Case Law Details
Shanmugar Services Vs ITO (ITAT Chennai)
As per the provisions of Sec.194C of the Act, any person responsible for making payment for any services needs to deduct TDS on such payment at the prescribed rate. From the plain reading of Sec.194C of the Act, it is abundantly clear that the person who makes payment is required to deduct TDS on such payment, whether the person makes the payment for himself or on behalf of the third party. In this case, the assessee is a Custom House Agent has made payment to CFS Agents on behalf of its customers and claimed that payment is in the nature of reimbursement of expenses and thus, outside the scope of Sec.194C of the Act. We do not find merits in the arguments of the assessee, because as per Sec.194C of the Act, it is abundantly clear that a person, who makes payment is required to deduct TDS and thus, we are of the considered view that there is no merit in the arguments of the assessee that payments made to CFS Agents, is outside the scope of Sec.194C of the Act.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These two appeals filed by the assessee are directed against the order passed by the Commissioner of Income Tax (Appeals)-2, Chennai, dated 01.03.2017 and pertains to assessment years 2009-10 & 2010-11. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order.
2. The assessee has, more or less, raised common grounds of appeals for both the assessment years. Therefore, for the sake of brevity, grounds of appeal for the AY 2009-10, are re-produced as under:
1. The Learned Commissioner of Income Tax (Appeals) erred in confirming the order of Assessing Officer upholding disallowance under section 40 (a) (ia) for non-deduction of TDS on reimbursement of Transport charges aggregating to Rs.31,59,665/- and CFS charges paid aggregating to Rs.24,01,000/-.
2. The Learned Commissioner of Income Tax (Appeals) failed to note that the Assessing Officer has not properly carried out the directions of the Hon’ble ITAT in ITA No.1873/2012 and 190/2012 dated 18/4/2013.
3. The Commissioner of Income Tax (Appeals) ignored the law laid down by courts of law that Transport charges and CFS charges paid before the end of relevant previous year cannot be disallowed in terms of section 40 (a) (ia) for non-deduction of Tax at source. (“Paid”/ payable”).
4. The Commissioner of Income Tax (Appeals) erred in holding that Assessee had admitted that shortfall in TDS is paid in the next Financial Year ignoring submissions made to the contrary in the fresh assessment (under appeal) in giving effect to the order of Hon’ble ITAT.
5. The Commissioner of Income Tax (Appeals) ignored to properly deal with the objection raised by Assessee that provisions of section 40 (a) (ia) are not applicable to reimbursement of Transport charges and CFS charges paid before the end of relevant previous year.
6. The Commissioner of Income Tax (Appeals) ignored the detailed objections raised against invoking section 40 (a) (ia) for the disallowance but confirmed the disallowance merely on wrong impression set out in the order in appeal that Assessee had admitted that no TDS is effected in respect of Transport charges and CFS charges paid.
7. The Commissioner of Income Tax (Appeals) failed to deal with detailed evidence furnished in paper book form that the entire transport charges and GFS charges were paid before the end of relevant previous year based on judgment, of Hon’ble Supreme Court in the case of Vector Shipping Services (P) Ltd.,
8. The Commissioner of Income Tax (Appeals) ignored the submissions of Appellant that no TDS need be effected on mere reimbursement of transport charges paid and CFS charges paid and ignoring several cases furnished in paper book form to Commissioner of Income Tax (Appeals).
9. The Commissioner of Income Tax (Appeals) ignored the recent amendment made to section 201 and Rule 26 A (of IT Rules) that if payee has paid tax, no disallowance under section 40 (a) (ia) is possible in the assessment of the Appellant (Deductor).
10. For these grounds and for such other grounds that appellant may raise during the hearing of the appeal, the Hon’ble Tribunal may consider the issues raised in this appeal.
3. The brief facts of the case are that the assessee firm is a Custom House Agent, filed its return of income for the assessment year 2010-11 on 02.11.2010 admitting total income of Rs.12,56,176/-. During the course of assessment proceedings, the AO noticed that the assessee has paid CFS charges of Rs.62,91,518/- at Madras Port & Tuticorin Port to 18 parties including M/s.Shipping Agencies Pvt. Ltd. The assessee has deducted TDS u/s.194C in respect of payment made towards CFS charges at Tuticorin Port. However, has not deducted TDS on payment made towards CFS charges at Chennai Port. The assessee claimed that payments made at Chennai Port, are not covered u/s.194C of the Act, because there is no agreement between the assessee and the recipients. The AO did not accept the arguments of the assessee and according to the AO, when the assessee deducted TDS on payment made for CFS charges at Tuticorin Port, then there is no reason for the assessee not to deduct TDS on payments made at Chennai Port, even though, nature of payments are one and the same. Therefore, the AO disallowed payments made towards CFS charges for Rs.24,01,000/- u/s.40(a)(ia) of the Act for non-deduction of TDS u/s.194C of the Act. The assessee carried the matter in appeal before the First Appellate Authority, but could not succeeded. The Ld.CIT(A), for the reasons stated in his appellate order dated 01.03.2017, sustained the additions made by the AO and rejected the ground taken by the assessee.
4. The Ld.AR for the assessee submitted that the Ld.CIT(A) erred in not appreciating the fact that the assessee is not required to deduct TDS on payments made towards CFS charges, because said payments are in the nature of reimbursement of expenses, which is outside the scope of provisions of Sec.194C of the Act. The assessee had also made an alternative argument without prejudice to the above argument and submitted that, if at all, disallowance is required to be made u/s.40(a)(ia) of the Act, then only 30% of total expenditure incurred by the assessee without deduction of TDS, has to be made, because, the amendment made to provisions of Sec.40(a)(ia) of the Act by the Finance Act, 2010, is held to be retrospective in nature and apply to the assessment years w.e.f. AY 2005-06, when the provision was inserted to the statute. In this regard, relied upon the decision of the Hon’ble Supreme Court in the case of CIT v. Calcutta Export Co., reported in [2018] 93 taxmann.com 51 (SC).
5. The Ld.DR, on the other hand, submitted that the first arguments of the assessee that payment made by the assessee is outside the scope of Sec.194C of the Act, is devoid of merits, because as per provisions of Sec.194C of the Act, which is the responsibility of the person who makes payment and thus, when the assessee has made the payment on behalf of its customers to CFS agents, then the assessee shall deduct TDS on said payments. Therefore, he submitted that since the assessee has failed to deduct TDS u/s.194C of the Act, the AO has rightly disallowed expenses u/s.40(a)(ia) of the Act and thus, his orders should be upheld.
6. As regards, the second argument of the assessee that if at all, payment is required to be disallowed, then only 30% of expenses, which is not subject to TDS, needs to be disallowed. The Ld.DR fairly agreed that if at all, statute requires 30% of disallowance, then the AO may be directed to examine and allow relief accordingly.
7. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered the provisions of Sec.194C of the Act and provisions of Sec.40(a)(ia) of the Act. As per the provisions of Sec.194C of the Act, any person responsible for making payment for any services needs to deduct TDS on such payment at the prescribed rate. From the plain reading of Sec.194C of the Act, it is abundantly clear that the person who makes payment is required to deduct TDS on such payment, whether the person makes the payment for himself or on behalf of the third party. In this case, the assessee is a Custom House Agent has made payment to CFS Agents on behalf of its customers and claimed that payment is in the nature of reimbursement of expenses and thus, outside the scope of Sec.194C of the Act. We do not find merits in the arguments of the assessee, because as per Sec.194C of the Act, it is abundantly clear that a person, who makes payment is required to deduct TDS and thus, we are of the considered view that there is no merit in the arguments of the assessee that payments made to CFS Agents, is outside the scope of Sec.194C of the Act. We further noted that the very same issue is covered by the decision of ITAT, Chennai, in the case of M/s. Prahari Agency Pvt. Ltd. v. ITO in ITA No.1701/Chny/2018 vide order dated 20.10.2001, wherein, the Tribunal had considered identical issue of payment made by custom house agent to CFS agents and held that provisions of Sec.194C of the Act, is applicable when the Custom House Agent makes payment to CFS Agents. The relevant findings of the Tribunal are as under:
9. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee is in the business of clearing agent, has rendered services to their clients and made direct payment to shipping companies/CFS Agents for services rendered to their clients. The assessee has raised bills to his clients in two parts, (i) a bill for service charges towards services rendered by them along with other payments (ii) a debit not for reimbursement of other charges paid by the assessee on behalf of their clients as an intermediary for the clients and which are backed by specific invoices raised by service providers to their clients. The assessee has not deducted TDS on payments made to shipping companies/CFS Agents on behalf of their clients. The assessee contended that payments made to shipping companies/CFS Agents is in the nature of reimbursement of expenses without any element of profit and thus same cannot be brought within the TDS provisions and consequently, no disallowance can be made u/s.40(a)(ia) of the Act.
10. We have gone through reasons given by the AO to disallow payments made to shipping companies/CFS Agents u/s.40(a)(ia) of the Act, in light of the arguments advanced by the ld. AR for the assessee and we ourselves do not in agreement with arguments advanced by the Ld. AR of the assessee for the simple reason that payment made by the assessee to shipping companies/CFS Agents is not a reimbursement of expenses, but first hand payment between principal to principal on the bill raised by the shipping companies and CFS. No doubt, the assessee has made payment on behalf of their clients for bills raised by shipping companies/CFS Agents and further, the services rendered by the shipping companies/CFS Agents is for their clients. But, what is important is who made payments to service providers and what law say about TDS provisions. The concept of TDS provisions was introduced to withhold tax on income of service providers. As per provisions of section 194C of the Act, it is abundantly clear that any person responsible for paying any sum to any resident for any work. That means while making payment, the person responsible for making payment shall deduct TDS as per law. Generally, the service receiver shall deduct TDS on payments made to service providers. In this case, the assessee acts an intermediary between service provider and service receiver. The assessee has availed services from shipping companies/CFS Agents for their clients and made payments directly to shipping companies/CFS Agents. The assessee has taken responsibility of making payment on behalf of their clients. Therefore, as per law while making payments the person who makes the payments should deduct TDS on such payments. In this case, since, the assessee has availed services for their clients and also payments have been made by the assessee directly to the shipping companies/CFS Agents. Therefore, in our considered view, the assessee ought to have deducted TDS on such payments. The arguments of the assessee that if at all tax has to be deducted, it shall be deducted by its client but not the assessee is also not correct, because, service provider does not have had an occasion to deduct TDS. In fact, payment made by the assessee to shipping companies is reimbursement in the hands of the clients and thus, there may be no occasion for the recipient of services to withhold tax on such payments. The concept of reimbursement of expenses will come into operation only when someone made payments on behalf of the assessee and assessee reimburse such expenditure. In this case, it is not so. In fact, the assessee has made payments on behalf of their clients and thus it is reimbursement for their client. In our view, the assessee being a payer directly to the shipping companies/CFS Agents ought to have deducted TDS while making the payment although such payments was made on behalf of their clients. Therefore, we are of the considered view that there is no merit in the arguments of the assessee that payments made to shipping companies/CFS Agents is in the nature of reimbursement for which TDS liability cannot be pinned on the assessee. In the present case, since, the assessee has made payments on behalf of their clients, it should have deducted TDS on such payments, while making payments. The assessee being payer fails to deduct tax on the pretext that the payment is only a reimbursement and the tax has to be deducted by the end user which is practically not possible, because the payment is directly made by the assessee. If you accept the arguments of the assessee, then the purpose of legislature is defeated and the intend to subject the contract payment to deduction of tax at the point of payment is defeated by arranging transaction in such a manner that the purpose is defeated. It is also important to note that it is the assessee who has booked the expenditure towards container storage charges on payment to shipping companies/CFS Agents and debited in their books of accounts. Similarly, the assessee has received charges from its clients including amount paid to shipping companies/CFS Agents and the same has been credited to its P&L a/c when it had received payments from its clients. Therefore, we are of the considered view that payments made by the assessee to shipping companies/CFS Agents is not a reimbursement of expenses, but first hand payment between principal to principal on the bill raised by the service providers. Since, the assessee has made payment on behalf of their customers; the assessee ought to have deducted TDS on such payments while making payments. Since, the assessee has failed to deduct TDS, on such payments the AO is right in disallowing such payments u/s.40(a)(ia) of the Act. Hence, we confirm additions made by the AO.
In this view of the matter and consistent with view taken by the coordinate Bench, we are of the considered view that payment made by the assessee to CFS Agents is covered u/s.194C of the Act and thus, for non-deduction of TDS on such payments, the AO has rightly disallowed expenses u/s.40(a)(ia) of the Act.
8. Coming back to alternative arguments of the assessee. The assessee has made an alternative argument in light of decision of the Hon’ble Supreme Court in the case of CIT v. Calcutta Export Co.(supra) and according to the assessee, amendment made by the Finance Act, 2010 to the provisions of Sec.194C of the Act, is curative in nature and it should be given retrospective operation from the date of insertion of the said provision i.e. w.e.f. Assessment Year 2005-06. The Ld.AR for the assessee claimed that if at all, payment is required to be disallowed, then only 30% of expenses needs to be disallowed, but not the total amount paid by the assessee without deduction of TDS. We find that the provisions of Sec.40(a)(ia) of the Act, has been amended from time to time to give relaxation to the assessee for not complying with TDS provisions. The said amendments have been considered by various Courts, including the Hon’ble Supreme Court in the case of CIT v. Calcutta Export Co., and held that amendment made by the Finance Act, 2010 to provisions of Sec.40(a)(ia) of the Act, is curative in nature and should be given retrospective operation from the date of insertion of the provision i.e. w.e.f. AY 2005-06. Since, provisions of Sec.40(a)(ia) of the Act, has been amended so as to disallow 30% of any sum payable on which tax is deductible at source under Chapter-XVIIB and such tax has not been deducted or after deduction, has not been paid on or before the due date specified in sub-sec.(1) of sec.139 of the Act, and such amendment is held to be retrospective in nature and applicable from AY 2005-06. Therefore, we are of the considered view that only 30% of expenses incurred by the assessee without TDS should be disallowed u/s.40(a)(ia) of the Act. Hnce, we direct the AO to restrict the disallowance of payment made to CFS Agents without deduction of TDS @30% of such payments.
9. In the result, the appeal filed by the assessee in ITA No.1136/Chny/2017 for the AY 2009-10 is partly allowed.
ITA No.1137/Chny/2017 for the AY 2010-11
10. The facts and issues involved in this appeal are identical to the facts and issues which we had considered in ITA No.1136/Chny/2017 for the AY 2009-10. The reasons given by us in the preceding paragraphs shall mutatis mutandis apply to this appeal, as well. Therefore, for similar reasons, we hold that provisions of Sec.194C of the Act, is applicable for impugned payments made to CFS Agents. However, in respect of the second arguments of the assessee that only 30% of impugned expenses shall be disallowed u/s.40(a)(ia) of the Act, we find that a similar issue has been decided by us for the AY 2009-10. Hence, we direct the AO to disallow 30% of payments made to CFS Agents without TDS.
11. In the result, the appeal filed by the assessee in ITA No.1137/Chny/2017 for the AY 2010-11 is partly allowed.
12. In the result, the appeals filed by the assessee in ITA Nos.1136 & 1137/Chny/2017 for the AYs 2009-10 & 2010-11 are partly allowed.
Order pronounced on the 22nd day of March, 2022, in Chennai.
