TMI Blog2018 (7) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... ping companies or their Agents, are not taxable in India, therefore, assessee is not liable to deduct TDS. In this view of the matter, we set aside the orders of the authorities below and delete the entire addition. Scope of auditor's opinion - The opinion of the Auditor is not conclusive because the issue shall have to be considered and decided as per Law. Further, the assessee-company has filed the revised audit report to clarify the above position. Disallowance u/s 40A(3) - Held that:- There is an amendment in Rule 6DD of I.T. Rules as is noted by the Ld. CIT(A), but in Section 40A(3) itself, an exception is provided on account of nature and extent of banking facilities available, consideration of business expediency and other relevant factors. It is not in dispute that assessee-company was engaged in the business of Clearing and Forwarding Agent and acted on behalf of other companies. The amounts in question have been tabulated in the assessment order. These payments are made to airline companies. The nature of business of assessee-company and the agency carried on by the assessee-company on behalf of others, clearly shows that for business expediency in the line of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipping agents, packing agents, salvors, wreck removers, wreck raisers, auctioneers, baggage transporters, forwarding and clearing agents, wholesale warehousemen, booking agents of goods, articles or things on behalf of customers from one place to another place in any part of the world. 3.2. During the assessment proceedings, the basic financial statements along with computation of income and Tax Auditor report were filed. On perusal of the records, it was noticed that Assessee-Company had made certain payments to non-resident parties with respect to airfreight in tune of ₹ 120,86,24,827/-. The assessee-company was asked to file details with regard to such airfreight payments, which were filed. 3.3. The A.O. on perusal of the same noted that under column 21(b) inadmissibility of certain payments had been reported. Column 21(b) of tax audit report talks about amounts inadmissible under section 40(a) and further, sub-column (b)(i) talks about amounts inadmissible as payments to non-resident referred to in sub-clause (i). When some amounts are reported as inadmissible in tax audit report, such amounts are to be added back to profits and gains from business and profession. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taxable only in the State, in which, respective enterprises are fiscally domicile. The assessee-company has no obligation to deduct tax at source whether under section 194C or under section 195 for the payments made to non-residents towards airfreight. It was submitted that all the payments are towards freight to companies registered outside India and no tax is required to be deducted on payments to them since the payments to nonresidents are covered by provisions of Double Taxation Avoidance Agreement ( DTAA ) with those Countries. Further, more payments to non-residents on account of airfreight are not taxable in India. It is an admitted position that airfreight is paid to the agents on the actual basis and that bills and airfreight documents have been directly issued by foreign airlines. The agents while accepting the payments for airfreight components have been acted merely as agents of the respective airlines and have not received the airfreight payments in their own right. In copy of airway bills, name of these agents is mentioned as Issuing Carrier s Agent. Further, Agent s code is given as Agent s IATA Code. There is, thus, enough material to demonstrate that persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has not been established that payments made to non-residents were in the nature of airfreight with any supporting documents. The assesseecompany has failed to establish the fact that whether payments made to foreign agents are related to airfreight or it is mere reimbursement of expenses. The assessee-company failed to provide details. Therefore, in the opinion of the A.O. the assessee-company is required to deduct TDS on the amount of payments made to various non-resident agents/parties for freight. Therefore, A.O. disallowed the amount in question because assessee-company failed to deduct TDS on the same. [ 5. The assessee-company challenged the addition before Ld. CIT(A). The written submissions of the assesseecompany is reproduced in the appellate order in which the assessee-company reiterated the facts stated before the A.O. It was also explained that though the payments have been made to non-resident agents of the foreign airlines, but such freights have not been paid by the assessee-company as its expenses but have been paid primarily for and on behalf of M/s. Samsung India Ltd., for which, the assessee-company, does work of logistic solutions. In fact, the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame income by treating the later to be an assessee-in default. In the present case, the payees have offered the corresponding income in the returns, therefore, alleged TDS liability raised upon the assessee was not enforceable. Since the contract was between the exporter and the shipping lines and the assessee merely acted as an Agent, therefore, it is not liable to deduct tax in terms of Section 194C of the I.T. Act. It was further submitted that freight charges paid to the non-resident agents, in any case, are not chargeable to tax in India in view of Article-8 of respective DTAA. It was further submitted that such payments have been made in earlier and in subsequent years also and the nature of business of assessee-company remains the same. A.O. has not made any disallowance under section 143(3) or under section 143(1) of the I.T. Act. 6. The Ld. CIT(A), however, did not accept the contention of the assessee-company and noted that copies of the sample invoices have been furnished. M/s. Samsung India Ltd., makes payment to the assessee-company after deducting TDS, which needs to be routed through P L A/c. The assessee company made payment to foreign vendors corresponding to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of the airlines, therefore, it should be treated as payments made to airlines. The assessee-company did not claim deduction of the expenditure as the same have been reimbursed by the Principal. For the payments made by M/s. Samsung India Ltd., , they have deducted TDS on the entire amount that is why, the entire figure is coming up in 26AS but the entire amount so received is not income of the assessee-company because substantial portion was on account of reimbursement of the freight and other expenses. Therefore, there is no question of showing the entire amount in the P L A/c. The assessee-company relied upon several decisions in support of the contention that assessee-company was not required to deduct TDS. 8. The Ld. CIT(A), however, rejected the contention of the assessee-company and noted that Article-8 of respective DTAA is applicable for making payments to foreign airlines and not to other parties including foreign agents. A.O. has pointed out in consistencies in TRCs filed by the assessee-company. The theory of reimbursement of the expenses was also not accepted. This ground of appeal of assessee-company was accordingly dismissed. 9. The Learned Counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame set of facts, when Income Tax Department accepted similar claim of the assessee-company for preceding as well as subsequent assessment years, then, for assessment year under appeal, the similar claim of assessee-company should not be disallowed on account of non-deduction of TDS without bringing any new material on record. In support of this contention, he has relied upon the decisions of the Hon ble Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 295 (SC) and Radhasoami Satsung Saomi Bagh vs. CIT (1992) 193 ITR 321 (SC). Since no expenses have been claimed by the assesseecompany in its P L A/c and in the computation of income, so no disallowance should be made because it was a case of reimbursement by the Principal to the Assessee-Company. Learned Counsel for the Assessee further submitted that the amounts in question were paid to non-resident agents on behalf of non-resident airlines/shipping companies. These amounts are not chargeable to tax in India under the domestic Law. Payments made to shipping company shall have to be considered in the light of specific provisions of Law contained under section 44B r.w.s.172 of the I.T. Act because the ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gets profit share from foreign counterparts and there is no reimbursement of expenses between the two parties. It is a service being rendered by the assessee-company, so TDS is liable to be deducted. The rule of res judicata does not apply. Since new facts have been pleaded, so the case may be decided on merits. The Ld. D.R. also filed two written submissions in which the same submissions have been reiterated, in which, Ld. D.R. also explained that audit report was given by an Independent Auditor who opined that such amounts shall have to be disallowed. The assessee-company shall have to route the payments and expenditure through P L A/c. He has submitted that the issue shall have to be decided according to principles of Law and not in accordance with the Accounting Practice and relied upon the decision of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd., reported in (1997) 227 ITR 172 (SC). The assessment order passed by the A.O. under section 143(3) is cryptic in nature and notice issued under section 133(6) would not help the assesseecompany. It is not clear whether sample invoice, airway bills were provided before A.O. The bills referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies. Freight is paid by the assessee-company on behalf of M/s. Samsung India Ltd., and others. There is no Privity of Contract between the assesseecompany and the non-resident Agents of foreign airlines/shipping companies. Assessee-Company worked as a Facilitator/Agent between the parties. PB-660 to 669 is copy of the chart giving details of payments remitted to non-resident Agents by the assessee-company along with the details of payments reimbursed by the client to the assessee-company, of the exact amount in question. PB-627 to 659 is the chart of complete details of invoice bill raised on assessee-company and bills raised by assessee upon M/s. Samsung India Ltd., amounts in US Dollar, date of invoice, bill in the name of assessee-company with reference to documents filed in the paper book. The same are supported by copy of the sample bills raised upon assessee-company and bills raised by assessee in turn, upon M/s. Samsung India Ltd., which would establish that amounts actually paid as freight, has been reimbursed to the assessee-company. PB-4 to 21 is the copy of the P L A/c which would not show any claim for such expenses made by assessee-company. It would established t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 295 held in para-31 as under : 31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it. 13. ITAT, Mumbai Bench, in the case of ITO vs. Rajeswari Shipping and Logistic (2016) 49 ITR 120 (Tribu.) (Mum.) held as under : Assessee having made payments on behalf of its clients, there was no liability to deduct tax at source on Assessee. No disallowance u/s.40(a)(ia) could be made for alleged failure of Assessee to deduct tax at source on payment made on behalf of importers/clients. 14. ITAT, Kolkata Bench in the case of Mitra Logistic (P.) Ltd., vs. ITO (2012) 139 ITD 420 held as under : If business expenditure is claimed as reimbursement, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipping lines for transportation of cargo, since CHA only act as an intermediary and the privity of contract is not between assessee and foreign lines/shipping lines to whom such charges were paid. 19. The assessee-company further submitted that, in this case, it is not in dispute that it is a case of reimbursement only and, therefore, assessee-company is not liable to deduct TDS. In support of this contention, Learned Counsel for the Assessee relied upon the decision of ITAT, Mumbai Bench in the case of DCIT vs. Rank Shipping Agency (P) Ltd., ITA.No.5946/ Mum/2008, Dated 21.11.2012 and Order of ITAT, Delhi Bench in the case of DCIT vs. Jay Kay Freighters Pvt. Ltd., ITA.No.3407/Del./2011 Dated 08.08.2012. 19.1. In the instant case, since the amount paid to the nonresident agents was on behalf of non-resident shipping company or non-resident airline company, therefore, these amounts are not chargeable to tax in India under the domestic Law and the assessee-company was not liable to deduct TDS on these payments. It is well settled law that no TDS is required to be deducted by the payer, if the income of non-resident payee is not liable to tax in India. We, rely upon the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source 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 section 172. 4. Section 194C deals with work 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 clauses (a ) to (j) of sub-section (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, section 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 section 172 shall apply and those of sections 194C and 195 will not apply. 19.3. Learned Counsel for the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any services in India. They do not have any P.E. in India and they do not have any business connection in India. No such case is also made out by the A.O. 19.5. Assessee-Company also pleaded that freight charges paid to non-resident shipping/airline companies directly or through their agents is exempt under Article-8 of DTAA, copies of various relevant DTAAs are filed at pages 526 to 555 of the paper book, which clearly provides that profits from operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State. Therefore, the impugned payments are not taxable to tax in India, therefore, there is no liability to deduct TDS under section 195 of the I.T. Act. 20. The A.O. observed that Article-8 of DTAA is valid only for payments made to airline companies since payments have made to their Agents, therefore, DTAA will not apply. It may be noted here that it is well known fact that agents of shipping airline companies are merely collection agents and coordinating agency. They receive payment on behalf of airline/shipping companies only. These facts would also be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as under DTAA, the income received by non-resident airline/shipping companies or their Agents, are not taxable in India, therefore, assessee is not liable to deduct TDS. In this view of the matter, we set aside the orders of the authorities below and delete the entire addition. In the result, ground Nos. 1 and 2 of the appeal of the assessee are allowed. 24. On ground No.3, assessee-company challenged the order of the Ld. CIT(A) in confirming the disallowance of ₹ 8,17,807/- under section 40A(3) of the I.T. Act, 1961. 25. The A.O. noted from the tax audit report that the assessee-company has incurred expenditure covered under section 40A(3) of the I.T. Act because the payments have been made in excess of ₹ 20,000/- by cash. The details of same are noted in the assessment order for a sum of ₹ 8,17,807/-. The A.O. accordingly disallowed the same. 25.1. The assessee-company challenged the addition before the Ld. CIT(A) and it was submitted that payments have been made to various airlines. The assessee-company pleaded that these are reputed airlines and have PAN and genuine payments have been made, therefore, no disallowance could be made under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sec. 40A(3) in the case of Harshila Chordia vs, ITO supra has clearly held that when the genuineness of the transaction/payment is not disputed and the identity of the payee / received is established then such case will fall under the exceptional circumstances covered under-rule 6DD of IT Rules. The decision of the Hon ble Jurisdictional ITAT in the case of the M/s Ace India Abodes Ltd. vs. ACIT CC-2, Jaipur in ITA no. 79/JP/20110rder dated 12.2.2011 and in the case of the M/s Shree Salaaar Overseas Pvt. Ltd.: vs. DCIT, Circ1e-2 in ITA no. 56/JP/2 10, order dated 21.2.2011 also supported the assessee s contention. The decision of the Jurisdictional High Court and the Jurisdictional ITAT are also of binding nature. Therefore respectfully following the ratios of judgment of the Jurisdictional High Court as well as ITAT decisions, Ld. CIT(A) has rightly held that the assessee s case is found to be covered under the exceptional circumstances under rule 6DD of IT Rules. Accordingly, the addition made by the AO amounting to ₹ 60 lacs was rightly deleted by the Ld. CIT(A). Also we find no force in the arguments advanced by the Ld. DR, in view of the decision of the ITAT, B Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers - Principal company Tata insisted that cheque payment from assessee's co-operative bank would not do, since realization took longer time and such payments should be made only in cash in their bank account -If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation - Assessee, therefore, made cash payment - Whether in view of above, no disallowance under section 40A (3) was to be made in respect of payment made to principal- Held, yes [ Paras 21 to 23] [in favour of the assesse] Sri Laxmi Satvanaravana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhrapradesh High Court) Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limit (Rule 6DD) - Assessee made certain payment of purchase of ground nut in cash exceeding prescribed limit - Assessee submitted that her made payment in cash because seller insisted on that and also gave incentives and discounts - Further, seller also issued certificate in support of this - Whether since a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty, but the requirement of law to be followed by the assessee was of as technical nature as was in the case of Swastik Roadways (3 SCC 640) and the consequence to fall for failure to observe such norms in the present case are much higher than which were prescribed under the Madhya Pradesh Sales Tax Act. Apparently, it is a relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the Circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. We hold that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transaction. Admittedly, this is not the case in the facts of the assessee herein. The payments made in cash to Shri. Amit Dutta had been duly acknowledged by him in an independent deposition given by him before the Learned AO which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l under the exception clause of Rule 6DD(k). 4.9. We find that one of the grounds raised by the assessee is violation of principles of natural justice on the part of the Learned CIT(A) to enhance the assessment without giving enhancement notice to the assessee. But from the order of the Learned CITA, it is specifically mentioned that the assessee was given due opportunity and show cause notice for enhancement of assessment by ₹ 54,01,473/- for making further additions on account of section 40A(3) of the Act. We find that the assessee had not come on any affidavit before us refuting this finding. Hence the enhancement made by the Learned AO cannot be faulted with on violation of principles of natural justice. 4.10. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the addition made in the sum of ₹ 60,50,8901- and 54,01,473/- u/s 40A(3) of the Act. Accordingly, the grounds raised by the assesee in this regard are allowed. 5. In the result, the appeal of the assessee is allowed. 7. After perusing the aforesaid decision of the ITAT, Kolkata, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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