessee has admitted that payments of the bills (GRs) Greater than Rs. 20,000/- but less than Rs. 50,000/- to sub-contractors in a year amount to Rs. 7,08,105/- and on which tax was required to be deducted. Since as admitted, no tax has been deducted on this amount of Rs. 7,08,105/-, the same is not allowable as a deduction under clause (ia) of clause (a) of Sec.40 of the I.T. Act, 1961.

 

Assessee has contended that loading and unloading charges of Rs. 17,71,013/- included in the bills by the sub contractors and reimbursed by the principals are not liable for deduction of tax at source. The contention of the assessee is not acceptable for the reason assessee has been charged by the sub contractors with the loading and unloading charges in their bills issued to the assessee and in turn assessee charged in the bills principals for transport, loading and unloading and service. It has been clarified in Circular 715 by the CBDT that “transport contracts” would in addition to contract for transportation and loading and unloading of goods also cover contracts for plying of buses, ferries, etc. along with staff. In view of the above, the total disallowance on account of non deduction of tax at source on Motor fleet Hire Charges paid will be as under :-

 

(i)    Bills below Rs. 20,000 but exceeding in aggregate during the previous year relevant

Rs. 50, 000 

to A.Y. 2005-06 as discussed above 

Rs. 2,40,55,370/- 

(ii)   No TDS made relying on Bhourka case As discussed above

Rs. 9,56,750/- 

(iii) Bill amount exceeding Rs. 20,000 but Aggregate amount less than Rs. 50,000/- As discussed

Rs. 7,08,105/- 

(iv) Loading & Unloading charges included in Sub-contractors Bills and recover from Principals as discussed above

Rs. 17,71,013/- 

 

Rs. 2,74,91,238/- 

 

 

Accordingly, Rs. 2,74,91,238/- are added back out of Motor fleet Hire Charges on account of non-deduction of TDS under clause (ia) of clause(a) to section 40 of the I.T. Act, 1961..

 

4. The CIT(A) upheld the view of the AO and sustained the addition on account of non deduction of TDS at Rs. 2,74,91,238/- u/s 40(a)(ia).

 

5. The assessee, being aggrieved with the order of the revenue authorities is now before the us.

 

6. Before us, the AR, appearing on behalf of the Assessee submitted that the assessee has been running lorries, trucks and container to and from ports and other destinations on behalf and instructions of its customers at pre determined rates. He further submitted that there are times, when the assessee has taken the contract from his customers but finds that he has himself to hire trucks/lorries/containers from outside parties, which he does at his own cost and peril. The AR further submitted that the assessee, bills, the customers on his own, i.e. his own bill/GR, irrespective of the fact that the lorry/truck/container had been outsourced by him. The AR submitted that neither the AO nor the CIT(A) went into the vary genesis of the business. He further submitted that the revenue authorities that each GR has to be treated separately and not aggregated if the goods are transported continuously. He further submitted that very basis and purpose of Circular 715 on this issue has been misread by the revenue authorities. The AR pointed out that the extracts of the Circular had been included in the written submissions placed before the CIT(A). Besides relying on the Circular, the AR had placed several case laws in the paper book submitted before the CIT(A). The AR also relied upon the decision of Hon’ble Vishakhapatnam Bench of I.T.A.T in the case of Mythri Transport Corporation V/s ACIT, ITA No. 183/Vizag/2008, reported in 124 ITD 40, wherein on similar facts to that of the assessee, that lorries had to be outsourced for un interrupted supply, the Hon’ble ITAT held as under:-

 

8.1 According to our understanding, s. 194C(2) is attracted if all the following conditions are satisfied :

 

(a) The assessee should be a contractor.

 

(b) The assessee, in his capacity as a contractor, should enter into a contract with a sub-contractor for carrying out the whole or any part of the work undertaken by the contractor.

 

(c) The sub-contractor should carry out the whole or any part of the work undertaken by the contractor.

 

(d) Payment should be made for carrying out the whole or any part of the work.

 

7. The AR has also placed reliance on the decision by Hon’ble Cuttuck Bench of I.T.A.T in RR Carrying Corp. V/s ACIT ITA No. 179/Ctk/2009, reported in 126 TTJ 240, wherein on similar facts as that of the assessee, i.e. there was no contractor or sub-contractor relationship between assessee and other transporters and therefore assessee was not liable to deduct tax at source from the payments made to other transporters and, therefore, same could not be disallowed under the provisions of section 40(a)(ia).

 

8. The AR has also placed reliance on the decisions of ITO V/s Indian Road Lines ITA No. 80/Asr/2010 reported in 45 DTR, Chandrakant Thackar V/s ACIT (Cuttack) ITA No. 247/CTK/2009, reported in 45 SOT 13.

 

9. Closing the arguments, the AR pleaded that the revenue authorities, were, thus wrong in adding back the impugned amount to the income of the assessee and thus the impugned addition needs to be deleted.

 

10. The DR relied upon the orders of the revenue authorities.

 

11. We have heard the issue at length and we have gone through the details provided/submitted by the AR. Except for the observation of the AO that the business of the assessee is continuous, nowhere has the AO proved that the assessee had bound himself in contracts with outsourced third parties. We are in complete agreement with the submissions of the AR that at best the business done by the assessee for whom he hires trucks/lorries/containers would amount to job work because whatever he receives from his customers are paid to the out sourced lorry owners, that too on his own risks and perils and also where the out sourced transporters are not binding the assessee’s customers. We also feel that the modes operandi followed by the assessee comes within the four corners of the Circular, which the assessee had been pleading before the revenue authorities. Under these circumstances and fact the assessee was not liable to deduct tax at source on the payments made to outsourced lorry owners. Consequently, the provisions of section 40(a)(ia) shall not apply on the assessee.  

 

12. In the result, the appeal of the assessee is allowed and the disallowance is deleted.

 

Order pronounced on this 13th day of April, 2012.  

 

 
ACIT Versus Minpro Industries PDF Print E-mail
Written by ITAT, JODHPUR   

ACIT Versus Minpro Industries

 

No. - ITA No. 394/Jd/2008

Dated - December 9, 2011

 

R.K. Gupta, N.L. Kalra, JJ.

 

Sunil Mathew for the Revenue  

Amit Kothari for the Assessee

 

 

ORDER  

R.K. Gupta, Judicial Member:-  

1. This is an appeal by Department against the order of learned CIT(A) relating to asst. yr. 2005-06.  

 

2. The Department is objecting in deleting the disallowance of Rs. 1,60,41,692 made by AO under s. 40(a)(ia). The Department has also filed an additional ground that learned CIT(A) was not justified in admitting additional evidence in shape of Board Circular No. 723, dt. 19th Sept., 1995 [(1995) 128 CTR (St) 6]. This additional ground has already been admitted by the Tribunal vide order sheet dt. 19th April, 2010.  

 

3. The brief facts of the case as observed by the AO are that in the P and L a/c the assessee has shown selling and distribution expenses amounting to Rs. 1,65,24,301. The AO asked the assessee to furnish the details. In response to which the assessee submitted the details of selling and distribution expenses amounting to Rs. 1,64,03,242 incurred on account of export clearing and forwarding expenses out of total selling and distribution expenses of Rs. 1,65,24,301. The AO also asked the assessee to furnish the proof of payment and deposition of TDS to credit of the Government within the due date, if TDS made. In response to which the assessee submitted that TDS has been deducted on payments of agency charges to C and F agents. In proof of the same copy of TDS certificates was furnished. The assessee further stated that the C and F agents raised bill in two parts, one for agency charges and other for reimbursement of actual expenditure. Accordingly the assessee deducted TDS only on agency charges to C and F agent as prescribed in s: 194C of the Act.  

 

3.1 From the above, the AO came to the conclusion that the assessee deducted tax only on agency charges paid to C and F agent and not on the gross amount. Therefore, the AO asked the assessee as to why the above expenses amounting to Rs. 1,64,03,242 paid to the C and F agent be not disallowed under s. 40(a)(ia) of the Act as per s. 194C of the Act as the assessee was supposed to deduct tax on the gross amount paid to C and F agent and not on the agency charges alone.  

 

3.2 In response to which the assessee submitted that the TDS is not required to be deducted on reimbursement of actual expenditure incurred by the C and F agent on its behalf due to the following reasons:-  

 

"That the C and F agent acted as our pure agent while incurring expense in connection with our export cargo under our instruction and established implicit agreement in this regard. He did not acquire any right, title or interest in any of the services which were produced on our behalf. In fact, he did not need those services etc. except for our needs. He did not need them nor used them. His interest was only to get his service charge for arranging such services for us at our cost and that too not fixed. If the rates for such services increase, in the meanwhile, he was reimbursed enhanced expenses. Converse was equally correct. The bills and invoices issued by the third parties were in our name and as such privy of contract arose between you, albeit to through the medium of our agent. In case default of payment, we only were liable for such payment to third parties."  

 

3.3 Further, in any case the C and F agent by making payment of transportation charges to different transporters deducted/deposited the TDS in Government account and thereafter these expenses were reimbursed by us on the basis of their debit notes. In view of the above facts and specially since due TDS stands already deducted/deposited in respect of payment to transportation, no liability arose for further deduction of TDS from such reimbursed expenses.  

 

3.4 Apart from the above it is submitted that in view of the clarification contained in Circular No. 715 [(1995) 127 CTR (St) 13], TDS may have been deductible on the gross sum from C and F agents in case there was a consolidated bill for his own services and services procured from others to fulfil his own contract. TDS cannot be deducted from the amount which we only authorize him to incur on our behalf for our benefit and thus ourselves incurring liability to third party directly. Had C and F agent not paid the amount of freight or other services, we would have been liable for the said payment and not the C and F agent.  

 

3.5 Even in the worst case scenario, according to the above circular, if a consolidated bill is raised including both the agency charges and the reimbursement of actual expenditure then TDS would be required to be deducted on the consolidated bill without excluding reimbursements (because in any case they are not separately indicated). However, in cases where separate bills and debit notes are raised/issued i.e. one for agency charges and the other for reimbursement of actual expenses, then TDS shall be deducted only on the bills for agency charges and not on reimbursements. Under the above facts and circumstances and in view of the legal position, application of provisions of s. 40(a)(ia) of the Act is not applicable in our case.  

3.6 The AO considered the explanation furnished by the assessee and observed that it was clear that the assessee has made the above payment to C and F agent for carriage of goods. The carriage of goods is covered as transportation contract within the definition of s. 194C. Accordingly, the assessee was required to deduct tax on payment made/credited to such C and F agents on the basis of "any sum payable". However, the assessee has deducted tax only on the amount pertaining to agency charges excluding the reimbursements. The assessee in its submissions has tried to explain that no tax was to be deducted on the reimbursement of expenses. For saying so the assessee has also relied on Circular No. 715, dt. 8th Aug., 1995 of the Board. However, the assessee has not interpreted the circular and its contents in correct manner. The assessee has not been able to understand the rationale and logic behind the issue discussed in question 30 of the circular which in a very crystal clear manner lays down that tax has to be deducted "on any sum" paid to the C and F agent. The relevant question No, 30 and answer are as under:-  

 

"Question No. 30: Whether the deduction of tax at source under ss. 194C and 194J has to be made out of the gross amount of the bills including reimbursements or excluding reimbursement for actual expenses?  

 

Ans. Secs. 194C and 194J refer to any sums paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of TDS."  

 

"Any sums" referred in the circular means the entire payment being made to the C and F agent whether it was the agency charges or any other expenses being incurred by the agent on behalf of the assessee.  

 

3.7 The AO further observed that from the submissions of the assessee it was very clear that the very basis of argument of the assessee was the mode in which the payment was being made to the C and F agent which was clear from the reply of the assessee wherein it has been stated that separate bill and debit notes were raised for agency charges and reimbursement of expenses. However, the main issue which was discussed in Circular No. 715 was the reimbursement of expenses and not the mode of reimbursement. The manner in which the C and F agent seeks for the reimbursement or the method followed to reimburse the expenses is either through raising of a single consolidated bill or by raising separate bills or by raising debit notes as seen in the case of the assessee. Further when the goods were exported by the assessee through the C and F agent it implies that a contract exists between the assessee and the C and F agent as per which the C and F agent supplies goods of the assessee to various destinations for which various expenses were incurred by the agent apart from the services being rendered by the agent to the assessee. This payment was made to the C and F agent in lieu of the contract which exists between the assessee and agent. It was the C and F agent who has been assigned the contract for providing various services by the assessee for transportation of its goods. Hence as per the provisions of s. 194C of the Act it became imperative that the tax has to be deducted on the gross payment being made to the agent. Therefore, on the basis of above there was no doubt that the assessee has not deducted TDS on payment made to C and F agent for carriage of goods and thus the expenses to the extent of such payment were disallowable in view of the provisions of s. 40(a)(ia) of the Act. As per the details of export clearing and forwarding expenses furnished by the assessee, out of total expenses incurred on payment made to C and F agent amounting to Rs. 1,64,03,242 tax has been deducted only on agency charges amounting to Rs. 3,61,550. Therefore, the amount of Rs. 1,60,41,692 was disallowed by invoking the provisions of s. 40(a)(ia) and added to the total income of the assessee.  

 

4. Detailed written submissions filed before learned CIT(A) were tabulated at pp. 6 to 22. It will be useful to reproduce those written submissions here as under:-

 

"During the course of appellate proceedings the learned Authorised Representative submitted as under:-  

 

'That appellant is a registered partnership firm engaged in the business of manufacturing and processing of mineral.  

 

During the year under appeal, the learned Asstt. CIT, Circle-1, Udaipur, completed the assessment under s. 143(3) of the IT Act, 1961, vide order dt. 28th Dec., 2007, received on 31st Dec., 2007 and made addition of Rs. 1,60,41,692 by applying s. 40(a)(ia) of the IT Act, 1961. The aforesaid order is bad in law on facts, against which, the appellant has preferred appeal before your Honour on the following grounds:-  

 

1. The assessment order passed by the learned AO determining the total income at Rs. 2,64,63,000 as against the returned income of Rs. 1,04,21,303 is not in accordance with the law.  

 

2. The learned AO has grossly erred in law as well as on fact of the case in making addition of Rs. 1,60,41,692 to the returned income on account of non-deduction of TDS from reimbursements of expenses/payment to various parties on our behalf by appellant's C and F agent, by wrongly invoking the provisions of s. 40(a)(ia) of the IT Act, 1961, which is unjustified, unwarranted and bad in law.  

 

3. The learned AO grossly erred in law as well as on fact in disallowing some expenses under s. 40(a)(ia) when in fact, no TDS was deductible.  

 

4. The learned AO has grossly erred in law as well as on fact of the case in charging interest under ss. 234B and 234D, whereas no such interest was chargeable.  

 

Before addressing each ground of appeal individually, appellant seeks your kind indulgences to consider our general submission as to correct approach and principles in interpreting apparently simple looking provisions like s. 40(a)(ia) of the IT Act, 1961, a provision which is in effect punitive and confiscatory in nature.  

 

The learned AO adopted a fundamentally wrong approach in interpretation and implementation of the provisions of s. 40(a)(ia) of the IT Act, 1961. He ignored the now well-established 'purposive approach' of interpretation of statutory laws enacted to take care of specific 'mischief.  

 

The background of enactment of provisions contained in s. 40(a)(ia) was that Government wanted to ensure that no payment containing element of taxable income escapes the tax net, and the payer of such income is compelled to deduct the tax in time for the fear of losing the deduction of such expense from him taxable income. This provision was not a substantive charge of tax on the payer of such income and was merely a device of seeking help from such payer of income in collection of right TDS. The intention was that Government's interest of due collection of TDS from the payment is protected, and the recipient of the income does not simply disappear after the receipt and does not pay the tax either. This section did not create any charge of tax in respect of the payer.  

 

In the instant case, the learned AO disregarded this well-established cannon of interpretation of statutory law and proceeded as if it was substantive charge of tax on the assessee—detaching it fully from the purpose for which the provision was enacted. It is not the case of the learned AO that the recipient of the payment is now not traceable, or he was not an income-tax assessee or has concealed the receipt from the appellant (in his return of income), when all the payments were through banking channels only and amenable to full verification.  

 

The grossness of approach of the AO and its impact on the appellant can be appreciated from the fact that even if the learned AO's stand is accepted to be correct the alleged default in deduction of TDS was about Rs. 3.52 laks only and the tax demand on appellant is about Rs. 58 lakhs. Law enacted to take care of 'mischief of non-deduction of TDS of Rs. 3.52 lakhs became a 'mischief in itself by saddling the appellant with a tax demand of Rs. 58 lakhs. This could not have been the purpose of enactment of s. 40(a)(ia) of the IT Act, 1961.  

 

Another important legal mistake, which the learned AO made, was that he failed to appreciate the concept of agency in India. While the AO did not dispute that a shipping company could act through a booking agent (CBDT circular envisages such situations), he failed to appreciate that the appellant could also deal with the foreign shipping company or its agent directly or in turn, through its own agent. The C and F agent of the assessee was a 'pure agent' of the appellant and satisfied all the conditions in this regard. For rendering services of an agent, he charged agency charges from the appellant and the appellant deducted the necessary TDS. As regards expenses incurred by the agent on behalf of the appellant, no TDS was deductible, and in any case in respect of major part of the expenses, it was so (e.g. ocean freight paid to the non-resident company = Rs. 1.16 crores - in view of CBDT circular). As regards TDS from transport expenses incurred on behalf of the appellant, due TDS was deducted by the appellant's agent and paid over to the Government.  

 

Though the transporter got his receipt after due TDS, the learned AO insists that the appellant should have deducted the said amount of TDS from the agency charges payable to the C and F agent. It was illogical and not in accordance with the obvious purpose of law. Secondly, even the total charges receivable by the agent from the appellant, as its service charge was very much below the total tax, which the learned AO wanted us to deduct.  

 

The reimbursement of expenses to agent was not a payment to him. He was given money to pay it over to the concerned parties/providers of various services to the appellant, on behalf of the appellant. There may have been occasions that because of long standing relations, agent paid the service providers even before receiving the money from the appellant.  

 

The nature of transaction can also be understood by the following example : the appellant asks one of its employees to take some money from the cashier at Udaipur and go over to the sea port aid arrange the transporter etc. negotiate the proper rates and make the payment, get the bill of lading etc., in the name of the appellant and if there is any shortfall in payment, get himself reimbursed from the cashier in Udaipur on his return back to Udaipur. Similar results can be achieved by appointing an independent person as agent. Arrangement of services from third parties either by the employee of the appellant or a paid agent stands at par. In the case of the employee, he gets his salary for the arrangement of services. In the case of agent, he gets agency service charges.  

 

Without prejudice to the appellant's submissions, as to the demerits of the disallowance, it is submitted that the provisions of s. 40(a)(ia) which was made effective from 1st April, 2005 were not applicable to the appellant's case as previous year ended before the said date. This law was applicable with effect from the asst. yr. 2006-07, and this submission is duly supported by the decision of the Hon'ble Allahabad High Court in the case of Krishna Mohan Agrawal vs. CIT (2007) 295 ITR 190 (All) and also supported by the decision of the Hon'ble Tribunal, Cochin Bench, in the case of Muthoot M. George Brothers vs. Asstt. CIT (1993) 47 TTJ (Coch) 434 respectively.  

 

The appellant's groundwise submissions are as under:-  

 

1. During the assessment proceedings, the learned AO asked to show cause why the clearing and forwarding expenses be not disallowed under s. 40(a)(ia) of the IT Act, 1961, as the tax was to be deducted on entire amount reimbursed to C and F agent as per provision of s. 194C of the IT Act, 1961.  

 

2. The appellant filed the reply vide letter dt. 20th Dec., 2007 and 24th Dec., 2007 and copies of aforesaid letters are enclosed herewith for your ready reference at page Nos. 1 to 23 and 24 to 120 of paper book respectively.  

 

3. The learned AO, without considering the submission of the appellant in right perspective, made addition of Rs. 1,60,41,692 by invoking the provision of s. 40(a)(ia) of the IT Act, 1961 and also contended that tax was to be deducted on entire amount reimbursed to C and F agent as per provision of s. 194C of the IT Act, 1961.  

 

4. The action of learned AO in disallowing Rs. 1,60,41,692 by applying the provision of s. 40(a)(ia) r/w s. 194C of the IT Act, 1961, is unjustified, unwarranted and bad in law due to the following facts and legal position:-  

 

(i) During the year under appeal, the appellant reimbursed expenses of Rs. 1,64,03,242 to C and F agent on appellant's behalf, which includes agency charges and following expenses under the accounting head 'Export clearing and forwarding expenses'. The details are as under:-

 

Sl. No.

Particulars

Amount

1.

Sea freight (ocean freight) being freight from the Indian port to the destination port paid by appellant through its forwarding agent to non-resident shipping companies. As per appellant, no TDS was deductible, as explained hereinafter.

1,16,11,550

2.

REPO charges means repositioning charges of empty containers and this activity means transportation of empty containers by Indian Railways from the port to Internal Container Depot (ICD), which in appellant's case is ICD, Sabarmati, Ahmedabad. As per appellant, no TDS was deductible, as explained hereinafter.

9,16,000

3.

CCI charges are the actual railway freight for transportation of custom cleared, export bound stuffed container from dry port, which in appellant's case is ICD, Sabarmati, Ahmedabad. This railway freight is paid by the C and F agent of the appellant to the Container Corporation of India (CCI), which is a Government of India undertaking. As per appellant, no TDS was deductible, as explained hereinafter.

3,74,652

4.

Terminal handling charges (THC) are incidental to the shipment of each container arid pertain to handling of container within the port area meant for export which are being reimbursed by appellant to the forwarding agent. As per appellant, no TDS was deductible as explained hereinafter.

8,79,731

5.

Road transportation charges is the freight charges for transporting empty container from dry port i.e. ICD, Ahmedabad to appellant's factory at Sirohi road and back from appellant's factory to the dry port. TDS has already been deducted by appellant's C and F agent and deposited with the Government.

20,31,226

6.

Agency charges paid to M/s Chinu Bhai Kalidas, Ahmedabad on which TDS is deducted by the appellant (agency charges Rs. 3,30,604, service-tax 30,946).

3,61,550

7.

Container handling service charges paid to M/s Star Shipping and Transport Agencies, Mumbai, on which TDS has already been deducted by the appellant.

54,000

8.

Bill of lading/shipping bill and sundry charges

1,72,717

9.

Other expenses

1,816

 

Total

1,64,03,242

 

The appellant submits pointwise reasons for which TDS has not been deducted on payments of the aforesaid services, as under:-  

 

1. Sea freight (ocean freight) Rs. 1,16,11,550:-  

No TDS was deductible on the aforesaid amount in view of following reasons:-  

 

(a) The amount pertains to the amount of sea freight from Indian port to destination port paid by appellant's agent (C and F agent) to non-resident shipping companies through their booking agents.

 

(b) In support of the above, copy of the certificate dt. 28th Feb., 2008 along with statement are enclosed herewith at page Nos. 121 to 122 of paper book, given by the forwarding agent of the appellant M/s Star Shipping and Transport Agency, which clearly certifies that he has paid the ocean freight to the various agents of non-resident shipping companies on behalf of appellant.  

 

(c) As per Circular No. 723, dt. 19th Sept., 1995 of the Board, such payments made for the ocean freight are not liable to TDS.  

 

Therefore, no TDS on such ocean freight has been deducted by appellant, while reimbursing such ocean freight to forwarding agent, who made such payment to the non-resident shipping companies on behalf of the appellant.  

 

2. REPO charges Rs. 9,16,000:-  

As explained above, this is transportation charge of empty containers from port to ICD—paid to the Indian Railways and any payment for freight to the Indian Railways is not liable for deduction of tax as per s. 194C r/w s. 196 of the IT Act, 1961.  

 

3. CCI charges Rs. 3,74,652:-  

(i) As explained above, this is the railway freight for transportation of the stuffed containers from ICD, Ahmedabad to the port and has been paid to the 'Container Corporation of India', which is a Government of India undertaking.  

 

(ii) In support of above, the appellant encloses herewith specimen copy of bill at page No. 63 of paper book, which clearly mentioned that this railway freight has been paid by the forwarding agent, M/s Chinu Bhai Kaliclas and Bros., Ahmedabad to CCI agent on behalf of the appellant.  

 

(iii) As per s. 196 of IT Act, 1961, any payment made to Government or a corporation established by or under a Central Act/Government of India undertaking, no TDS is deductible if any railway freight either to railways directly or to a Government of India undertaking is made by the appellant.  

 

(iv) In addition to above, Explanation of sub-s. (2) of s. 194C of the IT Act, 1961 also clearly stipulates that any freight paid for transportation of goods by the Indian Railways is not subject to deduction of TDS.  

 

(v) Since C and F agent of the appellant paid the CCI charges on behalf of the appellant, for transportation of containers from the ICD, Ahmedabad to the port by railways, no TDS was deductible from such payments.  

 

(vi) The appellant wishes to further put on record that the appellant receives the empty containers at factory situated in Sirohi Road, stuff-it (fill up) these containers in the presence of customs authorities, who after checking, close the container and affix their seal (lead) and thereafter the containers are dispatched to the ICD, Ahmedabad. As such, these are customs cleared and are export-bound containers where the appellant has no control whatsoever, once the containers are sealed by the customs authorities at appellant's factory.  

 

4. Terminal handling charges (THC) Rs. 8,79,731:-  

(i) As explained above, THC are reimbursed by the appellant to the forwarding agent and are incidental to the shipment of the container for export and are governed by s. 172 of IT Act, 1961 and also as per Circular No. 723, dt. 19th Sept., 1995 that the provisions of s. 194C do not apply for such payments.  

 

(ii) In this regard, your Honour's attention is specially drawn to sub-s. (8) of s. 172 of the IT Act, 1961, which states as under:-  

 

'For the purpose of this section the amount referred to in sub-s. (2) shall include the amount paid or payable by way of demurrage charges or handling charges or any other amount of similar nature.' (Emphasis, italicized in print, supplied).  

 

(iii) In view of above facts, no TDS is deductible on THC reimbursed by the appellant.  

 

5. Road transportation charge Rs. 20,31,226:-  

(i) This transportation charge pertains to transportation of empty as well as stuffed container duly customs cleared and bounded for export and are paid by the appellant to the C and F agents, who have already deducted the TDS on all such charges.  

 

(ii) In support of above, the appellant encloses herewith a certificate dt. 26th Dec., 2007 from M/s Chinu Bhai Kalidas and Bros., Ahmedabad, at page No. 120 of paper book, which is self-explanatory.  

 

(iii) Having already paid the TDS on such transportation charges, the TDS cannot be deducted twice which your Honour will kindly agree.  

 

6. Agency charges Rs. 3,61,550:-  

As already clarified, TDS from agency charges paid to M/s Chinu Bhai Kalidas and Bros., Ahmedabad, was duly deducted, 'copy of TDS certificate enclosed at page Nos. 21 to 23 of paper book. The learned AO, while completing the assessment under s. 143(3), has allowed the same.  

 

7. Container handling service charges Rs. 54,000:-  

As already clarified, the appellant already deducted TDS from payment to M/s Star Shipping and Transport Agency, Mumbai, being container handling service charges, copy of TDS certificate enclosed at page No. 123 of paper book. However, the learned AO, while completing the assessment under s. 143(3) did not allow the aforesaid expenses of Rs. 54,000. It was patently unjustified, unwarranted and bad in law and the same may kindly be considered and allowed.  

 

8. Bill of lading/shipping bill and sundry charges Rs. 1,72,717:-  

(i) Again, this amount being incidental charges of shipment of export cargo, which is not liable for deduction of TDS and the same deserves to be considered and allowed.  

 

(ii) On perusal of the above, your Honour would find that, the aforesaid export clearing and forwarding expenses included reimbursement of expenses on account of ocean freight, CCI charges, THC charges, REPO charges, transportation charges and other charges etc., which were paid by the C and F agent on behalf of the appellant and in turn, issued debit notes on the appellant, claiming reimbursement.  

 

(iii) Further, the C and F agent issued bills for services rendered by him towards agency charges, and issued debit notes for expenses incurred by him on behalf of the appellant.  

 

(iv) Thus, C and F agent raised bills against agency charges and debit notes for expenses incurred by him on behalf of appellant i.e. ocean freight, REPO charges, CCI charges, THC charges, transportation charges, other charges etc. To corroborate these facts, specimen copies of bills and debit notes of C and F agents are enclosed herewith at page Nos. 36 to 11Q of paper book for your kind perusal, verification and record.  

 

(v) That while making payment to C and F agent the appellant deducted TDS from agency charges. In evidence, copy of TDS certificates has already been filed during the course of assessment proceedings.  

 

(vi) Further, the appellant submits that TDS is not required to be deducted from reimbursements of actual expenditure incurred by the C and F agent on behalf of the appellant due to the following reasons:-  

 

(a) That the C and F agent acted as 'pure agent' of the appellant, while incurring expenses in connection with export cargo, under the appellant's instruction and established implicit agreement in this regard. The aforesaid C and F agent did not acquire any right, title or interest in any of the services which are carried out on behalf of the appellant. In fact and otherwise, the C and F agent never needed these.  

 

(b) Services etc. for himself except for needs of the appellant and the C and F agent neither needs nor uses them. C and F agent's interest was only to get 'service charges' for arranging such services for appellant at appellant's cost and that too not fixed. If the rates/charges of such services increased in the meantime, the enhanced charges were to be reimbursed. The bills and invoices issued by the third parties stand in appellant's name and as such privy of contract arose between them and the appellant, albeit through the medium of the agent. In case of default in payment, the appellant was only liable for such payments to third parties.  

 

(c) Further, in any case the C and F agent deducted TDS while making payment of transportation charges to different transporters and deposited the same in Government account. Thereafter, the appellant reimbursed these expenses, on the basis of his debit notes. In view of the above facts and since due TDS stands already deducted/deposited in respect of payment to transportation, no liability of TDS arose for further deduction from such reimbursed expenses.  

 

(d) In confirmation and to corroborate the aforesaid facts, the undertaking/certificate received from C and F agent, M/s Chinubhai Kalidas and Bros., Ahmedabad, is enclosed herewith at page No. 120 of paper book, which clarifies the facts and leaves no scope for deduction of TDS on reimbursement of expenses incurred on behalf of the appellants.  

 

(e) Further, the C and F agent incurred expenses on REPO charges, CCI charges etc. merely on behalf of the appellant, on which no liability for deduction of tax at source was there. To corroborate this fact, the appellant submits that M/s Star Shipping and Transport Agency, Mumbai also confirms vide their letter dt. 28th Feb., 2008 that the amount received from the appellant for making various payments i.e. shipment, ocean freight etc., were directly made by them to foreign shipping companies. Copy of confirmation received is enclosed herewith at page Nos. 121 and 122 of paper book for your kind verification and perusal.  

 

(f) In any case, payments on account of sea freight (ocean freight) and THC charges were paid to non-resident shipping agents (which constitutes almost 80 per cent of such reimbursed expenses) and therefore ss. 194C and 195 of the IT Act, 1961 do not apply. The Circular No. 723, dt. 19th Sept., 1995 which is reproduced below clarifies the issue:-  

 

TDS from payment made to foreign shipping companies:-  

1. Representations have been received regarding the scope of ss. 194C and 195 of the IT Act, 1961, in connection with TDS from payments made to the foreign shipping companies or their agents.

 

2. Sec. 172 deals with shipping business of non-residents. Sec. 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of s. 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Sec. 172 is a self-contained code for the levy and recovery of the tax, shipwise, and journeywise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.  

 

3. The provisions of s. 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of ss. 194C and 195 relating to TDS are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of s. 172.  

 

4. Sec. 194C deals with works contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in cls. (a) to (j) of sub-s. (1) to any resident (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any resident. On the other hand, s. 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.  

 

5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of s. 172 shall apply and those of ss. 194C and 195 will not apply.  

 

On perusal of the above, your Honour would appreciate that in the present appeal, since the C and F agent of the appellant made various payments like ocean freight etc., directly to the foreign , shipping companies on behalf of appellant, provisions of ss. 194C and 195 do not apply which please note.  

 

Apart from the above, your Honour would find that, in the present appeal, the nature of payments to C and F agents are of two types:-  

 

(1) agency charges; and  

 

(2) reimbursements of expenditure incurred by the agent on behalf of the appellant, as agent.

 

In view of he above, the appellant were liable to deduct tax only on the bill of agency charges and not on reimbursement of expenses.  

 

The appellant draws your kind attention towards the following decisions wherein it was held that payment of ocean freight and inland haulage charges cannot be subjected to TDS by virtue of the provision of s. 172 of the IT Act, 1961.  

 

1. ITO vs. Freight Systems (India) (P) Ltd. (2006) 103 TTJ (Del) 103, wherein it was held that TDS under s. 194C—Payment of ocean freight and inland haulage charges—Cannot be subjected to TDS by virtue of the provision of s. 172—This position is clarified by the CBDT Circular No. 723, dt. 19th Sept, 1995—Assessee, therefore cannot be in default for non-deduction of tax at sources from payments towards ocean freight and inland haulage charges'. (Copy enclosed at page Nos. 124 to 127 of paper book).  

 

2. CIT vs. Continental Carriers (P) Ltd. (2007) 163 Taxman 479 (Del) wherein it was held by the Hon'ble High Court that s. 194C r/w s. 172 of the IT Act, 1961—Deduction of tax at source—Contractors/sub-contractors, payments of assessee company, engaged in business of freight forwarding, did not deduct tax at source on payments made towards ocean freight and inland haulage charges (IHC). Assessee contended that payee company was agent of non-resident shipping company and, therefore, payment made to it was not considered for purpose of TDS; however, AO held that since all agents of non-resident shipping companies were resident companies, provisions of s. 194C were attracted—CIT(A) held that though agent was a resident, he received payments on behalf of non-resident shippers and, as such, assessee could not be made liable for TDS on such payments—Tribunal held that goods having been transported by a foreign shipping line, payments had obviously to be made to foreign shipping lines or agents thereof, who filed return under s. 172 in respect of such payments on behalf of shipping lines, and that confirmation from all agents filing returns under s. 172 had not been controverted by Revenue. Tribunal, accordingly, held that provisions of s. 194C were not (sic—applicable)—Whether since conclusions arrived at both by CIT(A) and Tribunal were based on appreciation of evidence, any substantial question of law arose. Held, no. (Copy enclosed at page Nos. 128 to 130 of paper book).'  

 

Under the above facts and circumstances and in view of the legal position, provisions of s. 40(a)(ia) of the IT Act, 1961 as well as provisions of s. 194C of the IT Act, 1961 are not applicable in the appellant's case."  

 

5. After considering detailed submissions and perusing material on record, the learned CIT(A) gave the following finding:-  

 

"The appellant firm is engaged in manufacturing and exporting of mineral. The appellant has paid an amount of Rs. 1,16,11,550 as sea freight being freight from the Indian port to the destination port to nonresident shipping companies, Rs. 9,16,000 REPO charges for transportation of empty containers by Indian Railways from the port to Internal Container Depot through ICD; Sabarmati, Ahmedabad, Rs. 3,74,652 CCI charges to railways, which is a Government of India undertaking, Rs. 8,79,731 terminal handling charges reimbursed to C and F agents, Rs. 20,31,226 road transportation charges for freight charges for transporting empty container from dry port i.e. ICD, Ahmedabad to appellant's factory at Sirohi Road and back from factory to the dry port through the appellant's C and F agents M/s Chinu Bhai Kalidas, Ahmedabad and M/s Star Shipping and Transport Agencies, Mumbai and Rs. 54,000 as container handling service charges paid to M/s Star Shipping and Transport Agencies, Mumbai on which TDS has already been deducted and Rs. 3,61,550 as agency charges paid to M/s Chinu Bhai Kalidas, Ahmedabad and M/s Star Shipping and Transport Agencies, Mumbai and deducted TDS and service-tax of Rs. 30,946. The AO has mentioned in the assessment order that carriage of goods is covered as transportation contract within the definition of s. 194C and, therefore, the appellant was required to make TDS on the payments made. The AO has also referred the Board's Circular No. 715, dt. 8th Aug., 1995 question No. 6 and question No. 30 as under:-  

 

Q. No. 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a C and F agent for carriage of goods?  

 

Ans.: The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to TDS as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in s. 194C(1). The provisions of s. 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in s. 194C of the Act. As regards payments made to C and F agents for carriage of goods, the same shall be subjected to TDS under s. 194C of the Act.  

 

Q. No. 30: Whether the deduction of tax at source under ss. 194C and 194J has to be made out of gross amount of the bill including reimbursements or excluding reimbursement for actual expenses?  

 

Ans.: Secs. 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of TDS.  

 

11. As per these two questions and answers the provisions of s. 194C would apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in the s. 194C of the Act. Further the deduction of tax at source has to be made on the gross amount of the bill including reimbursements or excluding reimbursement for the actual expenses.  

 

12. The Authorised Representative has submitted in this regard that the Finance (No. 2) Act, 2004 has made the provision applicable w.e.f. 1st April, 2005. The amended provisions of s. 40(a)(ia) are applicable for the previous year ending after 1st April, 2005 i.e. 31st March, 2006 for asst. yr. 2006-07 and not for asst. yr. 2005-06. The Authorised Representative has furnished the break up of the payments as under:-  

 

Sea freight transport

1,16,11,550

CCI charges

3,74,652

Steamer freight (TI IC charges)

8,79,731

REPO (empty container charges)

9,16,000

Transportation charges

20,31,226

Agency charges

3,61,550

BL/shipping bills/sundry charges

2,18,718

Total

1,63,93,427

Other expenses

9,816

Total

1,64,03,742

 

The copy of bills of agents, copy of ledger account, copy of export bills have also been submitted. From the above break up it is seen that Rs. 1,60,31,877 were paid to M/s Chinu Bhai Kalidas, Ahmedabad and M/s Star Shipping and Transport Agencies, Mumbai, for direct transport/sea freight on behalf of the non-resident shipowner to export and shipping the goods upto the destination ports. The Authorised Representative has also quoted CBDT Circular No. 723, dt. 19th Sept., 1995 as under:-  

 

'There would be cases where payments are made to shipping agents of non-resident shipowners/charterers of ship for carriage of passenger etc. shipped at port in India. Since the agent acts on behalf of the non-resident shipowners or charterer,, he steps into the shoes of the principal. Accordingly, provisions of s. 172 shall apply and those of ss. 194C and 195 will not apply.'  

 

In the last para it is written that there would be cases where payments are made to shipping agents of non-resident shipowners/charterers of ship for carriage of passenger etc., shipped at port in India. Since the agent acts on behalf of the non-resident shipowners or charterers, he steps into the shoes of the principal. Accordingly, provisions of s. 172 shall apply and those of s. 194C will not apply. The certificate from the agent M/s Chinu Bhai Kalidas, Ahmedabad and M/s Star Shipping and Transport Agencies, Mumbai has also been submitted, which confirms that the payment is made as sea freight to foreign shipping lines of goods sent by the appellant for export for each case to case.  

 

13. Further s. 194C deals with works contract including carriage of goods and passenger by any mode of transport other than rail to any resident mentioned in sub-s. (1) in cls. (a) to (j). It is clear that areas of operation for TDS are confined to resident. On the other hand s. 172 operates in the area of computation of profit of shipping business of non-resident who pays the tax by themselves as per s. 172 and no TDS is attracted.  

 

14. Payment of Rs. 1,16,11,550 is reimbursement for shipping to foreign agent and statutory reimbursements and hence not covered under s. 194C for TDS as it is not contract being his agency/other charges.  

 

15. Besides, the appellant paid/credited to the C and F agents for various import charges such as customs duty, port trust charges, container detention, packaging, sealing charges, documentation charges, payment to railway etc. total amount of Rs. 34,63,849 through its C and F agents. Agency charges were only Rs. 3,61,550 for several transactions and on which TDS and service-tax have already been deducted and deposited by the appellant.  

 

16. Regarding balance amount, they are not in the nature of agency payment but other miscellaneous payment such as licence verification charges, customs duty charges, license bulletin charges, extra tonnage charges etc., dock charges and service charges, container detention charges and packaging charges.  

 

17. In case of sea freight transport of Rs. 1,16,11,550 it has been paid to the agent on behalf of the non-resident shipowners and Rs. 9,15,000 arid Rs. 3,74,652 paid to railway through agent.

 

Therefore, provisions of s. 194C are not applicable in this regard. The Board's Circular No. 715 has been wrongly quoted by the AO. Further the Board's Circular No. 723 is in favour of the appellant as under:-  

 

'There would be cases where payments are made to shipping agents of non-resident shipowners/charterers of ship for carriage of passenger etc. shipped at port in India. Since the agent acts on behalf of the non-resident shipowners or charterer, he steps into the shoes of the principal. Accordingly, provisions of s. 172 shall apply and those of ss. 194C and 195 will not apply.'  

 

Therefore, the addition of Rs. 1,60,41,692 is deleted. The appeal is allowed on this ground."  

 

6. The learned Departmental Representative first placed reliance on the order of learned CIT(A). It was further submitted that Circular No. 715, dt. 8th Aug., 1995 considered by AO is directly on the issue. In this circular Board has clarified that even on reimbursement of expenses TDS has to be deducted. It was further submitted that Circular No. 723, dt. 19th Sept., 1995 has been wrongly considered by learned CIT(A). The learned CIT(A) should have allowed opportunity to the AO before considering this circular. It was further submitted that in case of Karnataka Urban Infrastructure Development Finance Corporation vs. CIT (2009) 221 CTR (Kar) 171 : (2008) 16 DTR (Kar) 153 : (2009) 308 ITR 297 (Kar), the Hon'ble Karnataka High Court has decided similar issue whereby it has been held that on reimbursement of expenses TDS is deductible. Copy of the order was also filed. Further, reliance has also been placed in case of Associated Cement Co. Ltd. vs. CIT and Anr. (1993) 111 CTR (SC) 165 : (1993) 201 ITR 435 (SC) whereby it has been held that on reimbursement of expenses the TDS is deductible. Accordingly, it was submitted that though AO has considered this aspect of reimbursement of expenses but in view of the decision of Hon'ble Karnataka High Court and in view of the decision of Hon'ble Supreme Court, the TDS is deductible. Therefore, learned CIT(A) was not justified in allowing the issue in favour of the assessee. Accordingly It was submitted that order of learned CIT(A) is liable to be set aside and order of AO is liable to be restored.  

 

7. On the other hand, the learned counsel of the assessee stated that learned CIT(A) has passed a reasoned order which is liable to be sustained. It was submitted that many of the payments made by C and F agents are even not liable to TDS at all which include certain Government payments and on foreign companies directly on which no TDS is deductible. Those payments are out of provisions of s. 194C. Provisions of s. 194 were read also by learned counsel. It was further submitted that in some of the cases the C and F agents have already deducted TDS and, therefore, there was no question of deducting TDS of the same amount again. Various Benches of the Tribunal have held clearly that on reimbursement of expenses TDS is not deductible. Reliance was placed on the decision of Delhi Bench of the Tribunal in case of ITO vs. Freight Systems (India) (P) Ltd. (2006) 103 TTJ (Del) 103 and on the decision of Hon'ble Delhi High Court in case of CIT us. Continental Carriers (P) Ltd. (2007) 163 Taxman 479 (Del). Attention of the Bench was drawn on details of expenses reimbursed by assessee which are tabulated in the order of learned CIT(A) at p. 7 and copy of which is placed in the paper book at pp. 75 and 76 and each and every payment was explained by learned Authorised Representative that how the same is not liable to TDS. Circular No. 723 of 1995 is very clear and is applicable on the Departmental authorities and, therefore, this was not an additional evidence which was filed before learned CIT(A). The learned CIT(A) has rightly considered the Board's circular, which is applicable on the facts of the present case. Therefore it was requested that the order of learned CIT(A) is liable to be sustained. Further, strong reliance was placed on the order of learned CIT(A).  

 

8. After considering the orders of the AO and learned CIT(A) and the arguments of both the parties, we find no infirmity in the finding of learned CIT(A).  

 

8.1 The Department has raised additional ground that learned CIT(A) was not justified in admitting Board Circular No. 723, dt. 19th Sept., 1995 without affording opportunity to the AO. Board circular is issued by the CBDT and which cannot be termed as an additional evidence. Therefore, we reject this ground of the Department that AO was not allowed any opportunity. The learned Departmental Representative has stated that even Board Circular No. 723 is not in favour of the assessee and learned CIT(A) was not justified in considering the same in favour of the assessee.  

 

8.2 We have gone through the Board Circular No. 723, copy of which is placed on record and contents of the same have been tabulated in the order of learned CIT(A) also and found that about certain payments it has been clarified by the Board that on these payments provisions of ss. 194C and 195 will not apply and provisions of s. 172 will be applicable. The learned CIT(A) has taken into consideration this circular and found that certain payments made by the assessee to the C and F agents who have already made the payment on behalf of the assessee were not covered either under s. 194C or under s. 195, as they are covered under the provisions of s. 172. Therefore, we hold that learned CIT(A) was justified in holding that on certain payments the provisions of ss. 194C and 195 were not applicable and, therefore, assessee was not liable to deduct TDS. Such payments have been discussed by learned CIT(A) in his order. They were on account of sea freight transport which were at Rs. 1,16,11,550, CCI charges, steamer freight charges, REPO container charges. Remaining expenses reimbursed by the assessee were on account of transportation charges at Rs. 20,31,226 and on this amount the agent has deducted TDS before making payment to the principal. Similarly, TDS has been deducted on shipping bill of Rs. 2,18,718, agency charges of Rs. 3,61,550 paid by assessee on which TDS has been deducted by assessee. There were other small payments of Rs. 9,816 on account of other expenses on which TDS was not applicable. In this way, the entire addition of Rs. 1,60,41,692 was deleted by learned CIT(A). The learned CIT(A) has discussed each item in detail and then only it has been held that assessee was not liable to make deduction of TDS on reimbursement of expenses. Various Benches of the Tribunal are taking a consistent view that if the payments are made on account of reimbursement, then no TDS is liable to be deducted on behalf of the payer i.e. assessee.  

 

9. The learned Departmental Representative placed reliance on the decision of Hon'ble Karnataka High Court in case of Kamataka Urban Infrastructure Development Finance Corporation (supra).  

 

10. We have gone through the ratio of this decision and found that the same is distinguishable. In this case on bona fide belief of the assessee company which was wholly-owned by State of Kamataka had not deducted TDS on account of non-resident company by observing that the amount spent towards accommodation and conveyance of the officer/employee of the non-resident company was not required to be treated as a part of their income, whereas it was a part of their income. Therefore, Hon'ble Kamataka High Court held that on this amount TDS was deductible. However, in the present case the facts are entirely distinguishable. There is no component of income on the amount paid by assessee on account of reimbursement. Whatever the amount was paid by the agent, that was reimbursed by the assessee. Therefore, there was no income component in the hands of agent. It is further seen that provisions of s. 172 were very clear that such type of payments which are made by assessee had been held that they are not part of regular income and, therefore, provisions of ss. 194C and 195 are riot applicable and Board has clarified the same. Therefore, there is no question of making any TDS on the part of the assessee and learned CIT(A) was justified in deleting the disallowance. One more decision has been relied on by the learned Departmental Representative in case of Associated Cement Co. Ltd. (supra) and we find that facts in this case are also distinguishable. In this case also we find that facts are totally different from the facts involved in the case in hand. Moreover, the payments made by assessee are covered by s. 172 where provisions of ss. 194C and 195 are not applicable as clarified by the Board vide Circular No. 723, dt. 19th Sept., 1995. The AO has placed reliance on the Circular No. 715 which is of earlier date from the Circular No. 723. The learned CIT(A) has observed that this circular was wrongly applied by AO as Circular No. 723 is applicable on the facts of the present case. Nature of payments has already been discussed by learned CIT(A) at p. 11 of his order. Therefore, we are not repeating those details again and in these details it has been clarified that the entire payments are covered by Circular No. 723, dt. 19th Sept., 1995 and on remaining payment, the agent has deducted TDS or the assessee has deducted the TDS. Therefore, in view of these facts and circumstances and in view of detailed reasoning given by learned CIT(A) which has been reproduced in this order, we hold that learned CIT(A) was justified in holding that assessee was not liable to deduct TDS on the amount reimbursed by the assessee. Accordingly, we confirm the order of learned CIT(A).  

 

11. In the result, appeal of the Department is dismissed.

 

 
Bluplast Corpn. Versus ITO PDF Print E-mail
Written by ITAT, MUMBAI   

Bluplast Corpn. Versus ITO

 

No. - ITA No. 5849/Mum/2010

Dated - December 9, 2011

 

R.S. Syal, D.K. Agarwal, JJ.

 

M.N. Vaishnav for the Appellant  

O.A. Mao for the Respondent

 

 

ORDER  

D.K. Agarwal, Judicial Member  

1. This appeal preferred by the assessee is directed against the order dated 31.3.2010 passed by the ld.CIT(A) for the assessment year 2006-07.  

 

2. Briefly stated facts of the case are that the assessee firm is engaged in the business of Trading activity of Thermoware, Vaccumware, Glassware and imported Articles. It filed return declaring total income of Rs. 5,93,000/-. However, the assessment was completed at an income of Rs. 48,72,255/- after making various disallowances/additions including disallowance of interest of Rs. 17,51,997/- and unexplained cash credits of Rs. 23,50,000/-, vide assessment order dated 26.12.2008 passed u/s 143(3) of the Income Tax Act, 1961 (in short the Act). On appeal, the ld. CIT(A), partly allowed the appeal.  

 

3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.  

 

4. Ground No.1 is against the sustenance of disallowance of interest of Rs. 17,51,997/-.  

 

5. Brief facts of the above issue are that, the AO from the PandL Account observed that the assessee firm has debited interest of Rs. 17,51,997/- against the business income and Royalty income. He further observed, from the balance sheet, that during the year under consideration the assessee has shown unsecured loan of Rs. 2,32,42,889/- and paid interest of Rs. 17,51,997/- thereon. He further observed that during the year under consideration the partners have withdrawn the funds from the firm to the tune of Rs. 2,34,33,638/- and loan and advances given Rs. 1,46,73,258/- to various entities on which the assessee has not charged any interest except Rs. 3,74,375/- from M/s Bluplast Industries Ltd. On being asked to explain as to why the interest paid Rs. 17,51,997/-on unsecured loan should not be disallowed, it was submitted by the assessee that as per para 3 Obligation of the Licensor of Addendum dated 14.3.2005 an obligation was put on the firm to invest Rs. 2 crores to the share capital of the company as the company has decided to go for an IP0. This is the only reason that the firm has borrowed money from various parties and transferred to the Share Capital of the Company through its partners and firm had to pay interest on loans. However, the AO did not accept the assessee's explanation. According to the AO, the assessee is not into business of money lending and from the facts, it is clear that the interest bearing funds have been utilized by assessee for giving non interest bearing loan and advances to partners and other entities. U/s 36(1)(iii) of the Act the interest is allowable as a deduction only when the money on which the interest paid is utilized for the business of assessee. In this case the assessee's business is Trading of Thermoware, Vaccumware, Glassware and imported Material's and it is very clear that the interest bearing funds have not been utilized for its business and accordingly he disallowed the interest debited to the profit and loss account. He further noted that the assessee made the interest payment over Rs. 5,000/- to the 14 parties aggregating to Rs. 91,725/- but has not deducted TDS. On being asked it was explained by the assessee that he has obtained Form No.15H in respect of interest paid to Kundandas Panjwani and Smt. Nirmala Bajaj but it has not submitted the same in the TDS Circle. In respect of others, the assessee has not furnished any explanation. According to the AO the assessee firm was liable to deduct TDS, however, it has failed to do so. In view of the above, the AO disallowed the amount of Rs. 91,725/- not allowable as per the provision of section 40 (a) (ia) of the Act, as on the said payment/expenses, the assessee failed to deduct tax at source (TDS) as per the provision of section 194C of the Act. Accordingly, the AO disallowed the interest of Rs. 17,51,997/- (including disallowance u/s 40(a)(ia) Rs. 91,725/-) and added back to the total income of the assessee.  

 

6. On appeal, the ld. CIT(A) while observing that the investment of Rs. 2 crores through partners in the share capital of the company by taking interest bearing loan from the market is an in-house arrangement which is not according to business principles, confirmed the disallowance made by the AO.  

 

7. At the time of hearing, the learned counsel for the assessee while reiterating the same submissions as submitted before the AO and the ld. CIT(A) further submits that in view of clause 3 of Addendum agreement dated 14.3.2005 appearing at page 1 to 6 of the assessee's paper book an obligation was on the firm to invest Rs. 2 crores to the share capital of the company as the company has decided to go for an IPO. This is the reason that the firm has borrowed the money from various parties and contributed to the share capital of the company through its partners and firm had to pay interest on loans of Rs. 17,51,997/-. He further submits that as per clause 2.1 of the said agreement, the assessee has received interest free deposits of Rs.1.50 crores from the said company which is appearing in the balance sheet of the assessee firm. He further submits that as per clause 0.2 of the said agreement the assessee has received royalty charges of Rs. 25,86,656/-. In the light of the above, he submits that the amount of Rs. 2 crores was given for the purpose of business of the assessee, therefore, the disallowance of interest is uncalled for. The reliance was also placed on the following decisions:  

 

1. S.A.Builders Ltd. V/s CIT(A) (2007)288 ITR 1(SC),  

 

2. CIT Delhi V/s Bharti Televenture Ltd. 11 Taxman 356.(Del),and  

 

3. M/s R.M.Patel and Sons V/s ITO ITA No.1845/Ahd/2009 dated 31.01.2011 (Ahmedabad-C Bench)  

 

8. On the other hand, the ld. DR supports the order of the AO and ld. CIT(A).  

 

9. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the relevant clauses of Addendum agreement dated 14.3.2005 entered into with assessee (the Licensor) and M/s Bluplast Industries Pvt.Ltd.(the Licensee) are as under:  

 

"2.1 Interest Free Deposits  

In consideration of the exclusive right to use of Licensed rights specified in the Agreement, Licensee shall pay to the Licensor an Interest Free Deposit of Rs. 1,50,000/- (Rupees One Crore Fifty Lakhs Only), within 180 days of entering into this agreement or 90 days of the opening of the IPO.  

 

0.2 Royalty Charges  

 

The Licensee also hereby agrees that it would pay to the Licensor Royalty Charges on yearly basis at the following schedule of rates:  

 

Yearly Turnover

% Royalty

Upto Rs. 50 Crores

0.50%

More than Rs. 50 Crores up to Rs. 100 Crores

Rs. 25,00,000/- plus 0.25% of the excess turnover above Rs. 50 crores

Above Rs. 100 Crores

Rs. 37,50,000/- plus 0.1% of the excess turnover above Rs. 100 crores

 

The above turnover would be considered for the period April to March every year.  

 

In view of what is stated in Para 1 above, the period for calculating turnover in the first year would be considered from 01st July 2005 to 31st March 2006.  

 

2.3...  

 

2.4..  

 

2.5..  

 

3...  

3.1..  

 

3.2...  

 

3.3 Further, it is agreed that the firm directly or through partners has to invest in shares worth Rs. 2 Crore (promoter quota) in the Share Capital of the Company during FY 05-06 as the company is in the process of IPO."  

 

From the above clauses of the agreement with the company, we find that there was an obligation to the assessee, directly or through partners, to invest in shares worth Rs. 2 crores in the share capital of the company as the company was in the process of IPO. The company in consideration of the exclusive rights to use of licensed rights shall pay to the assessee an interest free deposit of Rs.1.50 crores within 180 days of the entering into the said agreement or 90 days of the opening of the IPO whichever is later. The assessee was also entitled to the royalty from the company at the specified rates on the turnover. In order to fulfilment of the condition, the assessee through its partners has deposited Rs. 2 crores after taking unsecured loans from the various parties and in lieu thereof the assessee has received the interest free deposits of Rs.1.50 crores and Royalty during the year Rs. 25,86,656/-. Thus the amount advanced to the company by the assessee firm through its partners is a measure of commercial expediency and the AO has erred in holding that the investment cannot be said for business consideration and the ld. CIT(A) was also not justified in holding that the investment of Rs. 2 crores with the company was an in-house arrangement which is not according the business principles.  

 

10. In S.A.Builders Ltd.(supra) held (placitum 36, page 10 of 288 ITR 1):  

 

".......where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."  

 

Respectfully following the ratio of the above decision, we are of the view that the disallowance of interest to the parties except 3 parties viz. Umesh Bajaj, Nimesh Biharilal and Kundandas Punjwani is not sustainable in law and accordingly the same is deleted.  

 

11. As regards the interest paid to 3 parties viz. Umesh Bajaj, Nimesh Biharilal and Kundandas Punjwani, we for the reasons mentioned in subsequent paragraph of this order set aside the issue to the file of the AO to examine the same afresh in the light of the direction given therein.

 

12. As regards the application of the provisions of section 40(a)(ia) of the Act on the disallowance of Rs. 91,725/-, we find that there is no dispute that before the AO, the assessee has submitted Form No.15H in respect of Kundandas Punjwani, Smt. Nirmala Bajaj for not deducting TDS. However, due to certain reasons the same could not be submitted by the assessee in the TDS Circles. Since it is a fact that the assessee has obtained Form No.15H from the said parties, therefore, there is no default on the part of the assessee in respect of payment of interest without deducting TDS to Kundandas Punjwani and Smt. Nirmala Bajaj. The AO is directed not to consider the payment of interest to these two parties without TDS for the purpose of disallowance u/s 40(a)(ia) of the Act.  

 

13. As regards payment of interest to other 12 parties as appearing at paragraph 4.4 of the assessment order, we find that the assessee has not furnished any explanation in this regard even at this stage, therefore, the disallowance made by the AO to this extent u/s 40(a)(ia) is upheld. The ground taken by the assessee is, therefore, partly al lowed.  

 

14. Ground No.2 is against the sustenance of disallowance of unexplained cash credit of Rs. 4 lakhs.  

 

15. Brief facts of the above issue are that the AO noted that the assessee firm has shown loan of Rs. 2,32,42,889/-. The assessee was asked to furnish the loan confirmation along with copy of bank statements and copy of return of the loan creditors. In this regard, the assessee has filed the loan confirmation from the loan creditors but it has not filed the copy of bank statements and copy of returns of loan creditors to prove the genuineness and creditworthiness of the creditors. The AO issued summons u/s 131 to various parties. Out of these parties 11 summons returned back by the postal authority as un-served with remark 'left/not known/unclaimed' and 23 loan creditors have not filed any submission in response to summons issued to them. In the light of the above, the assessee was given opportunity to prove the same. In response, the assessee filed copy of bank statement and copy of return of some of the loan creditors but has failed to file any supporting evidence to prove the genuineness of 12 loan creditors aggregating to Rs. 23,50,000/-. In absence thereof, the AO added the same to the total income of the assessee. On appeal, the assessee has filed certain new evidence before ld. CIT(A), therefore, the ld. CIT(A) remanded the matter to the file of the AO for verification and report. The ld. CIT(A) after considering the remand report and the assessee' submission while confirming the addition in the account of S/Shri Omesh Bajaj Rs. 1,00,000/-, Nimesh Biharilal Rs. 1,00,000/- and Kundandas Panjwani Rs. 2,00,000/- aggregating to Rs. 4,00,000/- on the ground that the assessee failed to file confirmation and PAN to establishidentities, genuineness of transaction and creditworthiness of loan creditors, deleted the balance amount of addition.  

 

16. At the time of hearing, the ld.counsel for the assessee submits that since these loans are 'Hundi', loans which were taken through the brokers by cheques and the assessee has deducted TDS on interest and has squared up the loans during the year, therefore, the addition sustained by the ld. CIT(A) be deleted. In the alternative, he submits that now he is able to file confirmation letters and PAN, therefore, the issue may be set aside to the file of the AO for fresh consideration and adjudication.  

 

17. On the other hand, the ld. DR submits that since the assessee has failed to file loan confirmations with PAN, therefore, the ld. CIT(A) was fully justified in sustaining the addition made by the AO.  

 

18. We have carefully considered the submissions of the rival parties and perused the material available on record. We find from the assessment order that the AO had issued summons u/s 131 to all the parties. However, in the absence of any response, he has added Rs. 23,50,000/- as undisclosed income. We further find that in the remand report dated 25.2.2010, the AO has observed as under:  

 

S. No.

Name of the loan creditors

Amount of loan shown by the assessee

Compliance of loan creditors

1.

Kundandas Punjwani

Rs. 2,00,000

Non compliance from the loan party. However, the assessee filed copy of its own bank statement, copy of bills of exchange. The details filed by the assessee has been considered. However, the same is not acceptable in absence of any loan confirmation, identify, creditworthiness of the said loan party. Accordingly, the loan standing in the name of the said party remains unexplained.

2.

Nimesh Biharilal

Rs. 1,00,000

Non compliance from the loan party. However, the assessee filed copy of its own bank statement, copy of bills of exchange. The details filed by the assessee has been considered. However, the same is not acceptable in absence of any loan confirmation, identify, creditworthiness of the said loan party. Accordingly, the loan standing in the name of the said party remains unexplained.

3.

Umesh Bajaj

Rs. 1,00,000

Non compliance from the loan party. However, the assessee filed copy of its own bank statement, copy of bills of exchange. The details filed by the assessee has been considered. However, the same is not acceptable in absence of any loan confirmation, identify, creditworthiness of the said loan party. Accordingly, the loan standing in the name of the said party remains unexplained.

 

The ld. CIT(A) in the absence of any confirmation and PAN to establish identity, genuineness of transaction and creditworthiness of the loan creditors, confirmed the addition of Rs. 4 lakhs made by the AO. In the absence of any material to show that apart from issuing notice u/s 133(1) as to how the AO pursued the matter further with the said parties and keeping in view that the assessee is ready to file confirmation letter along with the PAN, we are of the view that in the interests of justice, the matter should go back to the file of the AO and accordingly we set aside the orders passed by the revenue authorities on this account and send back the issue to the file of the AO to examine the same afresh in the light of our observations hereinabove and in accordance with law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purpose.  

 

19. In the result, the assessee's appeal is partly allowed for statistical purposes.  

 

Order pronounced in the open court on 9.12.2011.

 
Srinivasa Constructions Ltd Versus Asstt Commissioner of Income Tax PDF Print E-mail
Written by ITAT, AHMEDABAD   

Srinivasa Constructions Ltd Versus Asstt Commissioner of Income Tax

 

No. - ITA Nos.1078 & 1079/Hyd/2011

Dated - February 29, 2012

 

Chandra Poojari, Asha Vijayaraghavan, JJ.

 

For Appellant: Sri A Srinivas

For Respondent: Sri K Viswanatham

 

 

ORDER

Per: Chandra Poojari:

These appeals preferred by the assessee are directed against separate orders passed by the CIT (A)-II, Hyderabad both dated 17-9-2007 and they pertain to the assessment years 2003-04 and 2004-05. The assessee raised common grounds of appeals for these two assessment years. Hence, these are clubbed, heard together and disposed of by this combined order for the sake of convenience.

 

2. The assessee raised the ground with regard to confirming the order passed by the assessing officer treating the assessee at default under sections 201(1) and 201 (1A) of the Act read with section 154 of the Act. Brief facts of the case are that the assessee company is engaged in the business of civil contract works. A survey under section 133A was conducted in the case of the assessee on 17-2-2004. Subsequent to the survey, necessary enquiries and investigation was conducted by the TDS Authority and the assessee was found to be a defaulter in respect of payment of interest attracting the provisions of section 194A of the Act, payment to sub contractors and labour payments attracting the provisions of section 194C of the Act and payment of professional and consultancy charges attracting the provisions of section 194J. Accordingly, the assessing officer computed short deduction under section 201(1) and interest under section 201 (1A) as under:-

 

Nature of payment

Default

Demand u/s 201(1)

Interest u/s 201(1A)

Interest

194A

Nil

Rs. 1,41,006

Consultancy Charges

194J

Rs. 3,800

Rs. 4,300

Sub-contract & labour charges

194C

Rs. 7,90,887

Rs. 3,29,943

 

Thus, a total demand for short deduction under section 201(1) amounting to Rs. 7,94,687/- and consequential interest u/s 201(1A) of Rs. 4,75,249/- was raised. Subsequently, the said order has been rectified by the assessing officer vide order under section 154 of the Act dated 16-12-2005 wherein, the short deduction under section 201(1) and 201(1A) was worked out only for the default under section 194C on account of payment under labour charges and a final demand of Rs. 9,88,229/- had been raised comprising of short deduction under section 201(1) amounting to Rs. 7,53,625/- and interest under section 201(1A) amounting to Rs. 2,34,604/-. Aggrieved by the order of the assessing officer, the assessee went in appeal before the CIT (A).

 

3. Similarly, for the assessment year 2004-05, the assessing officer computed short deduction under section 201(1) and interest under section 201 (1A) as under:-

 

Nature of payment

Default

Demand u/s 201(1)

Interest u/s 201(1A)

Consultancy charges

194J

Rs. 7,125

Rs. 5,430

Sub-contract &labour charges & labour charges

194C

Rs. 20,68,755

Rs. 6,60,145

 

Thus, a total demand for short deduction under section 201(1) amounting to Rs. 20,75,880/- and consequential interest u/s 201(1A) of Rs. 6,65,575/- was raised. Subsequently, the said order has been rectified by the assessing officer vide order under section 154 of the Act dated 16-12-2005 wherein, the short deduction under section 201(1) and 201(1A) was worked out after verification of the tax paid by the assessee. Accordingly, the assessing officer worked out a total demand of Rs,26,91,845/- comprising of short deduction under section 201(1) amounting to Rs. 20,75,880/- and interest under section 201(1A) amounting to Rs. 6,15,965/-. Being aggrieved by the order of the assessing officer, the assessee went in appeal before the CIT (A). On appeal, the CIT (A) confirmed the orders of the assessment officer for the years under consideration. Further aggrieved, the assessee is in appeal before us.

 

4. We have heard the rival submissions of the parties and perused the material available on record. The learned departmental representative relied on the order of the Tribunal dated 21-3-2011 passed in ITA Nos. 1198 and 1199/Hyd/2007 in the case of Srinivasa Civil Works Pvt. Limited pertaining to the assessment years 2003-04 and 2004-05 wherein the Tribunal held in paragraphs 8,9 and 10 as follows:-

 

“8. We have heard both the parties on this issue. The section 194C reads as follows:

 

9. To settle the controversy involved herein, it is necessary to know about the provisions of section 194C of the IT Act. Payments made to contractors and sub contractors: (1) Any person responsible for paying any sum to any resident (hereinafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and

 

a) The Central govt. Or any state govt.

 

b) Any local authority; or

 

c) Any corporation established by or under a central, state or Provincial Act, o

r

d) Any company or

 

e) Any cooperative society; or

 

f) Any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or

 

g) Any society registered under the Societies Registration Act, 1860(21 of 1860) or under any law corresponding to that act in force in any part of India ; or

 

h) Any trust; or

 

i) Any university established or incorporated by or under central, state or provincial Act and an institution declared to be a university u/s 3 of the UGC, 1956 (3 of 1956) or

 

j) Any firm or (k) any individual or an HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under cl.(a) or cl.(b) of S.44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to be account of the contractor;

 

Shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to

 

i) One percent in case of advertising

 

ii) Any other case two percent, of such sum as income tax on income comprised therein.”

 

10. The Hon’ble Supreme Court in the case of Birla Cement Works Vs. CBDT (2001) 248 ITR 216 (SC) has laid down the conditions precedent for attracting the provisions of section 194C of the Act viz., (1) there must be a contract between the person responsible for making payment to contractor (2) the contract must be for carrying out of any work, (3) the work is to be carried through the contractor (4) the consideration for the contract should exceed Rs. 10,000/ (20,000)- i.e. the amount fixed by sub. sec. 194C and (5) that the payment is made to the contractor for the work carried out by him. In the present case, the relationship between the assessee and the maistry created through the agreement. The agreement need not be in writing. The assessee paid the money to the maistry for supply of labour for carrying any work which is popularly known as labour contract, there is legal obligation on the assessee to deduct tax at the specified rate and deposit the same with the govt. It is persistent to note that in section 194C the legislature is unambiguous terms made it clear that the payee or recipient should be ‘contractor’ or ‘sub contractor’. In the present case, because of an agreement between the assessee and the maistry the payment was made for supply of labour for carrying out the work for the benefit of the assessee. Thus, the assessee cannot shirk from its liability of deduction of tax. Further, the word ‘contractor’ for the purpose of these provisions would be any person who enters into a contract with the central or any state govt or any local authority, any corporation established b or under a central, state Provincial Act, any company or any cooperative society for carrying on any work including supply of labour for carrying out any work and a ‘subcontractor’ would mean any person who enters into a contract with the contractor for carrying out, or for the supply of labour for carrying out, the whole or the part of the work undertaken by the contractor under a contract with any of the authorities named above of for supply whether wholly or partly and labour which the contract has undertaken to supply in terms of his contract with any of the aforesaid authorities. We find, in the present case, the controversy is regarding the payments made for disbursement of labour charges to maistries. The main contention lf the assessee’s counsel is that there is no contract between the assessee and the maistries and it cannot be said to be labour contractors within the meaning of the provisions of section 194C . According to him, there is no requirement in law to deduct tax at source by the assessee under the provisions of section 194C of the Act and he placed reliance on the order of the Tribunal in the case of Samanwaya Vs. ACIT (34 SOT 332 (Kol.)

 

On the other hand, the DR placed reliance on the judgement of Uttaranchal High Court in the case of Kumaon Mandal Vikas Nigam Ltd. Vs. ITO (290 ITR 538). In our opinion, when the mobilisation of labour is assigned to the labour contractor, there is an agreement between the assessee and the maistry and for which the assessee has paid charges. This fact is emanated from the order of the Assessing Officer and the assessee could not bring out any concrete evidence/material to suggest that there is no contract between the assessee and the maistries. In such circumstances, it is natural to come to the conclusion that the payments was made for supply of labour for carrying out the work of the assessee. Where any work is carried out by supplying the manpower, the provisions of section 194C is attracted. In the present case, it is not the case of the assessee that the payment is not related to the supply of labours. Nothing has been brought on record to the effect that manpower was not provided by the maistries himself. In view of this matter, in our opinion, the CIT(A) is justified in confirming the order of the Assessing Officer. This ground of the assessee in both the appeals is dismissed.”

 

5. The learned authorised representative of the assessee submitted before us that the assessing officer and the CIT failed to appreciate the fact that the assessee is not engaged any labour contractor and all the payments made towards labourers who are employed by the assessee directly and as such the provisions of section 194C do not apply. The assessing officer and the first appellate authority failed to appreciate the difference between the relationship of contractor-contractee and employer- employee and the fact that labourers are employed by the assessee itself has been recorded by the assessing officer himself in the statement taken on oath from the Managing Director in the course of assessment proceedings wherein the Managing Director categorically stated that the masteries are also employees and head a group of labourers and that each of the mastri is in charge of the group. It is further submitted that the first appellate authority while accepting the fact that the masteries are employees, erred in holding them as contractors.

 

6. We have considered the rival submissions and perused the material available on record. The main grievance of the assessee is that the assessee made the payments to each labourer individually not to mastri and it is accounted for the said payments in its cash book. As the individual payment does not exist the prescribed limit under section 194C of the Act, the order of the Tribunal is not applicable to the facts of the instant case. The assessing officer held that it is not possible to the assessee-company to mobilise such huge number of labourers or control them at one place as labour turnover in such projects is very high. According to the assessing officer, the assessee could not have made the payment to each individual labour who is its employee and instead of paying them directly, the amounts were paid to the middlemen. After considering the facts and the circumstances of the case, we are of the opinion that the assessing officer is required to examine the assessee’s cash book and find out whether the assessee has directly paid the amounts to the individual labourers or the same was paid through the mastri. If the assessee paid the said payments to the individual labour, then the assessee is not liable to deduct TDS under section 194C of the Act, otherwise the assessee is liable to deduct TDS u/s 194C of the Act. In view of the above, we set aside the entire issue to the file of the assessing officer to decide the same afresh in the light of the decision of the Tribunal mentioned supra in ITA Nos. 1198 & 1199/Hyd/2007 for assessment years 2003-04 and 2004-05 and our above observations.

 

7. In the result, the appeals filed by the assessee for the years under consideration are treated as allowed for statistical purposes.

 

(Order was pronounced in the Court on 29.2.2012.)

 
LG Electronics India (P.) Ltd. Versus Commissioner of Income-tax PDF Print E-mail
Written by ALLAHABAD HIGH COURT   

LG Electronics India (P.) Ltd. Versus Commissioner of Income-tax

 

No. - WRIT TAX NO. 367 OF 2012

Dated - March 22, 2012

 

ASHOK BHUSHAN AND PRAKASH KRISHNA, JJ.

 

Ritesh Kumar Agrahari for the Petitioner

Bharat Ji Agarwal and Ritesh Jain for the Respondent

 

 

ORDER

1. Heard Sri Ritesh Kumar Agrahari, learned counsel for the petitioner, and Sri Bharat Ji Agarwal, learned Senior Advocate, assisted by Sri Ritesh Jain, for the department. By consent of learned counsel for the parties, the writ petition is being finally decided.

 

2. This writ petition has been filed praying for quashing the order dated 19 March, 2012 passed by the Commissioner of Income Tax (Appeals) by which the stay application filed by the petitioners in appeal has been disposed of by allowing it partly directing the assessee to pay 30 percent of the total demand.

 

3. Learned counsel for the petitioner in support of the writ petition, contends that the Commissioner of Income Tax (Appeals) having himself found in the order impugned that "I find enough strength in the plea of the assessee for stay of demand" there was no occasion to direct for depositing 30 percent of the total demand. He submits that in view of the aforesaid prima facie opinion formed by the Commissioner, it was a fit case for stay of the total demand. He further submits that the case was covered by Section 194-C and was not governed by Section 194-I which was apparent from looking into the contract of service and other materials which were before the authorities themselves. He has placed reliance on judgment of Gujarat High Court in CIT (TDS) v. Swayam Shipping Services (P.) Ltd. [2011] 199 Taxman 249/11 taxmann.com 137 (Mag.)

 

4. Shri Bharat Ji Agarwal, learned Senior Advocate, appearing for the department, submits that the Commissioner has discretion to grant partial interim relief even if it was a prima facie case. He has placed reliance on paragraphs 7 and 11 of the judgment of the Apex Court dated 9th February, 2009 in the case of Pennar Industries Ltd. v. State of AP.

 

5. We have considered the submissions of learned counsel for the parties and perused the record.

 

6. The grounds which were pressed by the petitioner in support of the stay application has been noticed by the Commissioner. The CBDT circular No. 1914 has also been relied which has been quoted by the petitioner in writ petition. After hearing the assessee's authorised representative and written submissions of the company, following was observed by the commissioner of appeals:-

 

"The assessee had not taken the trailers/cranes on hire or rent from the said parties. The assessee has given sub-contracts to the said parties for the transportation of goods and not for renting out of machineries and equipments. Section 1941 of the Act makes provision for deduction of tax at source where any person who is responsible for paying to a resident any income by way of rent where as section 194C of the Act makes provision for deduction of tax at source where any person is responsible for paying any sum to any resident for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and a specified person. In the facts of the present case, there is nothing to indicate that the assessee has taken trailers/cranes on rent so as to attract the provisions of Section 1941 of the Act. The assessee had given sub-contracts for transportation of goods. In the circumstances, the said transactions would fall within the perview of section 194C of the Act as the assessee was responsible for paying the amount in question for carrying out work in pursuance of contracts between the assessee and the transporters and as such was required to deduct tax at source at the rate prescribed under the said section. The Commissioner (Appeals) was, therefore, justified in holding that the assessee was not an assessee in default within the meaning of the said expression as contemplated under section 201 of the Act and consequently, the Tribunal was justified in confirming the order passed by the Commissioner (Appeals)."

 

7. The Commissioner referred to the judgment of the Apex Court in the case of Asstt. Collector of CE v. Dunlop India Ltd. [1985] 154 ITR 172 and circular of CBDT No.1914 and directed for deposit of 30% of the total demand.

 

8. The judgment of the Apex Court in Pennar Industries' case (supra) laid down following in paragraph 7:-

 

"7. It is true that on merely establishing a prima facie case, interim order of protection should not be passed. But if on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. Petitions for stay should not be disposed of in a routine matter unmindful of the consequences flowing from the order requiring the assessee to deposit full or part of the demand. There can be no rule of universal application in such matters and the order has to be passed keeping in view the factual scenario involved. Merely because this Court has indicated the principles that does not give a license to the forum/authority to pass an order which cannot be sustained on the touchstone of fairness, legality and public interest. Where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizens' faith in the impartiality of public administration, interim relief can be given."

 

9. The Apex Court in the aforesaid judgment has observed that it is true that on merely establishing a prima facie case, interim order of protection should not be passed. But if on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. From the perusal of materials brought on record, we are of the view that the Commissioner having himself expressed opinion in the order that there is enough strength in the plea of the assessee for stay of the demand, there was no occasion to direct for deposit of 30 percent. Thus the judgment relied by learned counsel for the petitioner also supports his submission. However, looking to the fact that we are only considering the stay application our any observation be not treated as concluded opinion on the issue and it shall be open for the Commissioner while deciding the appeal, to decide the appeal on merits without being influenced by any of our observation made in this order.

 

10. In view of the above, ends of justice be served in setting aside the order dated 19th March, 2012 and directing the appellate authority to decide the appeal finally on merits. We provide that during pendency of the appeal the demand against the petitioner shall be kept in abeyance. It is ordered accordingly. However, the petitioner shall furnish adequate security to the satisfaction of the respondent No. 4 for the amount to be deposited under the order of the Commissioner Income Tax (Appeals) i.e. 30% of the total demand within ten days. We make it clear that in case the security as directed above is not furnished, the petitioner shall not be entitled for any benefit of this order.

 

11. Accordingly, the writ petition is finally disposed of.

 

 
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