IN THE ITAT MUMBAI BENCH ‘L’
Assistant Commissioner of Income-tax
versus
S.R. Brothers
IT APPEAL NO. 5361 (MUM.) OF 2003
[ASSESSMENT YEAR 2006-07]
MARCH 30, 2012
ORDER
P.M. Jagtap, Accountant Member
This appeal is preferred by the Revenue against the order of learned CIT(Appeals)-19, Mumbai dated 10th July, 2009.
2. The main issue involved in this appeal relating to deletion by the learned CIT(Appeals) of the dis allowance of Rs.50,91,541/- made by the AO u/s 40(a)(ia) is raised by the Revenue in ground No. 1 and 2 of this appeal which read as under :
1. On the facts and in the circumstances of the case and in law the Learned CIT(A) has erred in deleting the dis allowance of Rs. 50,91,541/- made by the AO u/s 40(a)(ia) on account of non deduction of TDS on air freight paid to foreign airline companies, ignoring the fact that :-
(a) the foreign airline’s income is deemed to be table in India at a prescribed rate and unless specifically exempted from the TDS provisions by the AO through an order u/s 195(2) and no such order u/s 195(2) has been produced before the A.O.
(b) the CBDT’s circular No. 723 dated 19.09.1995, which covers only shipping company and not an Airline Company.
(c) the assessee has not paid freight directly to Airlines but to different parties who act as freight booking agents.
2. On the facts and in the circumstances of the case and in law the CIT(A) erred in placing reliance on article 8 of the DTAA and did not give any opportunity to the AO on this point in violation of Rule 46A of the I.T. Rules.
3. The assessee in the present case is a partnership firm which is engaged in the business of export of gift articles and promotional items. The return of income for the year under consideration was filed by it on 11th January, 2007 declaring total income of Rs.2,05,77,160/-. During the course of assessment proceedings, it was noticed by the AO that the assessee has made payment of freight charges without deducing tax at source. In this regard, the explanation offered by the assessee before the AO was that payment of freight made by it was recovered as sale proceeds as per the invoices and only the net freight was debited to the profit & loss account which was hardly 5% of the freight and it was mostly paid to airlines or shipping companies. Relying on the CBDT Circular No. 723, it was contended that no tax at source was deductible from the payment of such freight charges. This stand of the assessee was not found fully acceptable by the AO. According to him, Circular No. 723 relied upon by the assessee was applicable only in case of shipping companies covered by section 172 of the Income-tax Act and the benefit thereof was not applicable in respect of airlines. He also noted that the assessee had not made any payments on account of freight charges directly to the airlines. The AO, therefore, was of the view that there was failure on the part of the assessee to deduct tax at source from the payment of freight charges and required the assessee to show cause as to why such freight charges should not be disallowed u/s 40(a)(ia) for its failure to deduct tax at source from the payments thereof. In reply, the following submissions were made on behalf of the assessee before the AO :
“(2) We have already submitted to your office the details of freight charges paid. In this connection, we have to submit that out of the list only 7 parties are such where payment in excess of Rs.50,000/- during the year is made. We have to state that in respect of freight paid to them, no tax was required to be deducted at source considering the provisions of double tax avoidance agreements entered into by India with these countries. We have also produced sample letters from the Airlines companies in regard to the provisions of these payments.
(3) We have to submit that the payment freight to City transport Syndicate is for shipping freight straight covered by the provisions of section 172 of the I.T. Act, 1961. We are enclosing herewith copies of sample bills of City Transport to show that it is all shipping freight.
(4) We are also enclosing herewith bill details of Air Ship Services Pvt. Ltd., D. Wamdeo and Co., Aroscan Cargo Trade Pvt. Ltd. and DHL Express Pvt. Ltd. with sample bills. You will find that all the payment is towards Air Freight to Airlines Companies registered outside India and no tax is required to be deducted on payments to them since the payments to them are covered by the provisions of Double Taxation Avoidance agreements with those countries.”
4. The above submissions made by the assessee were found to be acceptable by the AO to the extent the same was in relation to payment of freight to shipping. He, however, found that there was a payment of freight charges made by the assessee on account of air fare and road transport aggregating to Rs. 50,91,206/- to the six parties on which tax was deductible by the assessee at source. He noted in this context that the payment of such freight charges was not directly made by the assessee to airlines but the same was made to different parties who acted as freight booking agent. He also noted that the said parties had also not furnished any certificate issued u/s 197 for no deduction of tax at source. Accordingly the freight charges paid to the said parties for air fare/road transport amounting to Rs. 50,91,206/- was disallowed by the AO u/s 40(a)(ia) in the assessment completed u/s 143(3) vide an order dated 23-12-2008.
5. Against the order passed by the AO u/s 143(3), an appeal was filed by the assessee before the learned CIT(Appeals) and after considering the submissions made by the assessee as well as the details and documents furnished by the assessee, the learned CIT(Appeals) deleted the dis allowance of Rs. 50,91,541/-made by the AO u/s 40(a)(ia) for the following reasons given in paragraph No. 1.4 of his impugned order :
“I have considered the facts of this case and the submissions made. The income of Non-Resident shipping companies and Non Resident Airlines companies is covered by special provisions of section 44B and section 44BBA of the Income Tax Act, 1961, respectively. Section 44BBA was inserted later. The circular was issued by the CBDT which covered shipping companies since at that time only section 44B was in force. The principles governing Non residents shipping companies and Non Resident Airlines companies are the same and therefore the circular in my opinion should equally apply to the payments made to the Non residents Airlines companies. Moreover the Double taxation Avoidance Agreements also covers this aspect by a specific article in most of the treaties which Indian has entered into with various countries. The details of such freight paid by the appellant are as under :
Details of Freight Paid A/c.
