ITO,WD-1(2), BURDWAN, BURDWAN vs. M/S CEMCO MARKETING, BURDWAN

1. 1. The assessee was under a contractual obligation to transport cement to the dealers premises from the rake point or from the godown as per instructions of the principals as a clearing and forwarding agent.

2. The principals were under contractual agreement to pay to the C&F agent handling, transportation and other charges as well as C&F margin at agreed rates per MT of cement handled/transported.

3. The principals have deducted tax on the payment made to the C&F agent in accordance with the relevant provisions of law.

4. The appellant however did not deduct tax on its payments to transporters or labourers.

5. That there was no clause in the agreement between the principal and the appellant which provided for payments to be made by the principals to the appellant for disbursal amongst dealers etc. for transportation/handling of cement. The appellant, when confronted with this report has filed a rejoinder dated 10.2.2016 the sum and substance of which is reproduced below. & 1418/Kol/2016 A.Ys 10-11 & 12-13 ITO Wd.1(2) Bwd. Vs. M/s Cemco Marketing Page 4

2. The appellant has rebutted the assertion of the ITO that the said reimbursement is not on actual basis and that the difference between the reimbursement and the actual constituted the profit margin of the appellant by drawing my attention to point A2 of the page 3 of the agreement where it is categorically mentioned that all reimbursements will be on actual basis as per rates fixed as mentioned in the annexure and further under point C2 of page 6 under the subtitle remuneration/commission further that the agent will get a prefixed commission- which in this case was Rs 12/- per MT. 3. As regards the rake firing ratio brought up by the remand report, where the appellant needs to transport a minimum quantity of cement to the dealers directly from the rake point, the appellant has stated that point ABC1 of page 8 of the agreement says that rake firing ratio has to be conducted subject to the availability of orders before hand - thus there was a condition precedent on it. Since the agreement is for the handling and transportation of cement, whatever may be the condition, the only activity is of transporting and handling of cement and for which the appellant is reimbursed by the principals. 4. That the observations of the AO that the principals could have paid directly to the dealers and that no prudent businessman would pay to an intermediary are irrelevant and would constitute interference on the running of the business of the principal company. That this in any case has nothing to do with the appellant's case. 5. The appellant has also rebutted the applicability of section 194C by reiterating his stated stand on the matter. 6. He also states that the ITO had contradicted, himself in his report by saying on the one hand "The principals were under contractual agreement to pay to the C&F agent handling, transportation and other charges as well as C&F margin at the agreed rates .... " while on the other had he avers that "There was no such clause in the agreement of contract between the cement companies and the C&F agent which provides any payment to be made by the principals to the C&F agent for disbursal among their stockists/dealers for transportation of cement. That the fact of the matter is that all relevant expenses in the handling and transport of cement from the rake point to the dealers was to be reimbursed to the appellant asp per actuals and this covered expenses borne by dealers and reimbursed by the appellant and thereafter reimbursed by the principals or expenses initially borne by the appellant and thereafter reimbursed by the principals. • After going through this entire issue and the material produced before me including the muster rolls, the agreement between the principal company and the appellant, the averments of the remand report as well ITA No.1056 & 1418/Kol/2016 A.Ys 10-11 & 12-13 ITO Wd.1(2) Bwd. Vs. M/s Cemco Marketing Page 5 as the rejoinder, I also have had occasion to study the order of the Hon'ble ITAT Kolkata passed in the appellant's own case for the AY 2008-09 in in which the revenue was in appeal on identical issues against the deletion by the Ld CIT(A) of the additions made by the AD on identical issues. The Hon'ble Tribunal had upheld the order of the CIT(A) holding that the appellant was actually incurring expenditure on behalf of the principals and therefore was not liable to be covered by the mischief of section 194C of the Act and that he was not under obligation to deduct tax at source. • Respectfully following the averments of the Hon'ble Tribunal and for the reasons cited above, that the appellant since he was merely making payments on behalf of the principals for which he was duly compensated, I am of the opinion that there was no requirement for the appellant to deduct tax at source u/s 194C from the payments. It is pertinent to note in this context that the remand report has unequivocally also observed that the principals have paid to the appellant after due deduction of TDS - which sets at rest the AO's apprehension that there might be loss of revenue, since for the said work tax has been deducted by the principals. Thereafter, it is just a matter of reimbursing the expenses incurred b the appellant - which is a matter of record. • Therefore I cannot find merit in the view taken by the AD that TDS had to be deducted on CF & Transportation Charges and the said disallowance therefore is not upheld.

3. For that on the fact and circumstances of the case, it is begged before your honour to note that the Ld. A.D has erred in disallowing Rs.95,05,125.00 on account of secondary transport and assessee firm handles cement from the railway rake point until it reaches to the dealer' point, as per the direction of the company, for which assessee firm gets commission from the company . Now the Ld. AO has made the addition U/s 40(a)(ia) of the Income Tax Act, 1961 on account of secondary transport and freight charges, which is nothing but the caring cost of reimburses the money to the dealers of the company after getting the money from the company and in the first instance the dealers pay for the secondary transportation and freight charges. Which include the truck hire charges that are at a fixed rate per kilometer and calculated as per distance covered. Here the assessee firm does not pay the money to any transport contractor but actually the money is paid to the dealers as reimbursements to their truck hire charges and other associated costs. Thus the ultimate beneficiaries to the payment are the truck owners and not the dealers and therefore the onus of deducting T.D.S u/s 194C of the Income Tax Act, 1961 does not fall upon the assessee firm. Please also not that in order to invoke section 40(a)(ia) of The Income Tax Act, 1961, there has to be an existence of a contract. But the Ld. AD could not establish any such contract as there is none, as the payment not being made to any contractor and/or sub-contractor. Moreover the payment has been reimbursed by the company and it is evident from the Profit & Loss Account of the year under consideration, where the assessee firm paid Rs. 95,05,125.74 whereas it received Rs. 95,04,703.55 that is Rs. 422.19 less than that is paid.

ITA No.1056 & 1418/Kol/2016 A.Ys 10-11 & 12-13 ITO Wd.1(2) Bwd. Vs. M/s Cemco Marketing Page 6 Please also note that in the case CIT-Vs-United Rice Land Ltd. (2008) 217 CTR (P & H) 332. Rakshit Transport - Vs - ACIT, Circle - 2, BDN Mythri Transport Corp. - Vs - AClT (2010) 124 ITO 40 (Visakhapatnam) and CIT - Vs - D. Rathinam (2011) 241 CTR (Mad) 476, it was held that the question of deduction of T.D.S. u/s194C of The Income Tax Act, 1961 will depend upon the fact whether there was any oral or written agreement or contract between the assessee and the recipient of income and if there was nothing on record to show the existence of any such contract, then section 194C of The Income Tax Act, 1961 will have no applicability and consequently section 40(a)(ia) of the Income Tax, 196iwill not come into play. Thus the Ld. AO's contention does not hold good in the eye of law. Please also note that section 40a(ia) of the Income Tax Act, 1961 enumerates the word payable (and not paid) to contractors and/or sub-contractors. In the case of Merilyn Shipping & Transports, Visakhapatnam- Vs – ACIT (2012) 44 (II) ITCL, 454 (Visakha- Trib)(SB) it was held that the section only speaks on the amount payable on which tax is not deducted and therefore it should apply only if the amount is payable but once the amount has already been "payable' cannot be “paid” as well as “payable” because in the case of CIT-Vs-TVS Lean logistics Ltd. (2007) 293 ITR 432 (Mad) the Madras High Court held that where the words of a statute are absolutely clear and unambiguous, then rule of literal construction has to be followed and the court cannot enlarge the scope of legislation when the language of the provision is plain and unambiguous. For the sake of argument, even if it is assumed that the term “payable” means “paid” and “payable” , still the assessee must get relief because the Apex Court in the case of CIT-Vs-vegetable Products Ltd. (1973) 88 ITR 192 (SC) held that if the court finds that the language of taxing statute is ambiguous or capable of more meanings then one, then the court has to adopt the interpretation which favours the assessee, more particularly so where the provision relates to imposition of Tax. Thus the Ld. A.O has acted vindictively and added Rs.95,05,125.00 for reasons to him only and by any stretch of mind, it cannot be said to be a lawful act. The facts for the sake of ground -wise completion are being briefly stated again: 1) The appellant is a C&F Agent of the agent of Ultratech Cement Ltd who is manufacturer of cement. The assessee handles the cement from the railway rake point till it reaches the dealer's godown. So the assessee unloads the cement from the railway siding and forward the same by truck to the godown and the expense incurred for this activity is called the Primary Transportation and/ or Freight and such amount is reimbursed by the principal company. Then the assessee arranges delivery of the cement bags from the godown to the various dealers point by truck and the expense incurred for it is called the Secondary Freight Charges and this amount is reimbursed by the company as well and all such reimbursements are made in actual basis as per the prefixed rates. In the case of Secondary Freight Charges, the dealers pay to the truck drivers and then raise the bill and the assessee reimburses such money to the dealers on actual basis on behalf of the company as the principal company pays such reimbursement and the job of the assessee is only to facilitate such payment. & 1418/Kol/2016 A.Ys 10-11 & 12-13 ITO Wd.1(2) Bwd. Vs. M/s Cemco Marketing Page 7 • During the assessment proceedings, the AO observed that the appellant claimed Secondary Freight Charges in the profit a loss account amounting to 95,05,125.00 and during the hearing stage the assessee was asked to provide explanation as to why the claim of expenditure should not be disallowed to which the assessee responded vide letter dated 11/03/2013 contending that the said expenditure is reimbursement expenditure and the payments were not made to any contractor or sub contractor and the expenses are not in pursuance of the assessee's business but the assessee only acts as a C&F Agent and facilitated such payments on behalf of the company. The AO contended that section 194C speak of tax deduction by the person making payment and also the payments were made under some contract and added them to the total income of the assessee. Before me the appellant has submitted that the AO failed to consider the facts of the case. • He stated that the deduction of tax at source U/s 194C on Secondary Freight Charges is not necessary. This is because such Secondary Freight Charges paid to the tune of Rs. 95,05,125.001 - are reimbursement of expenses and it is not any expenses of the assessee but it is the expenses of the company for which the assessee firm acts as a C&F agent. That the assessee is a C&F agent of Ultratech Cement Ltd who is manufacturer of cement. The assessee handles the cement from the railway rake point till it reaches the dealer's godown. The assessee arranges delivery of the cement bags from the godown to the various dealers point by truck and the expense incurred for it is called the Secondary Freight and this amount is reimbursed by the company as well and all such reimbursements are made in actual basis as per the prefixed rates. In the case of Secondary Freight Charges, the dealers pay to the truck drivers and then raise the bill and the assessee reimburses such money to the dealers on actual basis on behalf of the company as the principal company pays such reimbursement and the job of the assessee is only to facilitate such payment. • The assessee also placed reliance on the ratio of the assessee's own case before the CIT(Appeals) - XXXII, Kolkata and ITAT, Kolkata C Bench for the A/Y 2008-09, where the assessee got relief based on the facts that liability to deduct tax at source u/s 194C would only arise when the payment is made under a contract, which is not true in this instant case as there is no finding by the AO that the impugned payments were made to a contractor or sub-contractor under some contract. Rather the facts of the case suggest that the impugned payments are made to the dealers of the company and not to any transporters. & 1418/Kol/2016 A.Ys 10-11 & 12-13 ITO Wd.1(2) Bwd. Vs. M/s Cemco Marketing Page 8 • There is nothing on record to suggest the existence of any contract between the assessee and the recipient of the impugned payment and such is denied by the assessee as well. I have carefully examined the issues at hand as well all the relevant material as listed above. The issue has been discussed at length in the preceding paragraphs. The fact is that it has been established that the appellant was under contractual obligation with the principal company to ensure the handling and delivery of cement to the dealers and the principals would reimburse the entire expenses on actual terms to the C&F agent - the appellant. The secondary freight and transport charges which were incurred were similarly reimbursed by the principals on actuals. In fact these figures have appeared in the P&L account of the appellant and not contested by the AD. The payments have been reimbursed by the principals as is evident from the Profit & Loss Account for the year under consideration, where the appellant has paid Rs.95,0:5.125.74 whereas it has received Rs. 95,04,703.55. The fact that at first the dealers paid for the freight and had it reimbursed by the appellant in turn to be reimbursed by the principals makes no difference to the fact that ultimately the reimbursement came from the principals and the proposition that if the appellant had been making payments on behalf of the principals - as it has been established they were - then there was no obligation on the appellant to deduct tax at source. In view of the discussions above, the said disallowance is therefore not upheld.”