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[2020] 122 taxmann.com 124 (Bombay)/[2021] 276 Taxman 305 (Bombay)/[2020] 428 ITR 398 (Bombay)[07-10-2020] INCOME TAX : Where assessee-company made payment of certain amount to its Forwarding & Clearing agent (C&F agent) towards reimbursement of freight charges paid by them to carriers, since such payment towards reimbursement had no income element embedded in it, assessee was not liable to deduct tax at source on same ■■■ [2020] 122 taxmann.com 124 (Bombay) HIGH COURT OF BOMBAY Zephyr Biomedicals
v.
Joint Commissioner of Income Tax* M.S. SONAK AND DAMA SESHADRI NAIDU, JJ. TAX APPEAL NOS. 47 TO 49 OF 2015 AND 9 & 10 OF 2016 OCTOBER 7, 2020 Section 194C of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to (Reimbursement) - Assessment years 2009-10 and 2010-
- Assessee-company made payment of certain amount to its Forwarding & Clearing agent (C&F agent) towards (i) reimbursement of freight charges paid by C & F agent to carriers and (ii) actual service charges of C&F agent - C&F agent had raised seperate bills for both these payments - Assessee had deducted TDS on payment towards bills raised for services rendered by C&F agents - Assessing Officer disallowed an amount paid towards reimbursement
of freight charges under section 40(a)(ia) on which TDS was not deducted - Whether since payment towards reimbursement of freight charges to C & F agent had no income element embedded in it, assessee was not liable to deduct tax at source on same - Held, yes [Paras 18, 22 and 31] [In favour of assessee] Circulars and Notifications : CBDT circular No. 715 dated 8-8- CASE REVIEW
DIT (International Taxation) v. Krupp Udhe GMBH [2013] 40
taxmann.com 38/219 Taxman 138 (Mag.)/354 ITR 123 (Bom.);
CIT v. Dunlop Rubber Co. Ltd. [1982] 10 Taxman 179/[1983] 142
ITR 493 (Cal.); CIT v. Industrial Engineering Projects (P) Ltd.
[1993] 202 ITR 1014 (Delhi) (para 19); GE India Technology
Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman
234/327 ITR 456 (SC)(para 21); CIT v. Kalyani Steels Ltd. [2018]
91 taxmann.com 359/254 Taxman 350 (Kar.) (para 27); Pr. CIT v.
Consumer Marketing (India) (P.) Ltd. [2015] 64 taxmann.com 16
(Guj.) (para 28) and Om Satya Exim (P.) Ltd. v. ITO [IT Appeal No.
1335 (Ahd.) of 2010, dated 13-5-2011] (para 29) followed.
CASES REFERRED TO
DIT (International Taxation) v. Krupp Udhe GMBH [2013] 40
taxmann.com 38/219 Taxman 138 (Mag.)/354 ITR 123 (Bom.)
(para 5), CIT v. Siemens Aktiongesellschaff [2009] 177 Taxman
81/310 ITR 320 (Bom.) (para 5), Pr. CIT v. Consumer Marketing
(India) (P.) Ltd. [2015] 64 taxmann.com 16 (Guj.) (para 5),
Transmission Corpn. of A.P. Ltd. v. CIT [1999] 105 Taxman
742/239 ITR 587 (SC) (para 5), GE India Technology Centre (P.)
Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR
456 (SC) (para 5), CIT v. Kalyani Steels Ltd. [2018] 91
taxmann.com 359/254 Taxman 350 (Kar.) (para 6), CIT v. Dunlop
Rubber Co. Ltd. [1982] 10 Taxman 179 [1983] 142 ITR 493 (Cal.)
(para 19), CIT v. Industrial Engineering Projects (P.) Ltd. [1993]
202 ITR 1014 (Delhi) (para 19) and Om Satya Exim (P.) Ltd. v. ITO
[IT Appeal No. 1335 (Ahd.) of 2010, dated 13-5-2011] (para 29).
Pramod Vaidya and Ms. G. Almeida , Advs. for the Appellant.
Ms. Susan Linhares , Standing Counsel and Ms. S. Pinto , Adv.,
payments made by the Assessees towards reimbursement never had any income element therein. In such circumstances, neither was there any obligation upon C&F agents to pay any income tax upon such reimbursed amounts nor was there any obligation upon the Assessees to deduct any tax at source (TDS) upon such amounts. He submits that the TDS is nothing but an alternate mode for recovery or collection of tax on income. Therefore, if no income element is involved in payments made, there is no
obligation to deduct TDS. He relies on ( i) DIT (International
Taxation) v. Krupp Udhe Gmbh [2013] 40 taxmann.com 38/
Taxman 138 (Mag.)/354 ITR 123 (Bom.); ( ii) CIT v. Siemens
Aktiongesellschaff [2009] 177 Taxman 81/310 ITR 320 (Bom.);
(iii) Pr. CIT v. Consumer Marketing (India) (P.) Ltd. [2015] 64
taxmann.com 16 (Guj); ( iv) Transmission Corpn. of A.P. Ltd. v. CIT
[1999] 105 Taxman 742/239 ITR 587 (SC) and ( v) GE India
Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/
Taxman 234/327 ITR 456 (SC), in support of his contentions.
6. Mr. Vaidya submits that the ITAT has misconstrued the CBDT Circular No. 715 dated 8-8-1995 and the interpretation of the ITAT is not in consonance with the decisions of the Karnataka
High Court in CIT v. Kalyani Steels Ltd. [2018] 91 taxmann.com
359/254 Taxman 350 and the Gujarat High Court in Consumer
Marketing (India) (P.) Ltd. ( supra).
7. Mr. Vaidya submits that there are errors apparent on the face of record of the impugned orders made by the ITAT. He points out that in this case "Jet Air Freighters" were the C&F agents and not carriers as incorrectly held by the ITAT. Besides, the ITAT noted only one of the five bills on record and therefore incorrectly concluded that the freight charges were only Rs. 1,25,272/- and the payment of Rs. 2,05,660/- had no nexus with the reimbursement of freight charges. He pointed out that in addition to this one bill, there were four other bills and the amounts therein totalled upto Rs. 2,05,660/-. 8. For all the aforesaid reasons, Mr. Vaidya submits that the first two substantial questions of law as framed in all these appeals may be answered in favour of the Assessees. 9. Ms. Linhares, learned counsel for the Revenue stresses upon the Circular No. 715 and submits that such Circular is quite clear and binding upon the Authorities under the IT Act. She submits that the view taken by the ITAT is entirely consistent with what is
set out in Circular No. 715. In particular, she makes reference to answers to Question Nos.7 and 30 in Circular No. 715 and submits that since the view taken by the ITAT is entirely consistent with the answers in Circular No. 715, there is no case made out to interfere with the impugned orders or to answer the substantial questions of law as raised in favour of the Assessees and against the Revenue, in all these appeals. She therefore submits that all these appeals may be dismissed.
10. The rival contentions now fall for our determination. 11. In order to appreciate the rival contentions, reference is necessary to the provisions in Section 4 and Section 190 of the IT Act which explain the basis of charge of income tax and the TDS regime respectively. 12. Section 4(1) provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, the income tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income tax) of, this Act in respect of the total income of the previous year of every person. Proviso to section 4(1) provides that where by virtue of any provision of IT Act, the income tax is to be charged in respect of the income of a period other than the previous year, the income tax shall be charged accordingly. 13. Sub-section (2) of section 4 of the IT Act provides that in respect of income chargeable under sub-section (1) of section 4, the income tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of the IT Act. 14. Therefore, what is important is that the income tax is a tax payable in respect of "total income" of the previous year of every person. Further, such income tax shall have to be deducted at source or paid in advance, where it is so deductible or payable under any of the provision of the IT Act. From this, it follows that unless the paid amount has any "income element" in it, there will arise no liability to pay any income tax upon such amount. Further, in such a situation, there will also arise no liability of any deduction of tax at source upon such amount. 15. Section 190 of the IT Act is to be found in Chapter XVII of the IT Act concerning the collection and recovery of tax. Sub-section
establish that separate sets of bills were invariably made towards the service charge components and reimbursement components by the Assessees to the C&F agents;
( iv) The Assessees have invariably deducted tax at source
when it comes to payment towards the first set of bills
i.e. towards the services rendered by the C&F agents
without any demur;
( v) Even in cases where composite bills were issued or
where there was any ambiguity about payment towards reimbursement components, the Assessees have deducted tax at source;
( vi) It is only in cases where separate bills were raised by the
C&F agents towards reimbursement and the freight charges, backed by proper evidence that the Assessees have not deducted any tax at source before making payments towards such reimbursement.
18. Thus, the Assessees only contend that in clear cases where separate bills have been raised by the C&F agents towards the reimbursement of freight charges, they are not liable to deduct tax at source upon payment towards such reimbursement components, since, such payment has no income element embedded in it. According to us, the Assessees' contention deserves to be upheld in the facts and circumstances of the present case. There are decided cases which support the contention of the Assessees and reference can be usefully made to some such cases.
19. In Krupp Udhe GMBH ( supra), the Division Bench of this
Court speaking through Dr. D. Y. Chandrachud, as His Lordship then was, held that the question as to whether the reimbursement of expenses will form a part of the taxable income is not res integra in so far as this Court is concerned. Reference
was then made to the decision in Siemens Aktiongesellschaff
(supra), wherein another Division Bench of this Court agreed
with the view taken by the Calcutta High Court in CIT v. Dunlop
Rubber Co. Ltd. [1982] 10 Taxman 179/[1983] 142 ITR 493 and
Delhi High Court in CIT v. Industrial Engineering Projects (P.)
Ltd. [1993] 202 ITR 1014 that the amounts by way of
reimbursement expenses do not constitute income as such and
liable to any income tax.
20. In Transmission Corpn. of A. P. Ltd. ( supra) the Hon'ble
Supreme Court held that when the Assessee makes the payment to non-residents, the Assessee is under the obligation to deduct tax at source under section 195. However, the obligation is limited only to appropriate proportion of income chargeable under the IT Act.
21. The decision in Transmission Cor. of A. P. Ltd. ( supra) was
considered by the Hon'ble Supreme Court in GE India Technology
Centre (P.) Ltd. ( supra), in which, it was held that the provisions
for deduction of TAS which are to be found in Chapter XVII dealing with collection of taxes and the charging provisions of the IT Act form one single integral, inseparable code and therefore, the provisions relating to TDS apply only to those sums which are chargeable to tax under the IT Act.
22. Based upon legal position as explained in the aforesaid decisions of the Hon'ble Supreme Court and our High Court, the Assessees' contention that there was no liability to deduct tax at source upon payments made towards reimbursement of amounts to the C&F agents, will have to be accepted. 23. The ITAT, in its impugned order dated 16-1-2015, indeed appears to have misread the bills issued by Jet Air Freighters and proceeded to incorrectly style "Jet Air Freighters" as "carriers" and not as the C&F agents. These very bills as well as other material on record very clearly establishes that Jet Air Freighters were indeed the C&F agents and it is "Jet Airways" which was the carrier in these cases. The reasoning of the ITAT is therefore vitiated by this apparent error. 24. Similarly, the ITAT once again erred in observing that the bills towards reimbursement was only in an amount of Rs. 1,25,272/- and since the Assessees had paid by cheque an amount of Rs. 2,05,660/-, this payment has no nexus with reimbursement of freight charges of the C&F agents. The record clearly bears out that in all there were five bills raised by the C&F agents towards reimbursement of freight charges and the break up of the same reads as follows :—
Date Doc No. Amount
2-5-2008 ZJV/0029/9 3268
No. 715.
29. In fact, the Gujarat High Court, referred to a previous
decision of ITAT in Om Satya Exim (P.) Ltd. v. ITO [IT Appeal No.
1335 (Ahd.) of 2010, dated 13-5-2011] and observed therein the Tribunal held after considering Circular No. 715, taken a view that when no composite bills were issued but separate bills were issued towards reimbursement of transportation charges, the Circular No. 715 was not applicable. On this basis, the High Court held that there was nothing in Circular No. 715 which required the deduction of tax at source in respect of payment made to C&F agents towards the reimbursement of transportation charges, when separate bills were raised for reimbursement claims.
30. Since, no decision of the jurisdictional High Court or the Hon'ble Supreme Court was pointed out, the ITAT in the present case, should have construed the Circular No. 715 in consonance with its construction by the coordinate Bench and in any case the High Courts of Karnataka and Gujarat. 31. For all the aforesaid reasons, we allow these appeals and answer the first two substantial questions of law, which were common to all these appeals, in favour of the Assessees and against the Revenue. 32. In view of the above, there is no necessity to consider the third substantial question of law framed in Tax Appeal Nos. 47 and 49 of 2015 and Tax Appeal No. 9 of 2016. 33. The impugned orders will now have to be modified accordingly. 34. These appeals are allowed in the aforesaid terms. There shall however be no order as to costs. Tanvi *In favour of assessee.
