DHARAM CHAND CHAUDHRY,KOLKATA vs. DCIT, CIRCLE - 33, KOLKATA, KOLKATA

Briefly stated facts are that the AO made disallowance of freight and transport charges to the extent of Rs.3,28,197/- for non-deduction of TDS u/s. 194A of the Act by invoking the provisions of section 40(a)(ia) of the Act. The AO made disallowance of the following payments: “i) Payment to Shri Manoj Kumar sing amounting to Rs.1,58,237/-. ii) Payment to Excel India Pvt. Ltd. Amounting to Rs. 83,026.00, iii) Payment to DHI Donzas Lemuir Pvt. Ltd. Amounting to Rs.86,934/- According to AO, the assessee is liable to deduct TDS u/s. 194C of the Act thereby applying the provisions of section 40(a)(ia) of the Act he made disallowance of the aforesaid three payments amounting to Rs.3,28,197/-. Aggrieved, assessee preferred appeal before CIT(A), who confirmed the disallowance by following circular no. 715 dated 08.08.1995 issued by CBDT by observing as under: “I have considered the submissions of the appellant. It is an admitted fact that payments of Rs.l,58,237/- were made to the clearing and forwarding agent who is covered under the provisions of section 194C. In Circular no. 715 dated 08.08.1995, the CBDT has clarified in reply to Question 6 that "as regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act". In view of the above, the AO has rightly held that the appellant was liable to deduct tax at source on payments of Rs.l,58,237/-; and-consequently, the provisions of section 40(a)(ia) are clearly applicable. The disallowance of Rs.l,58,237/- is confirmed. The argument that Excel India Pvt. Ltd. and DHI Danzas Lemuir Pvt. Ltd. are assessed to income tax or that payments were made through banking channel is not relevant in so far as the applicability of section 40(a)(ia) is concerned. The argument that the appellant was not allowed to deduct tax at source is also not relevant. The appellant was duty bound to deduct tax at source in accordance with the provisions of section 194C and the consent of the said companies was not required. As the appellant has failed to deduct tax u/s. 194C, the provisions of section 40(a)(ia) are clearly attracted. The judicial decision relied upon by the appellant is clearly distinguishable on facts. For, in that case, the assessee was clearing and forwarding agent; but, in the present case, the appellant is an importer and payments were made to clearing and forwarding agent. Secondly, in that case, the Hon'ble ITAT allowed relief on the ground that the payments fall within the ambit of the special provisions of section 172. But, in the present appeal, it was not even the case of the appellant that the payments are covered by the provisions of section 172. The disallowances of Rs.83,026/- and Rs.86,934/- are confirmed. Ground no. 3 is dismissed.”

We have heard rival submissions and gone through facts and circumstances of the case. We find that the assessee has imported spare parts from abroad to Kolkata through airport/seaport clearing agent M/s. Ashim Chatterjee & Co., who was engaged in clearing the material from the airport/seaport and delivered the same at the premise of the assessee. According to assessee, the payment of Rs.1,58,237/- was made to Shri M. K. Singh through the clearing agent to the truck drivers hired for delivery of the material from Dharam Chand Chaudhry AY 2007-08 airport/seaport to the stores. Further, the payment to Excel India Pvt. Ltd. and DHI Danzas Lemuir Pvt. Ltd. represents freight air and sea from Europe to Kolkata. According to assessee, these payments being freight from Europe to Kolkata. Hence, TDS is not liable. In respect to payment to M. K. Singh, same are through clearing agent on account of supply of material through airport/seaport. Before us, it was argued that these freights paid to agents on actual basis and that the bills and air freight documents have directly been issued to the foreign airlines. We find that the two parties namely, Excell India Pvt. Ltd. and DHI Danzas Lemuir Pvt. Ltd. and also Shri Manoj Kr. Singh being agent of foreign parties and they, while accepting the payment for air freight component they have acted merely as an agent of the respective airlines and have not received the airfreight payments in their own right. Ld. Counsel for the assessee before us relied on the decision of Coordinate bench of this ITAT in the case of Taj Leather Works Vs. ACIT and 1687/K/2011, AY 2007-08 and 2008-09 dated 31.05.2012, wherein it has been held as under: “8. As for the stand that the assessee should have moved the application under section 195(2) in case of payments to non residents and assessee’s failure to do so is to be visited with consequences for non deduction at source, the law is now settled by Hon’ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456) wherein Their Lordships have categorically held that, “where a person responsible for deduction is fair ly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof”. The plea of the revenue authorities to the effect that where the assessee does not move an application under section 195(2) and makes the remittance without deduction of tax at source, the assessee should be visited with consequences for non deduction of tax at source, which was accepted by Hon’ble Karnataka High Court in the case of CIT Vs Samsung Electronic Co Ltd ( 320 ITR 209), was categorically rejected by Their Lordships, and Their Lordships observed as follows: “In our view, section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income -tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. of A.P. Ltd.’s case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non- resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of Dharam Chand Chaudhry AY 2007-08 the Income-tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income-tax Act.”

We have also noted that it is not even the revenue’s case that the amounts paid to foreign airlines, on account of airfreight payments, are taxable in India, and quite rightly so, because, as the provisions of all the respective tax treaties clearly provide , the profits from operations of ships and aircrafts in the international traffic are taxable only in the state in which the respective enterprise are fiscally domiciled and not in the source state. This rule, howsoever devoid of paradigm justification as it may appear to many of us, is one of the fundamental rules followed in almost all the tax treaties and our tax treaties with UK, UAE, Singapore and Germany are no exception to this general rule. It is only elementary that a tax deduction at source under section 195 is only a vicarious liability inasmuch as when recipient s of income, i.e. the airlines concerned, have no primary liability to pay tax, there cannot be any vicarious liability to deduct tax from payments in which such income is embedded.

In view of the above discussions as also bearing in mind entirety of the case, we are of the considered view that the assessee did not have any obligations to deduct tax at source – whether under section 194 C or under section 195 – from payments made to the foreign airlines for airfreight. In this view of the matter, the impugned disallowances under section 40(a)(ia) are devoid of any merits, nor can these disallowances be made under section 40(a)(i) either – as alternatively suggested by the authorities below. We, accordingly, direct the Assessing Officer to delete the impugned disallowances. The assessee gets the relief accordingly.” We find that this issue is now covered in favour of assessee and against the revenue wherein the payments are made by assessee to Indian Agents of foreign airlines and in such situation assessee is not liable to deduct TDS. Hence, disallowance made by AO and confirmed by CIT(A) is deleted. This issue of assessee’s appeal is allowed.

The next two issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of communication expenses and motor car expenses at Rs.26,311/- and Rs.38,788/- on estimate basis. For this, assessee has raised following ground nos. 4 and 5 : “4. For that the Ld. CIT(a) is unjustified in disallowing communication expenses of rs.26,311/- on estimate based on the assumption that the amount of expenses disallowed is for personal purpose without identifying any item of expenditure which is disallowable in nature.

We have heard rival submissions and gone through facts and circumstances of the case. We find that the assessee has incurred communication expenses i.e. telephone expenses at Rs.5,26,226/- and motor car expenses at Rs.3,87,877/-. The AO disallowed 10% of both the expenses being in the nature of personal use. Aggrieved, assessee Dharam Chand Chaudhry AY 2007-08 preferred appeal before CIT(A), who restricted the disallowance of communication expenses at 5% and confirmed the addition of Rs.26,311/- but confirmed the disallowance of motor car expenses at Rs.38,788/- being 10%. Aggrieved, now assessee is in appeal before Tribunal.

We find that both the authorities below have not brought out any material to make these disallowances and just on the basis of estimate these disallowances were made. We find no reason to sustain the disallowances and hence both disallowances are deleted. Both the issues of assessee’s appeal are allowed.

The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of loss of sale of car amounting to Rs.72,937/-. For this, assessee has raised following ground no.6: