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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Ravish Sood & Shri N.K. Pradhan
O R D E R
PER RAVISH SOOD, JM
The present appeal filed by the assessee company is directed against the order passed by the Principal Commissioner of Income Tax (Central)-4, Mumbai (for short „Pr. CIT‟) under Sec. 263 of the Income Tax Act, 1961 (for short „Act‟), dated 14.03.2018 for A.Y. 2013-14. The assessee has assailed the impugned order on the following grounds of appeal before us : “The appellant, M/s Deepak Fertilizers & Petrochemicals Ltd, filed its return of income on 29 November 2013 declaring total income of Rs.1,03,99,28,820/-. The AO passed the assessment order dated 25 P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 January 201
7. The Principal Commissioner of Income Tax (Central)-4, Mumbai ('Pr. CIT(A)', for short) vide order dated 14 March 2018 invoked provisions of section 263 and disallowed demurrage expenses debited by the appellant. Being aggrieved by the order passed by the Pr. CIT, your appellant submits the following grounds of appeal for your sympathetic consideration: Ground No. 1: On the facts and in the circumstances of the case and in law the learned Pr. CIT erred in invoking provisions of section 195 of the Income-tax Act, 1961 (the Act') for disallowing demurrage expenses debited to the extent of Rs.4,94,33,000/- for non-deduction of TDS. The learned Pr CIT erred in facts and in law that such payment is covered as business income under section 44B of the Act. The learned Pr.CIT failed to appreciate that section 172 of the Act provides adequate measures for computation, assessment and recovery of taxes, thereby, there is no warrant to take recourse to section 40(a)(i) of the Act. On the facts and in the circumstances of the case and in law, the learned Pr. CIT erred in not considering the full member bench ruling of Hon'ble Bombay High Court in case of V.S.Dempo & Co. Pvt. Ltd reported in 387 ITR 354. Ground No.2: Without prejudice to the above ground, on the facts and in the circumstances of the case and in law the Pr.CIT erred in invoking provisions of sections 263 of the Income Tax Act for the impugned A.Y. 2013-14. The learned Pr. CIT failed to appreciate that the assessment order is neither erroneous or prejudicial to the interest of the revenue. Your appellant reserves the right to add to, alter or amend the above ground, if necessary.”
Briefly stated, the assessee company which is engaged in the business of manufacturing and trading of fertilizers and petrochemical products had e-filed its return of income for A.Y. 2013-14 on 29.11.2013, declaring its total income at Rs.103,99,28,820/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2). Assessment under Sec. 143(3) r.w.s 144C(3), dated 25.01.2017 was framed by the A.O P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 and the income of the assessee company was assessed at Rs.147,49,35,750/-.
The Pr. CIT after the culmination of the assessment called for the assessment records of the assessee. It was observed by the Pr. CIT, that the assessee without deduction of tax at source had paid demurrage charges to its foreign supplier on delayed discharge of material. Observing, that the A.O had erred in not disallowing the demurrage expenses of Rs.4,94,33,000/- under Sec.40(a)(i) of the Act, the Pr. CIT was of the view that the order passed by the A.O under Sec. 143(3) r.w.s 144C(3), dated 25.01.2017 was erroneous insofar it was prejudicial to the interest of the revenue. Accordingly, the Pr. CIT issued a „Show Cause‟ notice (for short „SCN‟), dated 22.02.2018, therein calling upon the assessee to explain as to why the demurrage charges of Rs.4,94,33,000/- paid to the foreign supplier de hors deduction of any tax at source may not be disallowed under Sec.40(a)(i) of the Act. In reply, it was inter alia submitted by the assessee, viz. (i) that, the demurrage charges were paid to the foreign supplier on delayed discharge of material purely on reimbursement basis on the basis of a „debit Note‟ raised by the said supplier and the same formed part of the ocean freight; and (ii) that, as the levy and recovery of tax on the profits of a non-resident from occasional shipping business is regulated Sec. 172 which falls in Chapter XV of the Act titled as “Liability in Special cases – Profits of Non-residents” r.w Sec.44B which enacts the special provisions for computing profits and gains of shipping business in case of non-residents, therefore, there was no warrant for applying the provision of Chapter XVII for collection and recovery of the tax and its deduction at source u/s Sec.195 of the Act. In support of his aforesaid contention that no obligation was cast upon the assessee to deduct tax at source in P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 respect of the demurrage charges paid to the foreign supplier, support was drawn by the assessee from the judgment of the „Full bench‟ of the Hon‟ble High Court of Bombay in the case of CIT, Panaji Vs. V.S. Dempo & Co. Pvt. Ltd. (ITA No. 989 of 2015), dated 05.02.2016. Further, it was submitted by the assessee that the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. M/s Orient Goa Pvt. Ltd. (2010) 325 ITR 554 (Bom) relied upon by the revisional authority had been „set aside‟ by the aforesaid „Full bench‟ of the Hon‟ble High Court in case of V.S. Dempo & Co. Pvt. Ltd. (supra). However, the Pr. CIT was not persuaded to subscribe to the contentions advanced by the assessee. It was observed by the Pr. CIT, that as the „Division Bench‟ of the Hon‟ble High Court of Bombay in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. Vs. CIT (ITA No. 989 & 991 of 2015), vide its order dated 08.09.2015, was unable to agree with the earlier view taken by a coordinate bench in the case of CIT Vs. Orient (Goa) Pvt. ltd. (2010) 325 ITR 554 (Bom), therefore, the matter was referred to the „Full Bench‟. It was observed by the Pr. CIT that though the „Full Bench‟ in the case of V.S. Dempo & Co. Pvt. Ltd. Vs. CIT, Panaji (ITA No. 989 & 991 of 2015) had discussed the issue and taken a view contrary to that earlier taken in the case of CIT Vs. Orient (Goa) Pvt. Ltd. (2010) 325 ITR 554 (Bom), however, as several other issues were involved in the said appeal, therefore, the same had been sent back to the „Division bench‟ for adjudication. Apart there from, it was observed by the Pr. CIT that the issue therein involved was further to be evaluated for a reference to the Hon‟ble Supreme Court. On the basis of his aforesaid observations it was concluded by the Pr. CIT, that as the A.O had failed to make any inquiry either on facts or in law as regards the failure on the part of the assessee to deduct tax at source on the demurrage charges, therefore, the order passed by him under Sec. 143(3) r.w.s 144C(3), dated 25.01.2017 was P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 rendered as erroneous and prejudicial to the interest of the revenue. It was observed by the Pr. CIT, that the failure on the part of the A.O to disallow under Sec.40(a)(i) the assesses claim of demurrage expenses of Rs.4,94,33,000/- on which no tax was deducted at source, had rendered the order passed by him under Sec. 143(3) r.w.s 144C(3), dated 25.01.2017 as erroneous in so far it was prejudicial to the interest of the revenue in terms of „Explanation 2‟ to Sec. 263 of the Act. Accordingly, the Pr. CIT „set aside‟ the assessment order passed by the A.O under Sec. 143(3) r.w.s. 144C(3), dated 25.01.2017 to his file for giving effect to the aforesaid directions.
The assessee being aggrieved with the order passed by the Pr.CIT under Sec.263, dated 14.03.2018, has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the facts of the case. It was submitted by the ld. A.R, that the assessee during the year had paid demurrage charges of Rs.4,94,33,000/-on the basis of a „debit note‟ raised on it by its foreign supplier for delayed discharge of the raw material that was imported by it. It was submitted by the ld. A.R, that the payment of the demurrage charges by the assessee to its raw material supplier was in the nature of a reimbursement of the charges forming part of the „ocean freight‟, which the foreign supplier had to bear on account of delayed discharge of material that was imported by the assessee. It was averred by the ld. A.R, that as the „demurrage charges‟ as per sub-section (8) of Sec.172 were to be included for the purpose of 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 as envisaged in sub-section (1) of Sec.172 of the Act, therefore, no obligation was cast upon the assessee for deduction of tax at source under Sec.195 at the time of payment of P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 such charges. Further, it was averred by the ld. A.R, that the view of the Hon‟ble High Court of Bombay in CIT Vs. Orient (Goa) Pvt. Ltd. (2010) 325 ITR 554, that for the purpose of invoking the provisions of Sec.172 the status of the person making the expenditure has to be as that of a non-resident was reversed by the „Full Bench‟ of the Hon‟ble High Court in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. Vs. CIT (ITA No. 989/2015& 991/2016), dated 05.02.2016. Accordingly, it was submitted by the ld. A.R that the Hon‟ble High Court of Bombay in the case of CIT vs. V.S. Dempo & Co. Pvt. Ltd. (ITA No. 989/2015 & 991/2016), dated 05.02.2016, had observed, that as a harmonious reading of the sub-sections of Sec. 172 would reveal as to how the tax should be levied, computed, assessed and recovered in the case of any ship belonging to or chartered by a non-resident and operated from India, therefore, there was no warrant in applying the provisions of Chapters XVII for collection and recovery of the tax and deduction at source under Sec. 195 of the Act. It was submitted by the ld. A.R, that the Hon‟ble High Court in the case of V.S. Dempo & Co. Pvt. Ltd. (supra) had observed, that as the income of a non-resident shipping company was to be taxed as per Sec. 44B and consequently Sec.172 of the Act, therefore, it could not be comprehended as to how any obligation was cast upon a resident assessee/Indian company for deducting tax at source as per sub-section (1) of Sec.195 while making payment to such non-resident shipping company. Accordingly, it was submitted by the ld. A.R, that as no obligation was cast upon the assessee for deducting tax at source in respect of the reimbursement of the demurrage charges paid to the foreign supplier, therefore, no disallowance of the said amount was made by the A.O under Sec. 40(a)(i) of the Act.
P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 5. Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the order passed by the Pr. CIT. It was submitted by the ld. D.R, that the A.O while framing the assessment under Sec.143(3) r.w.s 144C(3) had failed to take notice of the fact that as the assessee had not complied with the statutory requirement of deducting tax at source in respect of demurrage charges of Rs.4,94,33,000/-, therefore, the same was liable to be disallowed under Sec. 40(a)(i) of the Act. It was submitted by the ld. D.R that the Pr. CIT observing that the order passed by the A.O was erroneous in so far it was prejudicial to the interest of the revenue had rightly „set aside‟ the same to his file with a direction to re-adjudicate the same. It was submitted by the ld. D.R, that the Pr. CIT relying on the judgment of the Hon‟ble High Court of Bombay in the case of CIT, Panaji Vs. Orient (Goa) Pvt. Ltd. (2010) 325 ITR 554 (Bom), had rightly concluded, that as it was obligatory on the part of a resident assessee/Indian company to deduct tax at source at the time of making of payment towards demurrage charges to a non- resident shipping company, therefore, the failure on the part of the assessee to deduct tax at source u/s 195 at the time of making of said payment of Rs.4,94,33,000/- was liable to be disallowed under Sec.40(a)(i) of the Act.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, as the assessee had delayed discharge of raw material imported by it, therefore, the non-resident shipping company had imposed certain demurrage charges on the raw material supplier, which was subsequently reimbursed by the assessee. Our indulgence in the present appeal, has been sought, to adjudicate as to whether any obligation was cast upon the assessee to deduct tax at source at the time of payment of the amount towards demurrage P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 charges, or not. As is discernible from the order of the Pr. CIT, it was observed by him, that it was obligatory on the part of the assessee to have deducted tax at source under Sec.195 on the demurrage charges of Rs.4,94,33,000/- paid by it. It was observed by the Pr. CIT, that as the assessee had failed to deduct tax at source on the aforesaid demurrage charges, therefore, the A.O while framing the assessment under Sec. 143(3) r.w.s 144C(3), dated 25.01.2017, had erred in not disallowing the said claim of expense under Sec. 40(a)(i) of the Act. We find that the Pr. CIT while concluding that it was obligatory on the part of the assessee to have deducted tax at source on the demurrage charges had relied on the „Division bench‟ judgment of the Hon‟ble High Court of Bombay in CIT Vs. M/s Orient (Goa) Pvt. ltd. (2010) 325 ITR 554 (Bom). Admittedly, the Hon‟ble High Court of Bombay in the case of Orient (Goa) Pvt. ltd. (supra), had observed, that for allowability of expenditure under Sec.40(a)(i) of the Act, the status of the person making expenditure has to be as that of a non-resident before the provisions of Sec.172 of the Act could be invoked. However, we find that the aforesaid view taken by the „Division Bench‟ of the Hon‟ble High Court was thereafter reversed by the „Full Bench‟ of the Hon‟ble High Court of Bombay in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. (ITA No. 989/2015 & 991/2016), dated 05.02.2016. In the aforesaid judgment it was observed by the Hon‟ble High Court, that as the sub-sections of Sec.172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered in the case of any ship belonging to or chartered by a non-resident and operated from India, therefore, there was no warrant in applying the provisions of Chapter XVII for collection and recovery of the tax, and deduction at source under Sec.195 of the Act. We find that the Hon‟ble High Court not being persuaded to subscribe to the view earlier taken by the „Division bench‟ in the case of CIT Vs. Orient P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 (Goa) Pvt. Ltd. (2010) 325 ITR 554 (Bom), had observed, that it could not be comprehended as to how any obligation was cast upon a resident assessee/Indian company to deduct tax at source at the time of making payment to a non-resident shipping company. Accordingly, the Hon‟ble High Court had observed that as the sub-sections of Sec.172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered, in the case of any ship belonging to or chartered by a non-resident and operated from India, therefore, there was no warrant in applying the provisions of Chapter XVII for collection and recovery of the tax and its deduction at source under Sec. 195 of the Act. It was observed by the Hon‟ble High Court, that as the income of the non-resident shipping company was to be brought to tax under Sec.44B and consequently under Sec.172 of the Act, therefore, no obligation was cast upon the respondent assessee/Indian company to deduct tax at source at the time of making of payment towards demurrage charges. On the basis of its aforesaid observations the „Full bench‟ of the Hon‟ble High Court of Bombay in the case of V.S. Dempo Co. Pvt. Ltd. (supra) had reversed the view earlier taken by the „Division bench‟ of the High Court in the case of Orient Goa Pvt. Ltd. (supra). To sum up, the „Full Bench‟ of the Hon‟ble High Court of Bombay in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. (ITA No.989 of 2015), dated 05.02.2016, had concluded, that no obligation to deduct tax at source was cast on the resident assessee/Indian company at the time of making of a payment to a non-resident shipping company, as the latters income was liable to be brought to tax under Sec.44B and consequently Sec.172 of the Act.
We have given a thoughtful consideration to the issue before us, and find, that the implicit view taken by the A.O while framing the assessment under Sec.143(3) r.w.s 144C(3), dated 25.01.2017, that as P a g e | M/s Deepak Fertilizers & Petrochemicals Corporation Ltd. Vs. Pr. CIT (Central)-4 no obligation was cast upon the assessee to deduct tax at source on the demurrage charges of Rs.4,94,33,000/-, therefore, no disallowance of the said amount was called for under Sec.40(a)(i) of the Act, is in conformity with the judgment of the „Full Bench‟ of the Hon‟ble High Court of Bombay in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. (ITA No.989 of 2015), dated 05.02.2016. In fact, we find that the Pr. CIT had though observed that the „Full Bench‟ of the Hon‟ble High Court of Bombay in the case of V.S. Dempo & Company Pvt. Ltd. (supra) had taken a contrary view, however, he had erred in observing that the issue was still under litigation. Apart there from, we are unable to comprehend the view taken by the Pr. CIT that though the issue had been adjudicated by the „Full Bench‟ of the Hon‟ble High Court of Bombay in the case of CIT Vs. V.S. Dempo & Co. Pvt. Ltd. (ITA No. 989 of 2015), dated 05.02.2016, however, as the said issue was to be evaluated for referring the matter to the Hon‟ble Supreme Court, therefore, the view therein taken would not be binding. In our considered view, as per the principle of judicial discipline the Pr.CIT remained under a statutory obligation to have ritually followed the view taken by the „Full bench‟ of the Hon‟ble High Court of Bombay in the case of CIT Vs. V.S. Dempo & Co. Pvt. (ITA No. 989 of 2015), dated 05.02.2016, and could not have bypassed the same, for the reason, that a reference is to be made to the Hon‟ble Apex Court. Be that as it may, we are of a strong conviction that the implicit view taken by the A.O while framing the assessment under Sec.143(3) r.w.s. 144C(3), dated 25.01.2017, that in the absence of any obligation cast upon the assessee to deduct tax at source under Sec. 195 in respect of the demurrage charges of Rs.4,94,33,000/- the said amount could not have been disallowed under Sec.40(a)(i) of the Act, is found to be in conformity with the judgment of the „Full Bench‟ of the Hon‟ble High Court of Bombay in the case of V.S. Dempo & Co. Pvt. Ltd. (supra)