IN THE ITAT MUMBAI BENCH ‘L’
Assistant Commissioner of Income-tax
IT APPEAL NO. 5361 (MUM.) OF 2003
[ASSESSMENT YEAR 2006-07]
MARCH 30, 2012
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.
|Name of Party||
|Type of Bills||Payment Made||Country|
|Airship Services (I) Pvt. Ltd.||
|Air Way Bill||Singapore Airlines Cargo||Singapore||Exempt under Article 8 of DTAA|
|Air Way Bill||Emirates Sky Cargo||U.A.E.||Exempt under Article 8 of DTAA|
|Air Way Bill||Swiss World Cargo||Switzerland||Exempt under Article 8 of DTAA|
|Air Way Bill||Gulf Air Company G.S.C.||Bahrain||Exempt under Article 8 of DTAA|
|City Transport Syndicate Pvt. Ltd.||
|Shipping Bill||City Transport Syndicate Pvt. Ltd.||Doha/Qatar||Exempt Under Circular|
|Shipping Bill||PEE Express Ltd.||London UK||Exempt Under Circular.|
|Aroscan Cargo Trade Pvt. Ltd.||
|Air Way Bill||Gulf Air Company G.S.C.||Bahrain||Exempt under Articles 8 of DTAA.|
|Air Way Bill||Singapore Airlines Cargo||Singapore||Exempt under Articles 8 of DTAA.|
|Air Way Bill||Airways||U.A.E.||Exempt under Articles 8 of DTAA|
|DHL Express (I) Pvt. Ltd.||
|Air Way bill||DHL Express Cargo||China||Exempt under Articles 8 of DTAA|
|Octroi Bill||Kesar Octroi Services||No TDS on Octroi|
|Octroi Bill||Satguru Octroi Service||No TDS on Octroi.|
Considering this legal position and also the decision of Delhi High Court cited by the appellant, I find no reason to disallow the freight payment on account of non deduction of tax at source. The appellant has in a tabular form given as to how each of the payment is not to be subjected to the TDS. I am in agreement with the contentions of the appellant in his written submissions and accordingly delete the dis allowance of Rs.50,91,541.34. This ground of appeal is allowed.”
6. We have heard the arguments of both the sides and also perused the relevant material on record. As rightly submitted by the learned DR, one of the reasons given by the AO for making dis allowance u/s 40(a)(ia) was that the payment of freight charges was made by the assessee on account of air fare and not shipping charges and even the said air fare was not directly paid to the airlines but the same was paid to the different parties who acted as freight booking agents. As per the details furnished by the assessee for the fist time before the learned CIT(Appeals), the said payment, however, was shown to be made in some cases directly to the airlines and all these payments were held to be exempt by the learned CIT(Appeals) relying on Article 8 of the Double Tax Avoidance Treaty as well as in some cases relying on the CBDT Circular. He, however, has not given any reason or basis to show as to how the said payments were exempt either under the relevant tax treaties or under the Board’s circular. No opportunity was also given by him to the AO to examine the various details and documents filed by the assessee for the first time before him before giving relief to the assessee relying on the said details and documents. As rightly submitted by the learned DR, the payments were made to different parties from different countries and the applicability of Article 8 in case of each party was required to be examined in the light of different treaties applicable to the respective party. On page No. 3 of his impugned order, the learned CIT(Appeals) has also noted the submission of the assessee of having enclosed in some cases certificates issued u/s 197 for non deduction of tax by the Department which again is contrary to the finding given by the AO on page No. 4 of the assessment order that no certificate for non deduction of tax at source issued u/s 197 was furnished by any of the six parties to whom freight charges were paid by the assessee. Having regard to all these facts of the case, we consider it fair and proper and in the interest of justice to set aside the impugned order of the learned CIT(Appeals) giving relief to the assessee on the issue under consideration and restore the matter to the file of the AO for deciding the same afresh after taking into consideration the details and documents furnished by the assessee for the first time before the learned CIT(Appeals). Needless to observe that the AO shall afford proper and sufficient opportunity of being heard to the assessee before deciding this issue in the set aside proceedings.
7. In the result, the appeal of the Revenue is treated as allowed for statistical purposes.