POOMPUHAR SHIPPING CORPORATION LTD.,CHENNAI vs. DCIT CORPORATE CIRCLE 5(2), CHENNAI

Ld. Counsel for the assessee submitted that ld. Assessing 4.

Officer had disallowed the dry dock expenditure incurred by the assessee citing a reason that such expenditure came within the meaning of ‘royalty’ which was payable outside India, and assessee had failed to deduct tax on such payments. As per the ld. Authorised Representative, when the issued reached the ld. Commissioner of Income Tax (Appeals), it was pointed out by the assessee that the question whether tax was required to be deducted on payments made to Non Residents towards dry dock expenditure of ships, had come up before this Tribunal in assessee’s own case for assessment years 2003- 04, 2005-06 and 2008-09 in to 1254/Mds2011, dated 05.07.02012. As per the ld. Authorised Representative, the question stood answered in favour of the assessee by the Tribunal through the above order. Contention of the ld. Authorised Representative was -335-2018. :- 4 -: SP 61 – 63/18 that despite pointing out this decision of the Tribunal which went in favour of the assessee, ld. Commissioner of Income Tax (Appeals) confirmed the disallowance made by the ld. Assessing Officer u/s.40(a)(i) of the Act, relying on a judgment of Hon’ble Jurisdictional High Court in the case of Poompuhar Shipping Corporation Ltd vs. ITO, 360 ITR 257. However, as per the ld. Authorised Representative, this judgment relied on by ld. Commissioner of Income Tax (Appeals) was on payments made for chartering ships to Non Resident Shipping Companies and not on dry dock charges. As per the ld. Authorised Representative, question here was not on payments for chartering ships but payment for dry docking of ships.

Per contra, ld. Departmental Representative, strongly 5.

supporting the order of the ld. Commissioner of Income Tax (Appeals) submitted that judgment of Jurisdictional High Court relied on by the ld. CIT(A) covered the issue regarding non-deduction of tax at source on payments made to Non Residents, irrespective of the nature of payments and hence it applied on payments made for dry docking facility also.

We have perused the orders and heard the rival contentions. 6.

The question before us is whether the assessee was obliged to deduct tax at source on payments made to Non Resident entities, for dry -335-2018. :- 5 -: SP 61 – 63/18 docking of ships in foreign shipyards. Dry docking is a facility for maintaining and repairing ships so as to make it seaworthy. The question whether payments made to foreign entities for providing such dry docking facility required deduction of tax at source, had come up before this Tribunal in assessee’s own case in to 1254, 2063 and 2064/Mds/2011, dated 5.07.2012. What was held by the Tribunal at para 8 of its order is reproduced hereunder:-

‘’8. We have heard rival submissions made by the parties and have gone through the order of the CIT(A) as well as judgements relied on by the counsel for the assessee. We are of the considered opinion that dry dock expenses were paid by the assessee to the Chinese ship yard for carrying out maintenance and repairs to the ship to make it seaworthy. The Chinese ship yard does not have permanent establishment in India, therefore the entire amount of dry dock expenses paid to Chinese ship yard companies is not taxable in India. Since no part of the payment is taxable in India, the assessee was not liable to deduct tax at source on such payments. Our view is further fortified by the decision of the Delhi Bench of the Tribunal in the case of Lufthansa Cargo India (P) Ltd. Vs. DCIT reported as 91 ITD 133, wherein, it has been held that payment for repairs made outside India, therefore such items would fall within the purview of exclusionary clause of section 9(1)(vii)(b). Thus, even assuming that payment for such maintenance repairs were in the nature of fees for technical services, it would not be chargeable to tax. The Tribunal further held that the payments for repairs of aircrafts were made for earning income from sources outside India and were therefore, to be excluded from fees for technical services under section 9(1)(vii)(b). The CIT(A) in the impugned order has observed that under Article 7 of Double Taxation Avoidance Act agreement between India and China, the business profits of Chinese resident is taxable only in China unless it carries on business through permanent establishment in India. The CIT(A) relied on the order of the Delhi Bench of the Tribunal in the case of Lufthansa Cargo India (P)

-335-2018. :- 6 -: SP 61 – 63/18

Ltd.(supra) and has directed the Assessing Officer to delete the addition made towards dry dock expenses. We find that in the instant case ships were sent by the assessee outside India (i.e to Chinese ship yards) for maintenance and repairs on work contract basis. Since there was no permanent establishment of Chinese ship yards in India, therefore, no tax at source is to be deducted on the payments made by the assessee to Chinese ship yards. We, therefore, uphold the finding of the CIT(A) on this issue. Accordingly, the appeals of the Revenue are dismissed’’.

No doubt in the very same decision a question regarding liability to deduct tax on payments to a shipping company for chartering of ships was also address. This issue was decided by the Tribunal in favour of the assessee vide para 9 of the very same order dated 5th July, 2012, and this para is reproduced hereunder:-

‘’9. The next issue in the appeal of the assessee is disallowance of payment made to foreign shipping companies towards charter hire charges under section 40(a)(i). Vide detailed order in the assessee’s own case in to 148/Mds/2012 dated 29th June, 2012, reasons have been given by us, wherein it has been held that the assessee is liable to deduct tax on the payments of hire charges made to foreign shipping companies. It would not be out of place to mention here that foreign shipping companies had not filed returns of income. The assessee had filed return of income on behalf of the foreign shipping companies as ‘representative assessee’, showing Nil income. The said returns were filed by the assessee under protest. Though the case of the assessee is covered by the order of the Special Bench of the Tribunal in Merilyn Shipping & Transports Vs. ACIT., (supra), but at the same time, this does not in any manner restrict the Revenue authorities to initiate proceedings under section 201 for not deducting tax at source against the assessee. Respectfully following the decision of the Special Bench of the Tribunal in Merilyn Shipping & Transports(supra), we allow this ground of the assessee’’.

-335-2018. :- 7 -: SP 61 – 63/18 Judgment of Hon’ble Jurisdictional High Court in 360 ITR 257 relied on by the ld. Commissioner of Income Tax (Appeals), was on an appeal of the Revenue against an earlier decision of the Co-ordinate Bench of this Tribunal that payments made for taking ships on time charter basis from non-resident shipping companies did not require deduction of tax at source. In other words, the judgment of Hon’ble Jurisdictional High Court was on the issue of deduction of tax at source for payments made for time chartering of ships, which was held in favour of the Revenue. Hon’ble Jurisdictional High Court did not consider the issue of payment made for dry docking of ships. In our opinion, Ld. Commissioner of Income Tax (Appeals) fell in error in relying on a judgment of Jurisdictional High Court which was on a different issue. Question as to the requirement of deducting tax at source, for dry docking expenses, stood answered in favour of the assessee by the Tribunal in para 8 of its orders in to 1254, 2063 and 2064/Mds/2011, which has been reproduced by us.

We are therefore of the opinion that assessee was not obliged to deduct tax at source on dry dock expenditure paid to Non-resident entities. Disallowance made u/s.40(a)(i) of the Act for assessment years 2013-14 and 2014-15 on dry dock expenditure stand deleted.

Relevant grounds for these years are allowed. -335-2018. :- 8 -: SP 61 – 63/18

Next issued raised by the assessee is on an addition of 7.

�4,00,51,545/- claimed as receivable from Tamil Nadu Electricity Board (TNEB) and is relevant for assessment year 2010-2011 only.

per the ld. Authorised Representative, the latter amount comprised of actual expenditure of �6,67,98,046/- and interest of �4,00,51,545/-.

According to the ld. Authorised Representative, the ld. Assessing Officer had disallowed the interest portion of �4,00,51,545/- without appreciating the claim of the assessee it was working on no profit no loss basis. As per the ld. Authorised Representative, the ld. -335-2018. :- 9 -: SP 61 – 63/18 Commissioner of Income Tax (Appeals) also did not allow the claim, taking an erroneous view that expenditure corresponding to the income from TNEB only could be allowed. Strongly assailing the disallowance the ld. Authorised Representative, submitted that the net amount received by the assessee for chartering vessels came to �348,28,66,575/- after adjustments made through transfer to Sundry Creditors/Sundry Debtors. Relying on Schedule 9 to the profit and loss account for the year ending 31.03.2010 placed at paper book 11, ld. Counsel submitted that against total receipts of �370,93,60,067/-, a sum of �22,64,93,492/- was adjusted against Sundry Creditors/Sundry Debtors. As per the ld. Authorised Representative, the sum of �22,64,93,492/- deducted included a positive addition of �4,68,49,591/- against Tuticorin Port Trust. The said amount as per the ld. Authorised Representative was arrived at, after considering total receipts from TNEB and total expenditure of �10,68,49,591/- incurred. Thus, according to him, a further addition of �4,00,51,545/- resulted in duplication.

Per contra, ld. Departmental Representative fairly admitted 9.

the matter required a fresh verification by the ld. Assessing Officer.

We have perused the orders and heard the rival contentions. 10.

A sum of �4,00,51,545/- out of the total expenditure of -335-2018. :- 10 -: SP 61 – 63/18 �10,68,49,591/- was considered by the ld. Assessing Officer as interest expenditure on which corresponding income was not shown by the assessee. Now the claim of the assessee is that the difference between total expenditure of �10,68,49,591/- and receipt of �6,00,00,000/-, was suo motu shown by it as an adjustment while calculating additions to be made against transfer to Sundry Creditors/Sundry Debtors accounts. As per Schedule 9 of its Profit and Loss account, placed at paper book at paper No.11, a sum of �22,64,93,492/- has been deducted from aggregate chartering receipt of �370,93,60,067/-. Break- up of �22,64,93,492/- placed at paper book page 15 does have a credit of �4,68,49,591/- being the difference between receipts relating Tuticorin Port Trust and expenditure incurred for them. In the circumstances, we are of the opinion that the question whether the sum of �4,00,51,545/- considered for addition by the ld. Assessing Officer was included in the sum of �4,68,49,591/- shown by the assessee, as a part of the adjustment of �22,64,93,492/- requires a fresh look by the ld. Assessing Officer. We set aside the orders of the lower authorities and remit the issue back to the file of the ld. Assessing Officer for consideration afresh in accordance with law. -335-2018. :- 11 -: SP 61 – 63/18

Next issue raised by the assessee is on Service Tax 11. disallowances made for assessment years 2010-2011 and 2013-2014.

Contention of the ld. Authorised Representative was that assessee in the course of its business operation had collected Service Tax on behalf of Government and duly remitted it to the exchequer. As per the ld. Authorised Representative, assessee had in its profit and loss account shown a provision of �6,91,31,329/- for assessment year 2010-2011 and �6,65,78,053/- for assessment year 2013-14 as Service Tax. Submission of ld. Authorised Representative, was that ld. Assessing Officer disallowed these amounts noting that assessee had not remitted it to the exchequer, before filing the return for the impugned assessment year, relying on Section 43B of the Act.

Contention of the ld. Authorised Representative was that assessee had pointed out before the ld. Commissioner of Income Tax (Appeals) that the Service Tax was yet to be collected, but this was not accepted. As

per the ld. Authorised Representative what were charged to the profit and loss account were only a provision. Such Service Tax as per ld. Authorised Representative was not received from the TNEB. Relying on notification No.25/2011, dated 31st March, 2011, (F.No.334/3/2011- TRU), ld. Authorised Representative submitted that assessee was obliged to remit the Service Tax to the exchequer only on receipt of such taxes from its clients. According to him, the time when the tax -335-2018. :- 12 -: SP 61 – 63/18 was to be charged was changed to accrual basis only from 30.06.2011.

Ld. Authorised Representative also submitted that assessee was pursuing an application for exemption from levy of Service Tax, though this was denied by Additional Commissioner, CCO, Office of the Chief Commissioner of Central Excise, Chennai Zone through his letter dated 07.09.2010 placed at paper book page 19. According to him, the disallowance of the provision was not warranted. Reliance was placed on a judgment of Hon’ble Bombay High Court in the case of CIT vs. Ovira Logistics Pvt. Ltd, 377 ITR 129.

We have perused the orders and heard the rival contentions. 13.

It is not disputed by the assessee that provision for Service Tax was created by it by debiting the Profit and Loss Account for the impugned assessment years. Contention of the ld. Authorised Representative is that the liability to remit such sum to the exchequer arose only when payments for the services were received. Notification No.25/2011, dated 31st March, 2011 relied on by the ld. Authorised Representative states as under at para 6. -335-2018. :- 13 -: SP 61 – 63/18

‘’6. For rule 9, the following rule shall be substituted, namely:- "9. Transitional Provisions.- Nothing contained in this sub-rule shall be applicable,- (i) where the provision of service is completed; or (ii) where invoices are issued prior to the date on which these rules come into force. Provided that services for which provision is completed on or before 30th day of June, 2011 or where the invoices are issued upto the 30th day of June, 2011 the-point of taxation shall, at the option of the taxpayer, be the date on which the payment is received or made as the Case may be.".

No doubt the point of taxation is mentioned to be the option of the tax payer. It could be the date of debit or date on which invoices are raised. For the impugned assessment years assessee itself had chosen to debit the Service Tax receivable in its Profit and Loss account.

Having chosen this option, as the point of taxation, in our opinion, Section 43B of the Act clearly applied. Section 43B of the Act is reproduced hereunder:-

‘’Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or -335-2018. :- 14 -: SP 61 – 63/18

(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (e) any sum payable by the assessee as interest on any 4loan or advance from a scheduled bank in accordance with the terms and conditions of the agreement governing 4such loan or advances; 3or (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return: Explanation 1.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 2.— For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.

-335-2018. :- 15 -: SP 61 – 63/18

Explanation 3.— For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3A.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3B.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3C.— For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid. Explanation 4.— For the purposes of this section,-- (a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11 ; (b) "State Financial Corporation" means a financial -335-2018. :- 16 -: SP 61 – 63/18 corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (c) "State Industrial Investment Corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long- term finance for industrial projects and 2eligible for deduction under clause (viii) of sub-section (1) of section 36’’.

Coming to the judgment of Hon’ble Bombay High Court in 14. the case of Ovira Logistics Pvt. Ltd (supra) relied on by the ld. Authorised Representative, para 9 of this judgment is apposite and is reproduced hereunder:-

‘’9. Having perused the aforesaid decisions, we are clearly of the view that section 43B does not contemplate liability to pay the service tax before actual receipt of the funds in the account of the assessee. In our view, liability to pay service tax into the treasury will arise only upon the assessee receiving the funds and not otherwise. Accordingly, when services are rendered, the liability to pay the service tax in respect of the consideration payable will arise only upon the receipt of such consideration and not otherwise’’.

No doubt, their lordships held that liability to pay Service Tax to the treasury will arise only upon an assessee receiving the funds. It is clearly held that there is no liability for Service Tax before actual receipt of funds. Hon’ble Bombay High Court was not dealing with a situation where assessee itself had created a provision for Service Tax, though a direct debit to its Profit and Loss account, thereby accepting -335-2018. :- 17 -: SP 61 – 63/18 the point of charge as the point of raising invoice. This judgment in our opinion will not help the case of the assessee here.

Assessee having not remitted the amount before the due 15. date of filing of return, we are of the opinion that lower authorities were justified in applying Section 43B of the Act and making an addition. Accordingly, related grounds of the assessee for assessment years 2010-2011 and 2013-2014 are dismissed.

To summarize the result, appeals of the assessee for all the 16. three years are partly allowed for statistical purpose. Since we have adjudicated the appeals of the assessee, its stay petitions are dismissed as infructuous.

Order pronounced on Tuesday, the 10th day of April, 2018, at Chennai.