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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the Revenue against the Order dated 10.08.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in for the AY 2012-13 and raised the following grounds:
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The order of the learned CIT(A) is contrary to law, facts and circumstances of the case.
The learned CIT(A) erred in directing the Assessing Officer to delete the disallowance made u/s.40(a)(i) of the I.T. Act to the tune of Rs.6,62,69,387/-.
2.1 The learned CIT(A) ought to have appreciated the fact that the services defined in the agreement includes identifying potential shippers and consignees also to actively involved in canvassing on behalf of each other which amounts to services in the nature of managerial, technical or consultancy.
2.2 It is submitted that from the nature of services rendered by the freight forwarders as mentioned in the Agency Agreement, the services are not just pertaining to cargo handling, but are managerial and technical. In order to identify the potential shippers or consignees, the non-resident freight forwarders have to necessarily carry out extension marketing and advertising activities such as relationship marketing, internal marketing, integrated marketing, capturing marketing etc., to build a strong brand name of the assessee company in the offshore markets. Since the assessee company is dependent on the technical input of the freight forwarders located in the offshore, it amounts to consultancy services.
2.3 The learned CIT(A) ought to have appreciated that the following services are rendered by the freight forwarders which require an organized marketing strategy and plans which amounts to managerial and technical services:
2.4 The learned CIT(A) ought to have appreciated the explanation to Sec.9(2) inserted in Finance Act w.r.e.f. 01-06-1976, ‘Business Connection’ (Place of permanent establishment) is not required in a case where the income is deemed to accrue as per Section 9(1)(vii) of the Act. Therefore, as per Sec.5(2) r.w.s. 9(1)(vii) of the I.T Act, the payment made by the assessee to the Non- resident is an income accrued in India.
The learned CIT(A) erred in directing the Assessing Officer to delete the disallowance made u/s.40(a)(ia) of Rs.68,69,549/-.
3.1 The learned CIT(A) ought to have appreciated that the services rendered by public sector undertakings is in the nature of providing warehouse services and the same require compliance u/s.40(a)(ia) of the Act.
The learned CIT(A) has erred in deleting the addition made in respect of employees contribution towards PF of Rs.8,16,531/- which was remitted beyond the prescribed due dates.
4.1 The learned CIT(A) erred in deleting the addition made in respect of delayed remittance of its employees contribution of Provident Fund despite the fact that Circular No.22/2015 dated 17.12.2015 clearly applies to claim of deduction relating employers’ contribution and not for employees contribution to welfare funds.
4.2 The learned CIT(A) failed to appreciate that any received sum received on account of employees’ contribution to Provident Fund not remitted within the due date is to be treated as the income of the assessee and taxed in his hands as per provisions of Sec.2(24)(x) of the I.T. Act, 1961.
For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the AO restored.
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2.0 Ground Nos.1 & 5 are general in nature which do not require specific adjudication.
3.0 Ground Nos.2 to 2.4 are related to the disallowance made u/s.40(a)(i) of Income Tax Act (in short ‘the Act’) for non-deduction of tax at source.
Brief facts:
The assessee is a Pvt. Ltd. Company engaged in the business of providing logistic support in air/ocean transport warehousing and distribution and filed its return of income declaring total income of Rs.31,25,617/- on 30.11.2012. The assessment was completed u/s.143(3) by an Order dated 16.03.2015 on total income of Rs.7,70,81,080/-. The AO made various additions to the return of income, one of such additions was disallowance u/s.40(a)(i) of the Act which is one of the issues disputed in this appeal. The assessee has incurred the expenses towards the payment made to overseas agents comprising of: a. freight charges and other origin charges like: i. inland transportation; ii. storage of goods-in-transit; iii. export documentation and shipping charges; iv. export duty (in case of import shipments into India); b. destination charges like: i. clearance charges; ii. inland transportation; iii. storage charges etc. (in case of export shipments from India); and c. the service charges of the overseas agent.
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The AO treated the expenditure as fee for technical services and brought to tax u/s.40(a)(i) of the Act.
4.0 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal following his own Order for the AY 2011-12. The relevant part of the Ld.CIT(A)’s order is extracted as under for the sake of convenience:
19. I have carefully perused the facts in issue, arguments advanced by the appellant and material on record. An identical issue having similar set of facts came up for consideration before me in appellant’s own case for A.Y. 2011-12 wherein the said issue was decided in favour of the appellant vide my order in dated 15.2.2016 holding as under:
“The appellant admittedly is a third party logistics entity which rendered services of facilitating movement of goods for its clients established in India and outside India. In order to make available the services, it negotiated with handling agents both domestic as also in foreign country by way of negotiation for goods transported from foreign destination to India.
The dispute in this assessment relates to the exigibility of tax in relation to the payment made by the appellant to the foreign entities for the services rendered in various foreign destinations. It is in this context that the exigibility of tax to the payment have to be examined as to whether the tax liability is triggered in terms of Sec.9(1)(i) r.w.s.5 of the Income Tax Act.
It is settled law when services are rendered by a non-resident who has no business connection or presence by way of permanent establishment in India, the income would be triggered in the country of residence where the services were rendered. The ratio in the context of commission agent laid down by the jurisdictional Court in the case of CIT v. Faizan Shoes P Ltd 367 ITR 155 applies mutatis mutandis.
The non-residents to whom payments were made were for a bouquet of services such as Inland transportation, storage of goods in transit, export documentation and shipping charges, export duty in the port of origin and clearance charges, Inland transportation and storage charges in the destination. These cannot be classified as constituting either managerial or services which are technical in nature within the meaning of s.9(1)(vii) of the Act. The Board’s Circular No.715 relied upon also clarified that payment to clearing and forwarding agents for carnage of goods is subject to deduction of tax at source u/s.194C while s.194J stipulates deduction of tax at source in respect of professional and technical services. In s.194J the expression “fee for technical services” has been given the same meaning as laid down in Explanation-2 to s.9(1)(vii).
In Leaap International P Ltd the ITAT Chennai in for AY 2005-06 in its Order dated 27.5.2011 have held similarly that the payments to foreign company for services rendered outside India and foreign company having no branches or permanent establishment in India, the payments made to it were not liable for deduction at source u/s.195. In the case of Indiar Carriers P Ltd the ITAT Delhi Bench also held similarly in respect of the payments made to an agent outside India for freight forwarding functions on the same logic.
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On the facts of the case, these entities who have rendered services admittedly have no presence in India by way of permanent establishment and no business connection in as much as that the services were rendered outside India. It would suffice to hold that the basic ingredient to trigger the operation of Sec.9(1)(i) are conspicuous in their absence in such services. It would therefore make no difference whether or not any of the entities are resident in the jurisdiction which has DTAA with India or not. Payment(s) made to them would not be exigible to tax unless and until a case has been made out that they are in the nature of the services within the meaning of Sec.9(1)(vi) or 9(1)(vii) being “royalty “or “technical services” As such the same would be taxable as business profits in the country of residence. It is held therefore that since the payments are not chargeable to tax in India u/s.9(1)(vii) r.w.s. 195, the provisions of s.40(a)(i) will not be applicable. The AO is directed to delete the addition made. This ground of appeal
is allowed”.
20. Since the facts and circumstances of the case are identical for the present assessment year also, I do not find any reasons to deviate from the stand taken by me in the said assessment year and follow the same. Accordingly, this ground of appeal ground is allowed.
5.0 Aggrieved by the order of the Ld.CIT(A), the revenue is on appeal before us.
6.0 The Ld.AR appearing for the assessee argued that on identical facts for the AY 2011-12 in the assessee’s own case in dated 10.11.2016 the Hon’ble ITAT ‘B’ Bench allowed the assessee’s appeal. On the other hand the Ld.DR supported the orders of the AO.
7.0 We heard the rival submissions and perused the material placed before us.
The Ld.CIT(A) decided the issue in favour of the assessee following the decision of the Hon’ble jurisdictional High Court (cited supra). The Co- ordinate Bench in the order relied upon by the assessee confirmed the order of the Ld.CIT(A) in the assessee’s own case for the AY 2011-12. We extract the relevant Paragraph of the decision of ITAT in the case cited supra:
4.6 We have heard the rival submissions and carefully perused the materials on record. From the facts of the case, it is apparent that the assessee is engaged in the business of freight forwarding through its offices in India as well as abroad. With regard to export shipment from India, the assessee collects the goods from the exporters, carries out inland
ITA No.3140/Mds/2016 :- 6 -: transportation, storage of goods in transit, complies with export documentation and shipping requirements, clears the goods with customers, pays export duty, and co- ordinance with airlines/shipping agencies with respect to transportation of goods outside India etc., and the overseas agents of the assessee clears the goods at destination, pays import tax/duty, stores the goods in transit, carries out inland transportation and delivers shipment to the importer overseas. In the case of import shipments in India, the same activities are performed by the assessee and the foreign freight forwarders respectively in the reverse manner. Therefore it is apparent that, the payment made by the assessee company to the foreign freight forwarders are concerned, it is for services rendered outside India. The foreign freight forwarders who have received payments from the assessee also did not have any permanent establishment in India. In this situation in the case of the assessee, the learned Commissioner of Income Tax (Appeals) has rightly relied in the decision of the Hon’ble jurisdictional Madras High Court in the case of CIT Vs. Faizan Shoes P.Ltd., reported in 367 ITR 155, wherein it is held as follows:
“Held, dismissing the appeal, that on a reading of section 9(1)(vii), commission paid by the assessee to the non-resident agents would not come under the term “fees for technical services’. For procuring orders for leather business from overseas buyers, wholesalers or retailers, as the case may be, the non-resident agent was paid 2.5 per cent. Commission on free on board basis. This was a commission simpliciter. What was the nature of technical service that the non- resident agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing the export obligation was an incident of export and, therefore, the non- resident agent was under an obligation to render such services to the assessee, for which commission was paid. The non-resident agent did not provide technical services for the purposes of running of the business of the assessee in India. Therefore, the commission paid to the non-resident agents would not fall within the definition of “fees for technical services” and the assessee was not liable to deduct tax at source on payment of commission.”
4.7 Further, the reliance placed by the learned Commissioner of Income Tax (Appeals) in the decision of the Chennai Bench of the Tribunal in Leap International Pvt.Ltd. in vide Order dated 27.05.2011 is also justifiable because in that case it was held that payment made to foreign companies, for services rendered outside India, which did not have permanent establishment in India, tax need not be deducted at source under section 195 of the Act. For the above stated reasons, we do not find it necessary to interfere with the order of the learned Commissioner of Income Tax (Appeals) on this issue.
8.0 Following the decision of the Co-ordinate Bench in the assessee’s own case, we do not find any infirmity in the order of the Ld.CIT(A) and we uphold the order of Ld.CIT(A) and dismiss the revenue’s appeal on this issue.
9.0 Ground Nos.3 to 3.1 are related to the disallowance u/s.40(a)(ia) of the Act. During the assessment proceedings, the AO found that the assessee company made payments to the public sector companies such as Shipping Corporation of India, Central Warehousing Corporation, Century
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Play Homes India Ltd., and Container Corporation India Ltd., for a sum of Rs.70,70,523/-. However, the company has not deducted the TDS on amount of Rs.68,69,549/-. The AO was of the view that the services rendered by the public sector undertakings was in the nature of providing warehouse services and attracts the provisions of TDS. Since, the assessee failed to deduct TDS, the AO made addition u/s.40(a)(i) of the Act.
10.0 Aggrieved by the order, the assessee went on appeal before the Ld.CIT(A). The Ld.CIT(A) deleted the addition made by the AO holding that the TDS provisions do not attract. The Ld.CIT(A) observed that the assessee acted as facilitator in import and export and only agency charges were credited as income by the assessee and all the expenses incurred by the assessee on behalf of its clients have been reimbursed and on the reimbursement of expenses the provisions of TDS is not applicable. The Ld.CIT(A) relied on the decision of ITAT Ahmedabad in the case of ITO vs. Pritesh D.Shah (HUF) in and also relied on his own decision in the assessee’s own case for the earlier years. In the preceding assessment year on identical facts, the Co-ordinate Bench in the assessee’s own case in ITA No.1542/Mds/2016 remitted the matter back to the file of the AO to examine the facts relating to the tax deduction by the clients of the assessee. The relevant Paragraph No.5.4 is extracted hereunder:
5.4 We have heard the rival submissions and carefully perused the materials on record. Provisions of section 1940 makes it clear that any person responsible for paying any sum to any resident for carrying out any work in pursuance of any contract will be liable to deduct
ITA No.3140/Mds/2016 :- 8 -: tax at source. From the facts of the case, it is not clear about the relationship of the assessee with the Public Sector Undertakings and the nature of contract between them. It is also not clear whether the assessee is merely acting as an agent of its clients or has undertaken the warehousing facilities for its clients. Further it is not revealed whether the clients of the assessee have deducted tax at source for the payment made for providing the warehousing facility. Therefore, we remit the matter back to the file of the learned Assessing Officer to examine all the relevant facts and thereafter decide the issue afresh in accordance with law & merit.
11.0 Since the facts involved for the year under consideration are same, we remit the matter back to the file of AO to examine all the relevant facts regarding deduction of tax at source by the clients and decide the issue afresh on merits.
12.0 Ground Nos.4 to 4.4 are related to non-payment of employees contribution of Provident Fund. The AO found that the assessee has not made the payment of Rs.8,16,531/- being employees contribution towards Provident Fund before the due date of remittances as required u/s.2(24)(10) of the Act. Therefore, the AO made addition as per Clause (Va) of Sec.36(1) of the Income Tax Act.
13.0 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A). The Ld.CIT(A) deleted the addition placing reliance on the Hon’ble jurisdictional High Court Order and the Apex Court’s Orders. For ready reference, we extract the relevant part of Ld.CIT(A) order for the sake of convenience:
I have carefully perused the facts in issue, submissions made by the appellant and material on record. As regards the disallowance of delayed payment on employees contribution to PF is concerned, it will serve useful purpose to refer to Circular No.22/2015 dated 17.12.2015 in F.No. 279/Misc./140/ 2015-ITJ. It has been clarified therein, that the Apex Court decision in the case of CIT V. Alom Extrusions Ltd 185 Taxman 416 has been accepted with regard to the employer’s contribution to the PF Fund or Superannuation Fund or Gratuity Fund if deposited on or before the due date. No disallowance could be made u/s.43B of the Act. It has also been clarified that the Circular does not apply to claim of deduction relating to employees’ contribution to Welfare Funds governed by s.36(i)(va). However, in view of the jurisdictional High Court’s decision dated 24.7.2015 in the case of ITA No.3140/Mds/2016 :- 9 -:
CIT vs. Industrial Security and Intelligence India (P) Ltd in TC (A) No.585 & 586 of 2015 and MP No.1 of 2015, it has been held therein placing reliance on the Delhi High Court’s decision in the case of Aimil Ltd 321 ITR 508, that if the assessee had deposited employees contribution towards PF and ESI after the due date as prescribed under the relevant Act, but before the due date of filing of the return under the Income Tax Act, no disallowance could be made in view of the provisions u/s.43B as amended by Finance Act 2003. Respectfully following the ratio laid down by the Hon’ble High Court, the plea of the appellant is allowed. This ground of appeal is allowed. 14.0 We heard both the parties and perused the material placed before us.
The Ld.CIT(A) deleted the addition placing reliance on the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Industrial Security and Intelligence India Pvt. Ltd. The assessee remitted the contribution before the due date of the filing of return under the Income Tax Act. The Revenue has not brought any other decision contraverting the decision relied upon the by the Ld.CIT(A). Therefore, we do not find any error in the Order of the Ld.CIT(A) and the same is upheld.
In the result, the appeal of the Revenue is partly allowed. Order pronounced in the Open Court on 23rd March, 2017, at Chennai.