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Income Tax Appellate Tribunal, HYDERABAD BENCH ‘A, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, AM: This appeal filed by the assessee is directed against the order of CIT(A) – 6, Hyderabad, dated, 10/01/2018 for AY 2012-13.
Brief facts of the case are, the assessee-AOP, engaged in civil construction, filed its return of income for the AY 2012- 13 on 30/09/2012 admitting total income of Rs. 73,03,040/-, which was processed u/s 143(1) of the Income-tax Act, 1961 ( in short ‘the Act’). Subsequently, notices u/s 143(2) and 142(1) was issued to the assessee. In response to the said notices, the AR of the assessee furnished the required information as called for.
2.1 During the course of hearing, the assessee's AR was asked to furnish TDS reconciliation vide order sheet noting
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dated 21.1.2015. On examination of the details submitted, the AO noticed that the assessee has incurred an amount of Rs.32,75,617/- towards Port Handling Charges under the head "Works Cost" during the relevant year and also the assessee has not deducted TDS on the said payment.
2.2 The AO further observed that in absence of any documentary evidence to substantiate assessee's claim and moreover, since the assessee has failed to deduct TDS on the said payment of Rs.32,75,617/- and deposit the same into the Government Account within stipulated time. He, therefore, disallowed the above amount invoking the provisions of section 40(a)(ia) of the Act and added back to the total income of the assessee-JV.
When the assessee carried the matter in appeal before the CIT(A), the CIT(A) after discussing the issue at large with various case law, upheld the disallowance to the extent of Rs. 25,48,251/-.
Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal: “1. Learned Commissioner of Income Tax (Appeals) - 6 [CIT(A)] has erred on facts and in law. 2. Learned CIT(A) is not justified in upholding the disallowance to the extent of Rs. 25,48,251/- u/s 40(a)(ia) of Income Tax Act, 1961. 3. Learned CIT(A) has not found as a fact that the total payments made as per actual receipts of Rs. 25,48,251/- in A1(i) & A1(ii) of the Memo of Expenses is not by way of reimbursement of expenses incurred by ICMS on behalf of the assessee. 4. Learned CIT(A) has failed to consider the quotation (estimate) of ICMS (International Cargo Management Services) dated 19-10-2011 filed before him in
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accordance with which payments are to be made on the basis of actual receipts supplied by it to the assessee. 5. Learned CIT (A) has erred in holding that the invoice raised is composite only because reimbursement amounts and other service charges are contained in a single sheet of paper. Memo of expenses / invoice is not a composite bill. 6. Reliance of learned CIT(A) on the Case Law cited by him and Board Circular No. 715 is misplaced. 7. For these and any other grounds that may be raised at/before the date of hearing, it is prayed that the disallowance u/s 40(a)(ia) of reimbursed expenses be deleted.” 5. Before us, ld. AR of the assessee filed written submissions, the contents of which are as under:
“1. Issue in appeal before the Hon'ble Tribunal is disallowance u/s. 40 (a)(ia) of Rs. 32,75,6171- made by A.O and sustained by the Learned CIT(A) to the extent of Rs. 32,69,025/- (32,75,617 -6,592) except for Rs. 6,592/- being the service tax component. Appellant has not raised any ground against disallowance of Rs. 64,000/- of commission payment. 2. Learned CIT(A) treated the "Memo of Expenses" (Page 10 of P.B) as a composite invoice. Memo of expenses is only an account rendered to the assessee by International Cargo Management Services, Kolkata (ICMS), and not an invoice, much less a composite invoice. As assessee paid advances to the tune of Rs. 38,93,892/-. ICMS submitted invoices raised by Hapag- Lloyd India Pvt Ltd and receipts issued by that company (P 12-53) along with the Memo. 3. Expenses charged on its own towards expenses are those calculated at flat rates at items Al(iii), (iv) & V amounting to Rs. 5,56,774/- and Rs. 64,000/- towards charges for its services. (P 10) 4. Learned CIT(A) relied on orders of Benches of ITAT, which it is submitted are distinguishable. Judgment of Gujarat High Court on which he relied actually supports the case of the assessee in so far as reimbursements are concerned.
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Reliance by A.O on the decisions in the case of Om Satya Exim Pvt Ltd vs. ITO (ITA No. 1335/ Ahd/2010 dated 13.05.2011 and ITO Vs. Dr William India (P) Ltd [2005] 3 SOT 71 (ITAT) (Delhi) is misplaced as what fell for consideration were separate bills. Similar are the facts in the case of CIT Vs. Consumer Marketing (India(P) Ltd [2015] 64 taxmann.com 16 (Guj). They are not cases where any composite invoices fell for consideration nor of reimbursements. As regards the observations of the supreme court in the case of Associated Cement Co Ltd Vs. CIT [1993] 201 ITR 435 (SC), the passage on which reliance is sought to be placed by Learned CIT(A) is misquoted by him and it is torn out of context. That is basically a case where the contractor is liable to TDS and not a case of reimbursement at all. The contract amount was decided between the contractor and contractee on the basis of certain rates to be paid towards various categories of work. There is a clause 13 in the contract whereby if the rate payable to labour increases that increase must be reimbursed by the contractee Reimbursement rate becomes a part of the contract amount originally fixed by applying work-wise rates. 6. In respect of the decision relied on by the Learned CIT(A) in the case of PCIT vs. Consumer Marketing (India) (P) Ltd [2015] 64 taxxmann.com 16 (Guj)7 it clearly supports the case of the assessee. Hon'ble High Court noticed that separate bills had been raised in respect of reimbursement of expenses incurred by the Agent and held that "since the reimbursement bills were separately raised there was no requirement to deduct TDS in respect thereof. 7. In the case of the assessee also the ICMS, the Agent submitted all the invoices raised by Hapag-Lloyd India Pvt Ltd, Mumbai and the receipts issued by them in proof of payment (PP 12, 24, 27, 25 & 26, 33, 37) and receipts in case of other services and exhibited them in "Memo of Expenses" (P 10). Memo of expenses is in the nature of rendering account for the advance payment made to the Agent supported by bills and invoices, and the Memo is not invoice. 8. Only items Al (iii) (iv) & v in Memo of Expenses i.e 3,36,774 + 2,40,000 + 80,000 amounting to Rs. 5,56,774/- have been shown at flat rate.
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Learned CIT(A) has held that Q.No. 30 & Answer in Circular No. 715 dated 08.08.1995 is applicable. The question No. 30 and answer have been considered and interpreted by Bangalore Bench of the Hon 'ble Tribunal in the case of DCIT, Bangalore Vs. Dhanya Seeds (P) Ltd [2014] 64 SOT 15 (ITAT[Bang]) in Para 6.4.2. Hon'ble Bench upheld the order of Learned CIT(A) in that case holding that Board's Circular is applicable where there is no indication about the reimbursable amount in the bills separately. Order of CIT(A) has been upheld in Para 6.4.3. Facts in our case are exactly similar. Ratio of the decision of the Bench applies to our case. 10. On reimbursement to C&F Carriers Like ICMS above there are also other decisions by Bombay High Court and the Benchers of the Tribunal. They are listed herein below and copies enclosed duly highlighting the relevant parts. (P 1 to 10) i. CIT, TDS-2, Mumbai Vs. Zee Entertainment Enterprises Ltd [2018] 92 taxmann.com 30 (Bom.) Paras 2(iv) r.w.4(a). (P 11 to 14) n, ACIT, New Delhi Vs. Swasthik Pipes Ltd [2018] 98 taxmann.com 420 (Delhi -Trib) Head Note (Held-I) and Para 7. (P 15 to 21) iii. Smt. Madhu Mehta Vs. DCIT [2016] 48 ITR(Trib) 246 (ITAT[Mum]) Head Note and Page 260 (Relevant extract only enclosed.) (P 22 to 34) iv. ACIT Vs. Modicon Network (P) Ltd [2007] 14 SOT 2014 (ITAT[Del]) Para 14 & 15. (P 35 to 41) v. ACIT Vs. Grandprix Fab. (P) Ltd [2010] 128 TTJ 60 (ITAT[Del]) Para 14 & 15 (P 42 to 46) 11. It is submitted that in terms of the above judgments of the provisions of section 40(a)(ia) are not applicable except to the extent of Rs. 5,56,774/- covered by Al(iii), (iv) & v (P 10) . The case law cited above is applicable. Disallowance of Rs. 64,000/- & commission is not disputed in Grounds of Appeal. Out of Rs. 32,69,025/- disallowance sustained by CIT(A) Rs. 5,56,774/- only may be upheld, in the light of above submissions.”
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On the other hand, ld. DR relied on the orders of revenue authorities.
Considered the rival submissions and perused the material on record. We notice from the record that at the time of clearing the imported consignment, assessee utilized the services of M/s International Cargo Management Services (ICMS). The agent (ICMS) accepted to handle the clearing assignment and gave estimate for the port clearing expenses along with the service charges for handling the above assignment. It is the trade practice in this line of business that the agents handle all the activities relating to the customs clearance. The agents will do whole clearance from collecting the shipping agents delivery order to final dispatch of the consignment to the assessee’s desired address. At the time of assigning the job itself, the assessee and the agent are aware that majority of the payment made to agent are towards payment to shipping companies, freight charges, container hiring charges, container movement charges etc. All the above charges are supported by the invoices from respective agencies. The assessee is required to make advance payment to the clearing agent and clearing agent will submit the actual expenditure details with the supporting invoices to the assessee by way of “Memo”. Therefore, assessee is actually utilizing their services for the above purpose and they are compensated with the service charges, which also part of quotation submitted at the time of offer. This is the regular practice in the customs clearance.
7.1 In this case, assessee gave customs clearance job to ICMS and paid advance as per the quotation. The agents have submitted the “Memo” of expenses which is placed on record at pages 9 & 10 of the paper book. From the above Memo, it is
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clear that all the expenses incurred by the agents were supported by invoices and certain expenses were incurred by ICMS on the field and the service charges for the services of ICMS. Therefore, TDS provision can be invoked only on the compensation for the services rendered by the agents and all other expenses are supported with the relevant supporting papers. The AO cannot insist to deduct taxes on the payment, which is not the income of the agent. In the shipping line of business, the agents are utilized to collect the charges on behalf of the shipping companies and container charges. The office of agents are passing entity. Therefore, the payment made by the assessee towards port handling are not completely to the agent and for their services. Therefore, assessee is liable to deduct TDS only on the service charges to the agent and expenses which are not properly supported or the agent has taken services of other agents. The charges paid to shipping companies are not taxable, they are not expected to come under TDS provision.
7.2 Imagine a situation, the agent renders services for the compensation of let us say 5% of the total port handling charges and he pays the above 95% to the shipping company and gets the required invoices. If the assessee deducts TDS on total amount, can the service agent survive. The AO and first appellate authority have to understand the trade practice before coming to a conclusion, which may end up enforcing hardship on the assessee as well as on service provider.
7.3 In the given case, ld. CIT(A) has categorized the expenses in 4 categories, viz., 1) Expenses incurred towards services rendered by third parties to ICMS on behalf of the assessee, which amounted to Rs. 24,50,980/-
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2) Expenses incurred towards services rendered by ICMS on its own for the assessee, but without outsourcing the same to a third party, which amounted to Rs.6,56,774/-.
3) Expenses incurred towards service charges paid to ICMS towards various services rendered by ICMS, some on its own and some other services by outsourcing to a third party amounting to Rs. 64,000/-.
4) Expenses incurred towards service tax on service charges paid to ICMS amounting to Rs. 6,592/-.
The assessee is not expected to deduct tax on category 1. Therefore, AO is directed to restrict the disallowance u/s 40(a)(ia) to the extent of category 2 & 3 only. Item 4 is service tax. Therefore, ground raised by the assessee in this regard is allowed.
In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on 12th June, 2019.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 12th June, 2019. kv