KGL NETWORK (P) LTD.,DELHI vs. ACIT, CIRCLE- 14(2), NEW DELHI

PER BHAVNESH SAINI, J.M.

This appeal by assessee has been directed against

the Order of the Ld. CIT(A)-18, New Delhi, Dated 28.12.2017,

for the A.Y. 2014-2015, on the following grounds :

2 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

the parties and perused the material on record.

3 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 3. Ground Nos. 1 and 2 have been raised for

disallowance on account of non-deduction of TDS on airfreight.

3.1. During the year, the assessee-company was engaged

in the business of total logistic solutions providers, general

cargo agents, charter party contractors, shipping 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

Rs.120,86,24,827/-. The assessee-company was asked to file

details with regard to such airfreight payments, which were

filed.

4 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

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.

On perusal of the computation of income, A.O. found that the

amounts inadmissible as per tax audit report had not been

added back. The details of transactions/payments made to non-

residents which have been shown as inadmissible on account

of non-deduction of TDS have been reproduced by the A.O. from

pages 3 to 46 of the assessment order. The A.O, therefore, noted

that these details clearly indicate that freight charges., in tune

of Rs. 120,86,24,827/- have been made to various non-resident

agents and parties of vivid nationalities. The Assessee-Company

has failed to deduct any TDS with regard to such airfreight

5 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. charges and the same contentions has duly been raised by the

Auditor in tax audit report. The explanation of assessee was

called for as to why the above amounts should not be disallowed

in the absence of TDS being deducted. The A.O. noted in the

show cause notice to explain whether provisions of Section

44BBA is applicable in the case of assessee and that assessee

failed to provide tax residence certificate of all concerned parties

and that Article 8 of DTAA with concerned State/Country

governs the air transport and freight related things for most of

the DTAA’s. The assessee explained Section 44BBA of I.T. Act is

not applicable to the assessee because it is a resident company.

Valid tax residence certificates of all the Companies are

enclosed. Article 8 of DTAA with the concerned State/Country

governs the air transport and freight related things for most of

DTAA’s. The A.O. however noted that tax audit is prepared by

an Independent Auditor which gives fair and true picture of the

accounts of the assessee, in which, Auditor has mentioned that

the payments made to non-residents are inadmissible,

6 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. therefore, these should have been added back by the assessee-

company.

that it has reimbursed air-freight to non-residents on behalf of

Indian resident customers without deducting TDS. Section

40(a)(i) of the I.T. Act is not applicable because the assessee-

company has never claimed the airfreight as expenses in the

Profit & Loss Account. Such type of payments are also exempt

in consonance with India’s DTAA. Section 194C is also not

applicable because the payments are made to foreign non-

resident agents. As per provisions of the respective tax treaties,

it has been clearly provided that international traffic 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

7 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. deducted on payments to them since the payments to non-

residents 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 having received money for the

airfreight, have received the same in their capacity as “Issuing

Carrier’s Agent i.e., Agent of Airline concerned. The airfreight

payment is thus made to foreign airlines, though through the

agents, therefore, the payments cannot be said to have been

made to resident company. Accordingly, provisions of section

8 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 194C do not apply. The assessee-company relied upon the

decisions of the Hon’ble Supreme Court in the case of G.E. India

Technology Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC) in

which it was held that “any person paying any sum to a non-

resident is not liable to deduct tax if such sum is not chargeable

to tax under the Act.” The assessee-company also relied upon

other decisions of Hon’ble jurisdictional Delhi High Court in the

case of CIT vs. Estel Communications (P) Ltd., (2008) 217 CTR

102 (Del.) and decision of Karnataka High Court in the case of

Jindal Thermal Power Co. Ltd., 182 Taxman 252 in which it was

held that “there was no obligation to deduct tax at source since

there was no tax liability of non-resident in India. The assessee

bound to deduct TDS only if the freight payments to non-resident

is assessable in India.” If the freight payment is not so

assessable, there is no question of deducting tax at source.

Sections 194C and 195 are not applicable to the case in case of

freight payment to non-resident. The assessee-company also

filed revised tax audit report. The A.O, however, did not accept

the contention of assessee-company. The assessee-company is

9 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. basically a logistic and Cargos handling entity. M/s. Samsung

India Ltd., is a major client for the assessee company along

with others and 80% of the total business comes from M/s.

Samsung India Ltd., for the assessee-company. The assessee-

company handles shipment or cargos arriving at Air Ports and

dispatches such shipment to various locations as per client’s

requirements. The assessee-company in its accounting

recognition taking revenue excluding freight charges in its P &

L A/c, whereas as per the assessee-company, the client’s

including M/s. Samsung India Ltd., are deducting TDS on the

gross amount. M/s. Samsung India Ltd., and other clients are

treating it as reimbursement of expenses under section 194C

and deduct TDS accordingly. Whereas the assessee-company is

not deducting or withholding tax on the payment made to non-

resident agents. The A.O. noted that it has not been established

that payments made to non-residents were in the nature of

airfreight with any supporting documents. The assessee-

company has failed to establish the fact that whether payments

made to foreign agents are related to airfreight or it is mere

10 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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 assessee-

company 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-company, is reimbursed

on actual basis the amount of all expenses including freight by

M/s. Samsung India Ltd., and there is no profit element

11 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. involved in such reimbursement. This fact is evident from the

details filed in the paper book and supported by sample copies

of the bills raised on the assessee-company and the bills raised

by the assessee-company in turn on M/s. Samsung India Ltd.,

which would show that amount actually paid as freight has

been reimbursed to the assessee-company by M/s. Samsung

India Ltd. The assessee-company did not make any claim of the

deduction of the expenses, therefore, no disallowance could be

made. The A.O. has not made out any case, if assessee-company

made any claim of deduction of such expenses. The assessee-

company relied upon order of ITAT, Mumbai Bench in the case

of ITO vs. Universal Traffic Co. (2014) 42 CCH 55 (Mumbai-

Tribu.) in which the Tribunal relied upon the decision of the

Hon’ble jurisdictional Delhi High Court in the case of CIT vs.

Cargo Linkers (2008) 218 CTR 695 in which the Hon’ble High

Court held that “Assessee being a Clearing and Forwarding

Agent, is an, intermediary who booked Cargo for and on behalf

of importers and exporters and facilitated the contract for

carrying goods, therefore, not liable to withhold tax under section

12 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 194C from payments made towards airfreight on behalf of its

customers, decided the issue in favour of the assessee.” The

Tribunal agreed with above proposition. It was noted that the

Privity of Contract is between the clients and not with the

assessee. There was no contact between the assessee and the

authorities, rather the assessee has acted as a mere

facilitator/agent between the parties and the authorities. It is

well understood that TDS is deductible under section 194C on

the payments made to the contractors/sub-contractors. Thus,

the basic premise for deducting tax is on the contracting

parties. In the absence of any contractual relationship between

the assessee and the airlines/shipping lines/authorities,

assessee agent is not liable to withhold tax or deduct tax under

section 194C of the I.T. Act. The Apex Court in the case of M/s.

Hindustan Coca Cola Beverages Pvt. Ltd., vs. CIT (2007) 293

ITR 226 (SC) held that “where the deductee concern have

already paid tax on the payments made by the assessee-payer,

then the department, could not deduct tax from the deductor of

this same income by treating the later to be an assessee-in-

13 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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.

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-

14 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. company made payment to foreign vendors corresponding to the

invoices raised in its name by such vendors, therefore, such

expenses also needed to be routed through the P & L A/c. The

Ld. CIT(A), thus, did not accept the contention of assessee-

company that since the assessee-company did not make any

claim of deduction of these expenditure, therefore, no

disallowance should be made. This plea of the assessee-

company was rejected. The Ld. CIT(A) as regards the

submission of the assessee-company that such expenses are

only reimbursement of the expenses, there is no need to deduct

TDS and that the payment made to non-resident parties is not

chargeable to tax in India, asked the A.O. to file the remand

report.

6.1. The A.O. filed the remand report which is noted in

the appellate order, in which, the A.O. highlighted that Top-10

Agents Accounts for 96% of the payments made by assessee-

company is considered. Out of Top-10 Agents, most of the

payments have been made to KGL group companies. The

15 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. payments made to group companies have not been disclosed in

the tax audit report or in audited books of account which

creates doubts. The payments have been made by assessee-

company to foreign agents and not to foreign airline companies.

Article-8 of DTAA is valid only for payments made to airline

companies. Since the assessee-company made payments to

foreign agents, therefore, Article-8 of DTAA is not applicable.

The A.O. also reported that Article-8 of DTAA signed by India

with foreign Countries does not give a blanket relief from TDS

on freight paid to foreign airline companies. Details of same is

noted in the remand report in which the Place of Effective

Management (“POEM”) was needed to be settled while deciding

on the taxability of the profits/income generated. Further for

claiming relief under DTAA, Tax Residence Certificate is

mandatorily required. The assessee-company filed few TRCs of

foreign airlines companies, in which, discrepancies have been

noted by the A.O. But some were found in order. The A.O. also

reported that total receipts as per 26AS are of Rs.165.38 crores

but the turnover as per Profit & Loss Account is Rs.35.06

16 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. crores. The difference is not reconciled. The assessee-company

is required to deduct TDS on such payments.

assessee-company explained the same facts as were explained

earlier. It was submitted that the payments have been made to

the agents 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.

17 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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.

submissions made before the authorities below. PB 660 to 669

are the break-up of the amounts paid to the agents and

reimbursed to the assessee-company by the parties. Whatever

amounts that are paid by the assessee-company, are exactly

reimbursed to the assessee-company. The assessee-company

merely acted on behalf of M/s. Samsung India Ltd., and Others.

PB-627 is gist of the amounts paid by the assessee-company

with reference to amounts in USD and date of invoice bill in the

name of the assessee-company with reference to the paper

18 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. book. PB-4 to 21 is the consolidated P & L A/c and balance-

sheet of the assessee-company, in which, no amount has been

shown as income and no expenditure have been claimed by

assessee-company, of the impugned amounts paid. Note-15 is

income from operation and Note-17 is direct operation expenses

details. Assessee-Company did not debit the impugned

amounts in the P & L A/c and did not make any claim of the

expenditure. PB-1048 is the details of assessments made from

A.Ys. 2008-2009 to 2015-2016. In earlier A.Ys. 2008-2009 to

2011-2012, A.O. accepted this similar claim of assessee-

company while accepting the return under section 143(1) of the

I.T. Act. In A.Y. 2012-2013, A.O. allowed the claim of assessee-

company under section 154 of the I.T. Act of the same nature.

In A.Ys. 2013-2014 and 2015-2016, the A.O. allowed similar

claim of assessee-company in scrutiny assessments under

section 143(3). Copies of the assessment orders under section

143(3) for these years are filed in PB Nos.1013 and 1016. PB-

1025 to 1030 are the similar replies filed before A.O. on merit

for A.Y. 2015-2016, on which, identical claim of assessee-

19 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. company has been allowed. PB-1031 to 1047 are the details of

TDS enquiry conducted by the Revenue Department on the

same issue and after calling the complete details and

information under section 133(6) of the I.T. Act as well, the

Department did not take any adverse view against the assessee-

company and similar claim of assessee-company has not been

disturbed. PB-1066 to 1095 are the intimation under section

143(1) of I.T. Act issued by the Department for several preceding

assessment years under section 143(1), in which, similar claim

of assessee-company has been allowed. Learned Counsel for the

Assessee submitted that rule of consistency do apply to the

income tax proceedings. Therefore, on the same 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

20 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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 assessee-

company 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 shipping

is liable to pay tax. Circular 723 dated 19.09.1995 clarified the

above position that in such circumstances, Sections 194C and

195 shall not apply. Copy of the same is filed at PB-1349.

Learned Counsel for the Assessee further submitted that for

airlines, Section 44BBA is applicable. Since no amount of

freight is received in India and assessee-company remitted the

21 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. amount of the freight outside India. So, this Section will not

apply to the assessee-company. Section-7 of the I.T. Act will not

apply in this case because income deemed to be received is not

applicable to assessee-company, since payment was made to

non-resident, therefore, Article-8 of DTAA will apply and no

disallowance could be made. Copies of the same are filed at PB-

526 to 555. The benefit is allowable to the assessee-company

because DTAA of the concerned States specify that the profit

from operation of ship or aircraft or interest thereon is taxable

only in that State i.e., the non-resident companies. Learned

Counsel for the Assessee referred to various case Laws in

support of the above proposition that assessee-company is not

responsible for deduction of the TDS on the amounts in

question. Copies of the same are filed in the paper book, which

we shall refer to in the Order. Learned Counsel for the Assessee,

therefore, submitted that authorities below were not justified in

making the addition against the assessee-company. He has also

filed written submissions.

22 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 10. On the other hand, Ld. D.R. relied upon the orders of

the authorities below and submitted that Explanation-2 is

inserted to Section 195(1) w.e.f. 01.04.1962 which is

retrospective in nature. Assessee-Company filed revised audit

report without any cause. The client raises invoice for the work

assigned to the assessee-company and deducts tax under

section 194C for these services and the assessee claims the

entire TDS in its return. The Ld. CIT(A), reproduced the remand

report furnished by the A.O. in the appellate order in which the

A.O. has highlighted the reasons for making the addition

against the assessee-company. In the reply of assessee-

company filed at PB-1032, the assessee-company claimed

reimbursement of expenses, but, M/s. Samsung India Ltd.,

treats it as contract and deducts TDS. It is not a case of no

profit, therefore, TDS is required to be deducted. The assessee-

company is an Agent of M/s. Samsung India Ltd., who 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

23 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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 assessee-

company. It is not clear whether sample invoice, airway bills

were provided before A.O. The bills referred to by the Learned

Counsel for the Assessee, at the most, establish that assessee-

company is rendering services to its clients and is getting

24 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. payment for the said services. The break-up of the bills into

different components does not change the character of the

payment. He has relied upon the order of the ITAT, Ahmedabad

Bench in the case of Mayurbyhai Mangaldas Patel, Mehsana vs.

ITO, Ward-2, Mehsana in ITA.No.3451/Ahd./2014, Dated

30.11.2017 on the proposition that “error cannot be perpetuated

in the name of reverence to binding judicial precedents”.

through material on record. It is not in dispute that during the

year, assessee-company was engaged in the business of inter

alia, Clearing and Forwarding Agent. During the year, assessee-

company has had major work for and on behalf of M/s.

Samsung India Ltd. In this regard, assessee-company has made

payment to foreign shipping/airline companies through their

Agents aggregating to Rs.120.86 crores. According to A.O,

assessee-company should have withheld tax at source on these

payments under section 195 of the I.T. Act, 1961. Since, the

assessee-company has failed to deduct TDS, therefore, A.O.

25 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. disallowed the same under section 40(a)(i) of the I.T. Act, 1961.

The assessee-company, however, submitted that for invoking

Section 40(a)(i) of the I.T. Act, the A.O. should establish that

assessee-company has made a claim of deduction of expenses

under sections 30 to 38 of I.T. Act, on which, assessee-company

has failed to deduct tax at source. It is not in dispute that

assessee-company has not made claim of expenses in its P & L

A/c. In the instant case, though the payments have been

released to foreign shipping/airlines through their non-resident

Agents towards freight, but these payments have not been made

by the assessee-company on account of its expenses, but, have

been made for and on behalf of its clients/customers namely

M/s. Samsung India Ltd., and other Companies, for whom,

assessee-company does the work of logistics solutions. In fact,

the assessee-company is reimbursed on actual basis, the

amount of all expenses including freight by M/s. Samsung India

Ltd., and others and there is no profit element involved in such

reimbursement. The assessee-company explained and proved

that payments have been made to non-resident Agents of

26 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. foreign airline/shipping companies. 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 assessee-

company 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

27 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. which would not show any claim for such expenses made by

assessee-company. It would established that assessee-

company is a Clearing and Forwarding Agent and is not a

person responsible for deduction of TDS. PB-1048 is a chart

showing in earlier and subsequent assessment years, similar

payments have been accepted by A.O. without deducting of tax

at source under section 143(3)/143(1) of the I.T. Act, 1961. In

A.Ys. 2008-2009 to 2011-2012, A.O. accepted the claim of

assessee-company under section 143(1) of the I.T. Act, 1961. In

A.Y. 2012-2013 A.O. accepted the similar claim of assessee-

company under section 154 of the I.T. Act and in the remaining

years, A.O. accepted the similar claim of assessee-company in

scrutiny assessments under section 143(3) of the I.T. Act.

Copies of the assessment orders under section 143(3) for A.Ys.

2013-2014 and 2015-2016 along with submissions of the

assessee-company on merit are filed in the paper book at pages

1013 to 1030. PB-1066 to 1095 are the orders under section

143(1) for several assessment years, in which, A.O. accepted

similar claim of assessee-company. PB-1031 to 1047 are the

28 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. copy of the notice under section 133(6) from ITO, TDS, Ward-

(International Taxation), Dated 17.02.2010 along with

submissions of the assessee-company and details, in which, the

assessee-company similarly explained that assessee-company

handled Cargo imported by Indian manufacturer, for which,

freight is paid and assessee-company is not liable to deduct

TDS. No action have been taken by the Department against the

assessee-company for non-deduction of TDS. Since in earlier

years and in subsequent years, no disallowances have been

made by the authorities below on the same set of facts,

therefore, the Revenue Authorities should follow the rule of

consistency and should not have disallowed the amount in

question. 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.

Mahalaxmi Sugar Mills Co. Ltd., (1986) 160 ITR 920 (SC) held

29 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. that “duty caste on A.O. to apply relevant provisions of Law for

the purpose of determining the true figure of assessee’s taxable

income”. The Hon’ble Supreme Court in the case of Radhasoami

Satsang Saomi Bagh vs. CIT (1992) 193 ITR 321 (SC) held that

“revenue authorities should follow rule of consistency.” The

Hon’ble 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.”

30 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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.”

Ltd., vs. ITO (2012) 139 ITD 420 held as under :

“If business expenditure is claimed as reimbursement, and

in fact reimbursed, then no disallowance could be made

u/s.40(a)(ia)”

Cargo Linkers (2009) 179 Taxman 151 held as under :

31 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. “Clearing and forwarding agent is not person responsible

for deduction of tax at source under section 194C; further,

both CIT(A) and Tribunal, had concurrently found that there

was reasonable cause not to deduct tax at source; no

substantial question of law arises.”

case of CIT vs. Hardarshan Singh (2013) 350 ITR 427 (Delhi)

held as under :

“In the case of CIT v. Cargo Linkers: (2009) 179 Taxman

151 (Del) the Tribunal had also noted and found as a matter

of fact that the assessee was nothing but an intermediary

between the exporters and the airlines as it booked cargo

for and on behalf of the exporters and mainly facilitated the

contract for carrying goods. The principal contract was

between the exporter and the airline. It had also been found

as a matter of fact that the contract was actually between

the exporter and the airline and the assessee was only an

32 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. intermediary and, therefore, it was not the ‘person

responsible’ for deduction of tax at source u/s 194C”.

New Delhi vs. DCIT, Circle-26(1), New Delhi, in

ITA.No.1864/Del./2011 Dated 04.11.2011 following the

decision of Hon’ble jurisdictional Delhi High Court in the case

of CIT vs. Cargo Linkers (supra), it was, held as under :

“Therefore, from the various details filed by the assessee

and nature of assessee’s business of clearing and

forwarding agents, we find that the assessee is nothing but

an intermediary between the exporters and the shipping

lines. The assessee facilitates the contract for carrying

goods for and on behalf of its client i.e., exporters or

importers, or importers, and the principle contract for

carrying goods is between the exporter/importer and the

shipping lines. Therefore, deleted the disallowance made

under section 40(a)(ia) of the I.T. Act”.

33 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 18. ITAT, Mumbai Bench in the case of ITO vs. Universal

Traffic Co. (2014) 42 CCH 55 (Mum-Tribu.) held as under :

“A custom house agent (CHA) is not liable to deduct TDS

under section 194C, on payment made towards freight

charges, detention charges and de-stuffing charges, etc.,

paid to foreign lines or to their agents or shipping 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.”

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

34 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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 non-

resident 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 decision of the

Hon’ble Supreme Court in the case of G.E. India Technology

Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC).

19.2. Learned Counsel for the Assessee, referred to

provisions of Section 44B r.w.s. 172 of the I.T. Act because these

provisions deal with the shipping business of the non-residents

and in such cases, provisions of Section 194C and 195 relating

to tax deduction at source are not applicable. The assessment

of income of shipping company is to be done as per provisions

35 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. of Section 44B r.w.s. 172 of the I.T. Act. These are specific

provisions which deals with taxability of income of non-resident

shipping companies in India. According to these provisions, the

taxes on the income assessed in this section shall be paid by

the Master of the Ship. Further, the CBDT Circular No.723

dated 19.09.1995 clarified the position of Law that provisions of

Section 172 are to be applied where the payment is made to a

non-resident carrying-out shipping business and as such,

Sections 194C and 195 will not be applicable. The Circular is

reproduced as under :

“Circular No. 723, dated 19-9-1995. SECTION 172 SHIPPING BUSINESS OF NON-RESIDENTS

36 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 2. Section 172 deals with shipping business of non- residents. Section 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 section 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. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journey wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.

37 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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.

19.3. Learned Counsel for the Assessee also referred to the

provisions of Section 44BBA of the I.T. Act with regard to

payments made to Airline companies. Section 44BBA is

reproduced as under :

Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents

38 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 44BBA. (1) Notwithstanding anything to the contrary, contained in sections 28 to 43A, in the case, of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".

(2) The amounts referred to in sub-section (1) shall be the following, namely: —

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, live-stock, mail or goods from any place in India; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, live-stock, mail or goods from any place outside India.”

On perusal of the same, it shows that amount of freight income

received by the foreign airline company for carrying of goods

from any place outside India is not taxable in India and more

so, when no amount of freight is received or deemed to be

39 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. received in India by or on behalf of the said airline company.

Learned Counsel for the Assessee explained that substantial

foreign airline companies lifted the goods outside India and all

the payments are remitted outside India to foreign agents, non-

resident agents of non-resident airlines. The ITAT, Delhi Bench,

in the case of Welspring Universal vs. JCIT, Range-27, New

Delhi (2015) 56 taxmann.com 174 (Delhi-Trib.) held as under :

“Where commission paid by assessee to non-resident agent

for procuring export orders was not chargeable to tax in

hands of said agent, assessee was not liable to deduct tax

at source.”

19.4. Thus, the impugned payments made by the assessee-

company to such airline companies or its different agents are

not liable to be taxed in India even under the domestic Law and

therefore, assessee-company was not liable to deduct tax in

India. Further, it may be noted that such non-resident entities

have not rendered any services in India. They do not have any

40 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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.

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

41 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. airline companies are merely collection agents and coordinating

agency. They receive payment on behalf of airline/shipping

companies only. These facts would also be evident from the

bills/invoices raised by these agents showing that these have

been raised by them on the basis of Master Airway Bill of

corresponding Airline/Shipping companies, copies of which, are

filed in the paper book at pages 627 to 659 and others. The

ITAT, Kolkata Bench in the case of Taj Leather Works vs. ACIT,

Circle-32, Kolkata (2012) 23 taxmann.com 58 (Kol.) held as

under :

“Where assessee-exporter made payments to Indian agents of foreign airlines on account of airfreight, assessee did not have any TDS obligations either under section 194C or under section 195.”

the agents shall be undoubtedly of the nature of payment made

to airline/shipping company and these would be covered under

Article-8 of respective DTAAs. Since in none of the cases, these

42 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. non-resident agents have P.E. in India and A.O. has also not

pointed out their existence of P.E. of any agent in India,

therefore, there is no question of deduction of tax on these

payments. We, rely upon the decision of ITAT, Mumbai Bench

in the case of Gujarat Reclaim & Rubber Products Ltd., vs.

ACIT-10(2), (2013) 35 taxmann.com 587 (Mumbai-Trib.) in

which it was held as under:

“Where non-resident agent did not have PE in India,

Commission paid by assessee to non-resident agent for

rendering services in foreign countries cannot be disallowed

under section 40(a)(i).

therefore, A.O. was not justified in asking for filing of the

certificates in case of non-resident agents.

and above discussion, it is clear that assessee-company made

payments on behalf of its clients as Clearing and Forwarding

Agent which were reimbursed to the assessee-company. The

43 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. assessee-company did not make claim of deduction in the P &

L A/c. Similar claim of assessee-company has been allowed in

earlier and subsequent year, therefore, rule of consistency do

apply to the income tax proceedings. There were no justification

for the authorities below to take a different view on same set of

facts. Even no action have been taken while scrutinizing the

issue of TDS against the assessee-company. The assessee-

company has not violated the provisions of Section 44B r.w.s.

172 of the I.T. Act as well as 44BBA of the I.T. Act. Since, under

the domestic Law as 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.

order of the Ld. CIT(A) in confirming the disallowance of

Rs.8,17,807/- under section 40A(3) of the I.T. Act, 1961.

44 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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 Rs.20,000/- by cash. The details of same are

noted in the assessment order for a sum of Rs.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 40A(3) of the I.T. Act. The Ld. CIT(A),

however, did not accept the contention of assessee-company

and noted that Rule 6DD have been amended in 2008. The Rule

in its present form does not include any such circumstances

like business exigency or exceptional circumstances, under

which, such cash payments can be made as a business

expenditure under section 40A(3) of the I.T. Act, 1961. The

45 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. addition was confirmed and Ground No.3 of appeal of assessee-

company was dismissed.

since the genuineness of the payments have not been doubted

by the authorities below, therefore, for business expediency,

such amount should not be disallowed. He has relied upon the

order of ITAT, Delhi Bench in the case of ACIT, Central Circle-

2, Faridabad vs. M/s. Marigold Merchandise (P) Ltd., New Delhi,

in ITA.No.5170/Del./2014 for the A.Y. 2006-2007, in which the

Tribunal vide Order dated 11.09.2017 dismissed the

Departmental Appeal. The relevant portion of the order of the

Delhi Tribunal in paras-6 to 8 is reproduced as under :

“6. We have heard both the parties and perused the

records available on record especially the impugned order.

With regard to disallowance u/s. 40A(3) of the Income Tax

Act is concerned, we find that assessee has purchased the

land at Village Nangli Umarpur Distt. Gurgaon for a sum of

Rs. 3.69 Cr. from the seller parties namely Sh. Pohap Singh,

46 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. Sh. Chet Singh, Sh. Chandra, Sh. Kishan, Smt. Vidhya, Smt.

Jagwati, Smt. Veerwati and Smt. Lali. The purchase of

agriculture land is evidenced through sale deed and the

payment is also evidenced by way of the sale deed

executed before the Sub Registrar. There is no dispute on

the fact that the identity of e payee is proved, the

genuineness of the transaction is proved and the source

payment is also established in as much as such amount is

found to be withdrawn from the HDFC bank account of the

appellant company. The AO's case is that the provisions of

sec. 40A(3) are of mandatory nature whereas the assessee-

relying on the decision of the Hon’ble Jurisdictional

Rajasthan High Court in the case of Harshee a Chordia vs.

CIT supra has contended that when identity of the payee,

genuineness of the transaction and source of payment is

established then provision of section 40A(3) cannot be

applied. The Hon’ble Rajasthan High Court while

interpreting the provisions of Sec. 40A(3) in the case of

Harshila Chordia vs, ITO supra has clearly held that when

47 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 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 Rs. 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

48 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

of the ITAT, ‘B’ Bench, Kolkata vide Order dated 18.11.2015

passed in ITA No. 1448/Kol/2011 AY 2008-09 in the case

of Sri Manoranjan Raha vs. ITO wherein the Tribunal has

held as under:-

4.3 We have heard the rival submissions and perused the

materials available on record. We find that the payments

made by cash in violation of Section 40A(3) of the Act have

been duly acknowledged by the recipient Sh. Amit Dutta who

had deposed before the Ld. AO and confirmed the fact of

receipt of monies in cash. Hence the genuinity of payments

made by the assessee stands clearly established beyond

doubt. Even for the amounts enhanced by Ld. CIT(A) in the

sum of Rs. 54,01,473/-, the genuineness of the payments

and the necessity to incur the said expenditure for the

purpose of business of the assesseee was never disputed

by the Ld. CIT(A). We hold that since the genuinity of the

payments made to the parties is not doubted by the revenue,

the provisions of section 40A(3) could not be made applicable

to the facts of the instant case. It will be pertinent to go into

the intention behind introduction of provisions of section

49 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

40A(3) of the Act at this juncture. We find that the said

provision was inserted by Finance Act 1968 with the object

of curbing expenditure in cash and to counter tax evasion.

The CBDT Circular No. 6P dated 6.7.1968 reiterates this view

that "this provision is designed to counter evasion of a tax

through claims for expenditure shown to have been incurred

in cash with a view to frustrating proper investigation by the

department as to the identity of the payee and

reasonableness of the payment."

4.4. In this regard, it is pertinent to get into the following

decisions on the impugned subject:-

Attar Singh Gurmukh Singh vs. ITO reported in (1991) 191

ITR 667 (SC)

"Section 40A(3) of the Income-tax Act, 1961, which provides

that expenditure in excess of Rs.2,500 (Rs.10,000/- after

the 1987 amendment) would be allowed to be deducted only

if made by a crossed cheque or crossed bank draft (except

in specified cases) is not arbitrary and does not amount to a

restriction on the fundamental right to carry on business. If

read together with Rule 6DD of the Income-tax Rules, 1962,

50 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

it will be clear that the provisions are not intended to restrict

business activities. There is no restriction on the assessee in

his trading activities. Section 40A(3) only empowers 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

51 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

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 and to prevent

the use of unaccounted money or reduce the chances to use

black money for business transactions."

CIT vs CPL Tannery reported in (2009) 318ITR 179 (Cal)

The second contention of the assessee that owing to business

expediency, obligation and exigency, the assessee had to

make cash payment for purchase of goods so essential for

carrying on of his business, was also not disputed by the AO.

The genuinity of transactions, rate of gross profit or the fact

that the bonafide of the assessee that payments are made

to producers of hides and skin are also neither doubted nor

disputed by the AO, On the basis of these facts it is not

justified on the part of the AO to disallow 20% of the

payments made u/s 40A(3) in the process of assessment.

We, therefore, delete the addition of Rs.17,90,571/-

and ground no.1 is decided in favour of the assessee.

CIT vs Crescent Export Syndicate in ITA No. 202 of 2008

dated 30.7.2008 - Jurisdictional High Court decision

52 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

"It also appears that the purchases have been held to

be genuine by the learned CIT(Appeal) but the learned

CIT(Appeal) has invoked Section 40A(3) for payment

exceeding Rs.20,000/- since it is not made by crossed

cheque or bank draft but by hearer cheques and has

computed the payments falling under provisions to

Section 40A(3) for Rs.78,45,580/- and disallowed

@20% thereon Rs.15,69,116/-. It is also made clear

that without the payment being made by beater

cheque these goods could not have been procured and

it would have hampered the supply of goods within the

stipulated time. Therefore, the genuineness of the

purchase has been accepted by the ld. CIT(Appeal)

which has also not been disputed by the department

as it appears from the order so passed by the learned

Tribunal. It further appears from the assessment order

that neither the Assessing Officer nor the CIT(Appeal)

has disbelieved the genuineness of the transaction.

There was no dispute that the purchases were

genuine.”

53 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

Anupam Tete Services vs ITO in (2014) 43 Taxmann.com

199 (Guj)

"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 limits (Rule 6DD(j)-Assessment year 2006-

07 - Assessee was working as an agent of Tata Tele

Services Limited for distributing mobile cards and

recharge vouchers - 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]"

54 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

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 assessee

had placed proof of payment of consideration for its

transaction to seller, and later admitted payment and

there was no doubt about genuineness of payment, no

disallowance could be made under section 40A(3) -

Held, yes [ Para 23] [In favour of the assessee]"

CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227

(P&H)

In this case the court upheld the view of the tribunal in not applying section 40A( 3) of the Act to the cash

55 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

payments when ultimately, such amounts were deposited in the bank by the payee.

4.5 It is pertinent to note that the primary object of enacting section 40A(3) was two fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non- observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration.

4.6. The Hon'ble Apex Court in the case of CIT vs Swastik Roadways reported in (2004) 3 SCC 640 had held that the consequences of non-compliance of Madhya Pradesh Sales Tax Act , which were intended to check the evasion and avoidance of sales tax were significantly harsh. The court while upholding the constitutional validity negated the existence of a mens rea as a condition necessary for levy of penalty for non- compliance with such technical provisions required held that "in the consequence to follow there must be nexus between the consequence that befall for non- compliance with such provisions intended for

56 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

preventing the tax evasion with the object of provision before the consequence can be inflicted upon the defaulter." The Supreme Court has opined that the existence of nexus between the tax evasion by the owner of the goods and the failure of C & F agent to furnish information required by the Commissioner is implicit in section 57(2) and the assessing authority concerned has to necessarily record a finding to this effect before levying penalty u/s. 57(2).

Though in the instant case, the issue involved is not with regard to the levy of penalty, 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

57 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

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 was admittedly taken behind the back of the assessee. It is also pertinent to note that the Hon'ble Rajasthan High Court in the case of Smt.Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Raj) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally.

4.7. The assessee has also given the income tax assessment particulars of Amit Dutta before the Learned AO. Moreover, the Learned AO himself had taken deposition from Sri Amit Dutta u/s 131 of the Act wherein he had confirmed the receipt of monies in cash as well as by cheque / DD from the assessee. Hence the acknowledgement of the payments made by the assessee by the payee is proved beyond doubt. The assessee had also stated that the payee had duly included these payments as his receipts in his returns.

4.8. We are unable to buy the argument of the Learned AR that the assessee had made payment to

58 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

his agent Mr.Arnit Dutta for purchase of sim cards and others and hence would fall under the exception provided in Rule 6DD(k) of the IT Rules. For the sake of convenience, Rule 6DD(k) is reproduced herein below:-

"Rule 6DD(k) of the IT Rules 1962 6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to the profits and gains of business or profession under sub- section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely:-

*** *** *** *** *** *** *** *** *** ***

*** *** *** *** *** *** *** *** *** ***

(k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;"

The said rule says that if the payment is made by a person to his agent who is required to make payment in cash for goods and services on behalf of such person: Admittedly, Shri.Arnit Dutta is only the agent of Hutchison Essar Ltd and not the assessee as could

59 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi.

be seen very clearly from the Associate Distributor Agreement entered into by the assessee which is on records before us and before the lower authorities. Hence the payment made by the assessee to Shri.Arnit Dutta would not fall 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 Rs. 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 Rs. 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.

60 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 5. In the result, the appeal of the assessee is allowed.”

Kolkata, we are of the considered view that the issue in

dispute is also squarely covered by the aforesaid decision,

because the facts and circumstances of the present case are

exactly similar and identical to the aforesaid case law.

Therefore, respectfully following the aforesaid decision

dated 18.11.2015 of the ITAT, ‘B’ Bench, Kolkata passed in

ITA No. 1448/Kol/2011 AY 2008-09 in the case of Sri

Manoranjan Raha vs. ITO, the order of the Ld. CIT(A) is

upheld and grounds raised by the Revenue stand rejected.

7.1. We further find that assessee has filed a copy of

Application under Rule 27 of Appellate Tribunal Rules, 1963

dated 21.6.2017, but at the time of hearing, he has not

pressed the same, hence, the same is dismissed as such.

61 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. 27. On the other hand, Ld. D.R. relied upon the orders of

the authorities below and submitted that Tax Auditor has

mentioned in the audit report that this amount shall have to be

disallowed. He has submitted that non-genuine payments are

disallowable under section 37 of the I.T. Act. After amendment

in Rule-6DDJ in 2008, Rule 6 DDJ will not apply, therefore,

disallowance is justified.

though there is an amendment in Rule 6DD of I.T. Rules as is

noted by the Ld. CIT(A), but in Section 40A(3) of the I.T. Act,

1961 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

62 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. on by the assessee-company on behalf of others, clearly shows

that for business expediency in the line of business of assessee-

company, some times cash payments are made to complete the

work on behalf of Principal. The assessee-company, under such

compelling reasons, shall have to make payments in cash on

account of urgent need. The authorities below have not doubted

the identity of the payee and the genuineness of the transaction

in the matter. The source of payment is also not been doubted

by the authorities below, therefore, the decision of ITAT, Delhi

Bench in the case of ACIT, Central Circle-2, Faridabad vs. M/s.

Marigold Merchandise (P) Ltd., (supra), is squarely applicable

to the facts of the case. We, accordingly, set aside the orders of

the authorities below and delete the addition. Ground No.3 of

appeal of assessee-company is allowed.

the charging of interest under sections 234A, 234B, 234C and

234D of the I.T. Act. No arguments have been advanced on the

same. Since, charging of interest is of consequential in nature,

63 ITA.No.301/Del./2018 M/s. KGL Network (P) Ltd., Delhi. therefore, ground No.4 of appeal of assessee-company is

rejected.

Order pronounced in the open Court.

Sd/- Sd/- (L.P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Delhi, Dated 02nd July, 2018

VBP/-

Copy to

// BY Order //

Asst. Registrar : ITAT Delhi Benches : Delhi.