The Assistant Commissioner Vs. M/s. P.P. Overseas
I.T.A. No. 733/Mum/2010
(Assessment Year: 2006-07)
Per R.V.Easwar, President:
This is an appeal by the revenue and the same relates to the assessment year 2006-07. The assessee is a partnership firm carrying on the business of exporting spices and food stuff. The appeal arises out of the assessment order passed under section 143(3) of the Income Tax Act on 30.12.2008.
2. The first ground is as under:-
“1. (a) On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs.4,02,252/- made by the Assessing Officer?
(b) On the facts and in the circumstances of the case, the learned CIT(A) has erred in not appreciating that addition relates to C & F agency charges includes reimbursement and expenses falls under the ambit of section 1 94C of the Act.
(c) The learned CIT(A) on the facts and in the circumstances of the case and in law, erred in not appreciating the facts that clarification in view of Circular: No. 715, dated 8-8-1995 clearly states that any payment to C & F agent including reimbursement is contract.”
The brief facts in relation to the ground may be noticed. In the relevant accounting year the assessee debited Rs. 39,566/- under the head “C & F expenses”. In the course of the assessment proceedings, the assessee was required to furnish the party-wise details of the expenses and explain whether any tax was deducted at source as required by section 194C of the Act. In response to the same, the assessee submitted that C & F agency charges were paid to M/s. Vidhi Enterprises and Jayashree Shipping being their charges as agent of the assessee and that C & F expenses are reimbursement of expenses such as customs duty, food stuffing charges, DEPB licence/ miscellaneous expenses, conveyance and other charges paid. It was further submitted that considering the nature of the expenses, no tax was required to be deducted at source.
3. The Assessing Officer did not accept the assessee’s explanation. According to him the assessee’s case fell under the judgement of the Supreme Court in the case of Associated Cement Co. Ltd. Vs. CIT., 201 ITR 435 and therefore the assessee ought to have deducted the tax at source. The Assessing Officer further held that even the amounts reimbursed were subject to TDS. He also relied on the circular No.715 issued by the CBDT on 8th August, 1995 in this regard. Since the assessee had not deducted the tax from the payments, the Assessing Officer invoked section 40(a)(ia) of the Act and disallowed the total amount of Rs.4,02,252/-.
4. On appeal, the assessee also took up the plea, without prejudice, that each of the payments as agency fees was less than Rs. 20,000/- and the aggregate was also less than Rs. 50,000/- and therefore even on that ground, the assessee was not required to deduct tax under section 194C. It was contended that the assessee was not covered by the provisions of section 194C because of the judgement of the Hon’ble Bombay High Court in the case of East India Hotels Ltd. Vs. CBDT 179 Taxman 17 in which it was held that the section was not applicable to a service contract which is not specifically included in the section under Explanation III. Reliance was also placed by the assessee on the decision of the Visakhapatnam Bench of the Tribunal in the case of Mythri Transport Corporation Vs. ACIT., (2009) 124 TTJ 970, where it was held that when the risk of the main contract is not passed on to the intermediary then the provisions of section 194C do not apply.
5. The CIT(A) accepted the contention of the assessee based on the judgement of the Honourable Bombay High Court and the order of the Visakhapatnam Bench of the Tribunal and directed the Assessing Officer to delete the dis-allowance of Rs. 4,02,252/-. It is against this decision that the revenue has come in appeal.
6. We have carefully considered the facts and the rival contentions. The learned counsel for the assessee has also filed brief written submissions dated 13.11.2009. In the judgement in the case of East India Hotels Ltd. (supra), which is also reported in 320 ITR 526, the Hon’ble Bombay High Court has held as under:-
“(i) From the decision of the Apex Court in the case of Birla Cement Works Vs. CBDT (2001) 248 ITR 216 / 115 Taxman 359, it is clear that the words ‘carrying out any work’ in section 1 94C are limited to any work which on being carried out culminates into a product or result. In other words, the word ‘work’ in section 1 94C is limited to doing something with a view to achieve the task undertaken or carry out an operation which produces some results.
(ii) As illustrated in Circular No. 86 dated 29.05.1972 section 1 94C would apply to payments for carrying out the work such as constructing buildings or dams or laying of roads and air fields or railway lines or erection of installation of plant and machinery etc. In all these contracts, the execution of the contract by a contractor / sub-contractor results in production of the desired object or accomplishing the task under the contract.
(iii) From the fact that the contracts for supply of labour to carry out any work have been specifically brought within the purview of section 194C and the fact that four categories of service contracts have been specifically brought within the purview of section 194C by inserting Explanation III to section 194C,, it cannot be inferred that the services rendered by a hotel to its customers are also covered under section 194C.
(iii) It is true that the word ‘work’ in section 1 94C is not restricted to ‘works contract’ only, as held by the Apex Court in the case of Associated Cement Co.Ltd. Vs. CIT (1993) 201 ITR 345 / 67 Taxman 346. However, as held by the Apex Court in the case of Birla Cement Works (supra) the word ‘work’ in section 1 94C has to be understood in a limited sense and would extend only to the service contracts specifically included in the said section by way of Explanation III.”
The contract between the assessee and the C & F agent is a service contract which has not been specifically included in Explanation III below section 194C. In this view of the matter, the provisions of section 194C are not applicable to the payments to the C & F agents. If that is so, there was no obligation on the part of the assessee to deduct tax from the payment made to the C & F agents. Even otherwise and assuming that section 194C is applicable to the assessee and to the payments made to the five C & F agents, the payments made to M/s. Eagle Global, M/s. Sham Octrai and M/s. Jayashree Shipping were less than Rs.20,000/- each and even the aggregate payments to them was less than Rs. 50,000/-. Under sub-section (5) of Section 194C, no deduction need to be made if the amount paid to each contractor does not exceed Rs. 20,000/- or Rs. 50,000/- in the aggregate. Even on this score, the section is not applicable.
7. In respect of the remaining two agents namely M/s. Vidhi Enterprises and M/s. Sar Marine, the payments made included the payment of statutory liabilities such as customs duty, DEPB licence etc. which is actually the liability of the assessee and the receipt for the payment is issued by the concerned authority only in the name of the assessee. The C & F agents merely collected the payments from the assessee for payment to the concerned authorities. Such payments cannot be considered to be covered by section 194C as they are not for any work of the nature mentioned in Explanation III. It has been so held by the Punjab & Haryana High Court in the case of S.S.C Vs. State of Punjab, (2004) 268 ITR 398. Such payments amount to Rs. 76,643/- in the case of M/s. Sar Marine and Rs. 1,68,242/- in the case of Vidhi Enterprises. Therefore these amounts in any case are not subject to TDS, even if it is held that section 194C is applicable to the payments in question. However, it must be remembered that the basic question as to whether the payment of the nature made by the assessee are covered by the assessee are covered by Explanation III below section 194C has been answered in favour of the assessee by the judgement of the Hon’ble Bombay High Court cited above and on this ground alone the decision of the CIT(A) has to be upheld. We do so and dismiss the first ground raised by the department.
8. The second ground is as under:-
“The learned CIT(A) on the facts and in the circumstances of the case and in law, erred in directing the Assessing Officer to allow the expenditure of Rs. 4,00,529/- being premium paid on the life of partner under the Keyman Insurance Policy by misinterpreting the CBDT’s Circular No. 762 dated 18.02.1998 and failing to consider the Explanation (2) to section 10 (1 0D) of the I. T.Act, 1961, which needs to be restored.”
The brief facts in this connection are that the assessee is a firm and it had taken out key-man insurance policy on the partners of the firm. The insurance premium paid in respect of the policies was claimed as a deduction as business expenditure and they appear to have been allowed in the preceding assessment years. However, in the year under appeal, the premium was not allowed as a deduction. The CIT(A) however deleted the dis-allowance following the order of the Mumbai Bench of the Tribunal in the case of ITO Vs. Modi Motors (2009) 27 SOT 476, wherein it was held that premium paid under key-man insurance policy is allowable as a deduction in the case of partnership firm where policies are taken out on the lives of the working partners. The revenue is in appeal. We find that this issue now stands covered in favour of the assessee by the judgement of the Honourable Bombay High Court in the case of CIT Vs. B.N.Exports (2010) 323 ITR 178. Therefore respectfully following the said judgement, we confirm the decision of the CIT(A) and dismiss the ground.
9. Grounds 3 & 4 are general and require no decision.
10. In the result, the appeal filed by the department is dismissed with no order as to costs.
Order pronounced in the open court on this 18th day of February, 2011.