Section 194C TDS not applicable on terminal handling charges

DCIT Vs Keshodwala Foods (ITAT Rajkot)

The issue under consideration is whether TDS will be applicable on terminal handling charges u/s 194C?

The assessee in the present case is a partnership firm and engaged in the business of processing/export of marine food. The assessee during the year has incurred processing charges amounting to Rs. 1,98,07,861/-without deducting the TDS under section 194C of the Act. The Assessing Officer observed that such payment was made to the resident transport operator/ labour contractors to load the goods on the ships. Accordingly, the Assessee was required to deduct the tax at source under section 194C of the Act. Thus, the Assessing Officer disallowed the said claim on account of non-deduction of tax at source.

As per the circular no. 723 dated 19.09.1995 states that where the provisions of Section 172 are to apply, the provisions of Section 194C and 195 relating to tax deduction at source are not applicable. The Tribunal considered the said Circular and placed reliance on the decision laid down in the case of Deputy Commissioner of Income Tax v. Hasmukh J. Patel wherein it was concluded that where the provisions of Section 172 would apply, no deduction of tax was required under Section 194C. Therefore, the terminal handling charges paid to the non-shipping companies were covered under the provisions of section 172 of the Act. Hence, the Assessee was not liable to deduct the tax at source under the provisions of section 194C/195 of the Act.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-IV, Rajkot [Ld. CIT(A) in short] dated 16/06/2010, arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 08/12/2009 relevant to Assessment Years (A.Y.) 2007-08.

The Revenue has raised the following grounds of appeal:

1. The Ld. CIT(A)-IV, Rajkot has erred in law and on facts in deleting the addition of Rs. 1,98,07,861/- on account of processing charges.

2.  The Ld. CIT(A)-IV, Rajkot has erred in law and on facts in deleting the addition of Rs. 1,29,22,949/- on account of Terminal handling charges disallowed uls 40(ia).

3. The Ld. CIT(A)-IV, Rajkot has erred in law and on facts in deleting the addition of Rs. 26,69,502/- on account of unpaid liabilities uls 41(1).

4. The Ld. CIT(A)-IV, Rajkot has erred in law and on facts in partly deleting the addition on account of car & motor bike expenses Rs. 83452/-, telephone & postage expenses Rs. 1,15,2671- & travel & conveyance expenses Rs. 58,9201-.

5.  Any other ground that the revenue may raise before or during hearing proceedings before the Hon’ble ITA T.

6.  It is therefore, prayed that the order of the CIT-IV, Rajkot may kindly be set-aside and that of Assessing Officer be restored.

2. The 1^st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs.1,98,07,861/- towards the processing charges on account of non-deduction of TDS.

3. The facts in brief are that the assessee in the present case is a partnership firm and engaged in the business of processing/export of marine food. The assessee during the year has incurred processing charges amounting to Rs.1,98,07,861/-without deducting the TDS under section 194C of the Act. The assessee paid the charges to Shri Ramjibhai Kanjibhai Cham whereas the bills for the processing charges were raised by M/s Cham trading organization. The assessee in support of its contention for non-deduction of TDS filed two certificates issued under section of the Act for nil deduction dated 05/09/2006 for Rs.50 lakhs and 12/01/2007 for Rs.1,50,00,000/-. The assessee also claimed that the payment was made to Shri Ramjibhai Kanjibhai Cham on the instruction/authority issued by the M/s Cham trading organization.

3.1 The AO during the assessment proceedings to verify the genuineness of the expenses issued a notice under section 131 of the Act to M/s Cham trading organization wherein it was admitted that M/s Cham trading organization is not carrying out any processing activity for the assessee. It was also submitted by the representative of M/s Cham trading organization that as per the agreement the assessee has to bear only the electricity expenses for running the plant for which it has received higher charges on per kilogram basis. The AO accordingly further observed that there is no relevance of the certificate issued in the name of M/s Cham trading organization under section 197 of the Act. Thus, the claim of the assessee was not allowable as per the AO.

3.2 Besides the above, the AO also found that the assessee has defaulted in the deduction of TDS on account of processing charges paid to Shri Ramjibhai Kanjibhai as there was no certificate under section 197 of the Act in the name of such person.

3.3 Without prejudice to the above, the AO further found that the certificate has been issued under section 197 of the Act for Rs. 1.50 crores after substituting the earlier certificate issued for Rs. 50 lakhs only. Thus, the balance amount of Rs. 48,07,861/- requires to be disallowed on account of non-deduction of TDS.

4. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under:

i. Similar payment/ expenses were effected /incurred in the earlier year in the name same party but no disallowance was made in the assessment framed under section 143(3) of the Act. Similarly transaction was also made by the assessee with respect to other parties but there was no disallowance made by the AO.

ii. The premises of the processes were registered under the Marine Products Export Development Authority Rules 1972 and furthermore the name of the party was also appearing in the export invoices raised by the assessee.

iii. There was no doubt by the AO for the purchases and the quantities procured from the said party which was subsequently sold in the export market.

iv. The authorized representative of M/s Cham trading organization has accepted to have received the payment towards the plant higher charges as per the agreement. Thus, the statement suggests that there was the agreement between the assessee and M/s Cham trading organization. Furthermore, there was the clear direction by M/s Cham trading organization to make the payment to its partner as discussed above. Thus the finding of the AO is contradictory. The AO on one hand is denying the genuineness of the expenses but on the other hand admitting the fact that the assessee has paid plant higher charges.

v. There was no finding in the certificate issued under section 197 of the Act for Rs. 1.50 crores suggesting that the earlier certificate issued for Rs.50 lakhs has been substituted/cancelled/withdrawn/.

In view of the above, the learned CIT (A) deleted the addition made by the AO and allowed the ground of appeal in favour of the assessee.

Being aggrieved by the order of the learned CIT (A) the revenue is in appeal before us.

5. The learned DR before us submitted that the learned CIT (A) has given a finding that the books of accounts was not conclusive which is contrary to the provisions of law. Once it has been accepted by the authorized representative of M/s Cham trading organization that there was no processing charges received from the assessee as per the books of accounts, the same cannot be neglected.

6. On the other hand, the learned AR before us claimed that similar payment was made to the same party in the earlier assessment year which was accepted in the assessment framed under section 143(3) of the Act.

6.1 The learned AR also claimed that the goods purchased from the party were sold. As such, the sale of the goods cannot be made without the purchase. There was no doubt raised by the AO regarding the purchases and sales of the goods.

6.2 The learned AR also claimed that the TDS certificate issued for Rs. 1.50 crores was not substituted by the earlier TDS certificate as alleged by the AO.

7. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.

8. We have heard the rival contentions of both the parties and perused the materials available on record before us. There is no dispute to the fact that the premises of the processor namely M/s Cham trading organization was registered with the Marine Products Export Development Authority and the name of the processor was appearing in the invoices raised by the assessee. We also find that similar expenses were also claimed by the assessee in the earlier assessment years and there was no disallowance in the assessment framed under section 143(3) of the Act.

8.1 In the statement furnished under section 131 of the Act by the authorized representative of M/s Cham trading organization, it was clearly admitted that it has received plant hiring charges but there was no finding on such charges received by the party by the AO. Thus it is implied that the AO has accepted the plant hiring charges paid by the assessee to the party. Thus, the finding of the AO in itself is contradictory in the given facts and circumstances. Therefore we are reluctant to make any reference to such finding of the AO.

8.2 We also note that the assessee has made the payment to the partner of M/s Cham trading organization under the instruction. Merely, the payment made to third-party under the instruction of the main party cannot be ground to make the disallowance of the expenses. Furthermore, the Shri Ramjibhai Kanji bhai is representing the partnership firm in the capacity of the partner. Thus, payment to the partner cannot be a ground for making the disallowance.

8.3 We also note that there was no documentary evidence brought on record suggesting that earlier TDS certificate issued by the AO for Rs.50 lakhs was substituted by Rs.1.50 crores. Thus it is transpired that the TDS certificate issued by the AO up to Rs. 2 crores whereas the payment was made less than Rs. 2 crores. Accordingly we hold that the payment in the given case does not exceeds the limit as specified in the TDS certificate. Hence the ground of appeal of the revenue is dismissed.

9. The 2^nd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs.1,29,22,949/- towards the terminal handling charges on account of non-deduction of TDS, under section 194C r.w.s 40 (a)(ia) of the Act.

10. The assessee during the year has incurred terminal handling charges amounting to Rs.1,29,22,949/- without deducting the TDS. As per the assessee the amount of terminal handling charges incurred is part of ocean freight paid to the agents of non-resident shipping business. Such payments is governed under the provision of section 172 of the Act as clarified by the CBDT circular No. 723 dated 19/09/1995. Accordingly, the assessee claimed that it is not liable to deduct the TDS.

However the AO disagreed with the contention of the assessee by observing that such payment was made to the resident transport operator/labour contractors to load the goods on the ships. Accordingly, the assessee was required to deduct the TDS under section 194C of the Act. Thus the AO disallowed the claim of the assessee on account of non-deduction of TDS under section 194C of the Act and added to the total income of the assessee.

11. Aggrieved assessee preferred an appeal to the learned CIT (A) who has deleted the addition made by the AO by observing as under:

4.2 I have carefully considered the finding given by the Assessing Officer and the submission of the AR of the appellant. I find from the copies of debit notes raised by the shipping agents that generally two major kinds of charges are levied, freight and terminal handling charges (THC). Therefore the question is whether the entire amount of various charges mentioned in the debit notes can be said to be covered by Sec. 172 or by any other provisions of law so as to not to require the appellant to deduct tax at source. Sec. 172 regarding tax liability of shipping business of non-residents in India has been explained by the Board vide circular no. 723 dated 19-9-1995 which covers Sec. 194C, 195 and 172 and inter alia provides that since the Indian agent acts on behalf of the non-resident owner or charterer in respect of payments made to foreign shipping companies or their agents, the agent steps into the shoes of the principal and accordingly provisions of Sec. 172 shall apply to such cases and those of Sec. 194C and 195 will not apply. Sec. 172(8) lays down that for the purposes of Sec. 172, the amount referred to in sub-section (2) shall include the amount paid or payable by way of demurrage charge or handling charge or any other amount of similar nature. In the case law relied upon it is held that inland haulage charges and charges for transportation of cargo by feeder vessels from Indian port to the mother vessel where there is a link between the two would also form part of the profits from operation of ships in international traffic in various double tax agreements and are also not subject to TDS by virtue of Sec. 172. In the case of the appellant it is seen that there is no distinction anywhere or separate contracts for transport of cargo inland and overseas, unlike what is sought to be made out by the Assessing Officer. I find force in the submissions that there is a single and composite contract for transportation of export containers by the appellant with the non-resident shipping companies for which a single debit note is raised for the total work. Further, as explained in the case law cited, amount of handling charges are small percentage of total freight. I also agree with the contention that without loading and transporting the container to the ports, the same container cannot be shipped outside India and thus there is a direct connection between handling charges and freight. As the payments of both bave been made to Indian agents of foreiqn shipping companies, no TDS is required both by virtue of the explicit provisions of Sec. 172(8) read with Circular no. 723 as also the decisions of various tribunals as cited. In view of above, the disallowance of Rs.l ,29,22,949/- made by the Assessing Officer is directed to be deleted. This ground of appeal is allowed.

Being aggrieved by the order of the learned CIT (A) the Revenue is in appeal before us.

12. Both the learned DR and the AR before us relied on the order of the authorities below as favourable to them.

13. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we note that the handling charges were recovered/received by the agents of the non-shipping companies as evident from the invoice issued by them which are placed on pages 169 to 175 of the paper book. There is a Circular issued by the CBDT. The said Circular No. 723, dt. 19th Sept., 1995 states that where the provisions of s. 172 are to apply, the provisions of ss. 194C and 195 relating to tax deduction at source are not applicable. Acting on the above Circular, Tribunal, Ahmedabad Bench ‘C’ has held in the case of CIT v. Hasmukh J. Patel [2012] 49 SOT 197/[2011] 10 taxmann.com 229 (Ahd.), that where the provisions of s. 172 would apply, no deduction of tax is required under s. 194C. A Similar decision has been taken by a co-ordinate Bench of the Tribunal in the case of Asstt. CIT v. Leaap International (P.) Ltd. [2012] 50 SOT 157/[2011] 15 taxmann.com 251 (Chennai).

13.1 We also find that handling charges paid to the non-shipping companies also covered under the provisions of section 172(8) of the Act which reads as under:

^“[(8) For the purposes of this section, the amount referred to in sub -section (2) shall include the amount paid or payable by way of demurrage charge or handling charge or any other amount of similar nature.]”

13.2 The learned DR at the time of hearing has not brought anything on record suggesting that the handling charges were not paid by the assessee to the non-resident shipping companies. In view of the above, we hold that the assessee was not liable to deduct the TDS under the provisions of section 194C/195 of the Act. Hence the ground of appeal of the Revenue is dismissed.

14. The next issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs.26,69,502/- on account of unpaid liabilities under section 41(1) of the Act.

15 The assessee in its balance sheet as on 31 March 2008 has shown certain liabilities as detailed under:

15.1 As per the assessee, the aforesaid parties have supplied the goods of inferior quality, therefore the payment was not made to them. As such the matter is under the litigation.

15.2 However the AO found that these are very old creditors appearing in the books of accounts of the assessee. Furthermore the assessee has not filed any confirmation to the fact that these liabilities are still appearing in the books of accounts. Thus the AO held that these liabilities have ceased to exist in the books of accounts as per the provisions of section 41(1) of the Act. Accordingly he disallowed the same and added to the total income of the assessee.

16. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under:

5.1. I have carefully considered the finding given by the Assessing Officer and the submission of the AR of the appellant. It is seen in this regard that as far as books of accounts are concerned, it is not even the case of the Assessing Officer that the appellant has written back the same or treated them as no longer payable. The Assessing Officer has invoked Sec. 41(1) on the ground that they are old and hence beyond limitation period. In the case of one of the parties Mr. Rafiq, the A.R. presented confirmation that the same has been paid off by means of account payee cheque after assessment whereas in other case the amount is yet unpaid. In this regard, I find that Sec. 41 (1) nowhere provides that time barred liabilities are covered by it as deemed income. Sec. 41 (1) is a deeming fiction and hence it should be construed strictly as per its plain language. In various cases relied upon, High Courts and Tribunals have clearly held that no addition can be made u/s 41 (1) on the ground of expiry of limitation and when the appellant is showing the amount is payable and has not written back the same, it cannot be said to have ceased to exist. In the case of C.I.T. vs Office of the Official Liquidator 316 ITR 181, the Hon’ble Gujarat High Court has held that mere withdrawal of Court cases and submission of dispute to arbitration would not amount to cessation of liability so as to attract Sec. 41 Cl). Considering the material on record and the aforesaid decisions relied upon, the addition of Rs.26,69,502/- made by the Assessing Officer is directed to be deleted. This ground of appeal is allowed.

Being aggrieved by the order of the learned CIT (A) the revenue is in appeal before us.

17. Both the learned DR and the AR before us relied on the order of the authorities below as favourable to them.

18. We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute about the fact that the liability shown by the assessee has not ceased to exist in its books of account and the same is very much reflected in its balance sheet. Therefore, in our considered view, the same cannot be added to the total income of the assessee u/s 41(1) of the Act until and unless it is not written off in the book of accounts. In this regard, we find support and guidance from the order of Hon’ble ITAT in the case of Opto Audio Electronics Products Pvt. Ltd. Vs. ITO in ITA No.592/Kol/2008 for the A.Y 2002-03 vide order dated 25.05.2012 wherein it was held as under:

“4. We have heard the rival contentions and gone through facts and circumstances of the case. We find that assessee has disclosed sundry creditors to the extent of Rs.15,34,818/- as on 31.03.2002. The AO required assessee to file complete name and addresses and on the given address notice issued by AO u/s 133(6) of the Act returned unserved. According to AO, as assessee is unable to prove the liability he added a sum of Rs.2,78,261/- as bogus liability on account of cessation of liability without mentioning provision of section 41(1) of the Act. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO. Aggrieved, now assessee is in appeal before us. We find that it is not the case of revenue that it is a case of existing liability and assessee has not made any write off of all liabilities in its books of accounts and it is a fact that the sundry creditors are carried forward from earlier years and not arising or accrued during the relevant assessment year. In such circumstances whether AO can make addition on account of cessation of liability whether the same exists or not as per the books of accounts of accounts the liability exists and he has not made any write off of the same. Once the liability exists in the books of assessee and the creditor has right to claim over the same as per law, AO could not make addition on account of cessation of liability by invoking provision of section 41(1) of the Act. This issue has been settled by the Hon’ble Apex Court in the case of CCIT Vs. Kesaria Tea Co. Ltd. (2002) 254 ITR 434 (SC), wherein it is held that provision made towards purchase tax liability was allowed in earlier years and such provision was written back in a subsequent year under the impression that the dispute as to purchase tax liability was finally settled with the dismissal of the special leave petition in some other case, even though other issues bearing on the eligibility of purchase tax still remained. On these facts, it has been held that the unilateral act on the part of the assessee by way of writing off the liability in its accounts did not necessarily mean that the liability ceased in the eye of law. Hence, the provisions of section 41(1) were not attracted. Hence, respectfully following the judgment of Hon’ble Apex Court and going through the facts of the present case, we are of the view that once the assessee has not made any write off of creditors in its books of accounts, the amounts cannot be treated as cessation of liability u/s.41(l) of the Act. Hence, we allow this issue of assessee’s appeal.

5. Similar are the circumstances in the case of cessation of liability of M/s. ARC Infotech Private Limited amounting to Rs.95,610/-. As the assessee could not substantiate the sundry creditor ARC Infotech Private Limited which was outstanding as on 31.03.2002 the AO made the addition but assessee has never made any write off of this liability in its books of account. Similar are the facts in the present issue as in the above issue of sundry creditors, hence taking a consistent view we delete this addition.

6.  As regards to the liability of Rs.54,918/- on account of commission payable to Shri Narendra Kumar Duggar, it is also a fact that this liability is outstanding and it pertains to financial year 1997-98 relevant to A.Y.1998-99 and this liability does not pertain to the relevant assessment year 2002-03. The facts are exactly identical to the facts of the first issue of sundry creditors. Hence taking a consistent view, we delete this addition.”

18.1 We also find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of PCIT Vs. Matruprasad C. Pandey reported in 377 ITR 363 wherein it was held as under:

“However, it is required to be noted that as such those sundry creditors mentioned in the balance sheet of the assessee were shown as sundry creditors since past several years from the relevant assessment year and at no point of time earlier the Assessing Officer doubted the creditworthiness and/or identity. In any case the addition on the aforesaid ground under Section 41(1) of the Act cannot be made unless and until it is found that there was remission and/or cessation of the liability that too during the previous year, relevant to the assessment year in question, there cannot be any addition invoking the provision of Section 41(1) of the Act.”

In view of above, we hold that there cannot be any income on account of cession of liability which has not been written back by the assessee in its books of accounts. Hence we do not find any infirmity in the order of the learned CIT (A).

Hence the ground of appeal of the revenue is dismissed.

19. The last issue raised by the revenue is that the learned CIT (A) erred in partly deleting the addition made by the AO for Rs.2,57,639/- on account of certain expenses.

20. The AO during the assessment proceedings has observed that the personal use out of travelling and conveyance expenses, telephone and postage expenses, and motorcycle maintenance expenses cannot be ruled out. Accordingly the AO on estimated basis disallowed such expenses to the tune of 10% amounting to Rs. 515639.00 and added to the total income of the assessee.

21. Aggrieved assessee preferred an appeal to the learned CIT (A) who restricted the disallowance to the tune of 5% of the expenses claimed by the assessee.

Being aggrieved by the order of the learned CIT (A) the Revenue is in appeal before us.

22. Both the learned DR and the AR before us relied on the order of the authorities below as favourable to them.

23. We have heard the rival contentions of both the parties and perused the materials available on record. Considering the nature of the business of the assessee and past history, we feel that the disallowance to the extent of 5% as restricted by the learned CIT (A) is reasonable. Accordingly, we do not want to disturb the finding of the learned CIT (A). Moreover, the learned DR at the time of hearing has not brought anything on record contrary to the finding of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed.

24. In the result, the appeal of the Revenue is dismissed.

This Order pronounced in Open Court on  28/02/2020