Draft submission regarding applicability of section 194C , 195 and disallowance u/s 40(a)(ia) with regard to payment made to Non resident shipping companies

Addition of Rs.4,61,811/- u/s 40(a)(ia) of the Income Tax Act for failure to deduct tax at source. This relates to AY 2007-08

The facts are that during the course of assessment proceedings, it was noticed that the appellant had imported zinc scrap from UAE and Singapore. On a perusal of sale agreement, it was found that there was an agreement between the foreign seller and the appellant that sale proceeds will be on CIF basis. It was also agreed upon that for transportation upto NHAVA SHAVA Port, Mumbai  the expenses would be borne by the foreign seller. However, expenses on account of transportation of scrap from NHAVA SHAVA Port upto Delhi and onwards were to be borne by the appellant as per the agreement. For this purpose, the appellant hired the services of Saturn Ship Agency Pvt. Ltd. and IAL Container Line (India) Ltd., New Delhi . The total amount incurred by the appellant on account of payment to these parties amounted to Rs.4,61,811/-. Since the appellant did not deduct tax at source, the AO invoked provision to Section 40(a)(ia) and disallowed the amount paid.

During the appellate proceedings, the appellant stated the following against the addition made by the AO:

“Goods are being imported from Dubai and Singapore during the year under consideration. The imported material first reaches the Bombay port which is known as NHAVA SHAVA. It is the duty of the foreign supplier to get the goods reach the Bombay port. No freight charges are borne by the assessee upto the delivery of the goods at the NHAVA SHEVA port. Even from Bombay goods came by Railway at Delhi. This arrangement is made by the shipping agency viz. Saturn ship Agency Pvt. Ltd. New Delhi And IAL Container Line(India) Ltd. New Delhi. Every expense is borne by these shipping agencies for safe transportation of the goods from Mumbai port to Delhi. Entire expenses borne by the shipping agency are billed to the assessee. The complete detail of the expenses is specified in the bill raised by the shipping agency. A separate sheet is enclosed for the detail of these expenses. The expenses incurred for the safe delivery of the goods lifting from Mumbai Port to the Delhi are given to the shipping agency by the assessee. The transportation charges for lifting the material from Delhi to ultimate destination Faridabad are made by the assessee directly to the transporter.

The assessee has imported the material from Singapore and Dubai through two shipping viz. Saturn Ship Agencies Pvt. Ltd. And IAL Containership (India) Ltd. .”

“Moreover the shipping company and its agent in India is not assessed to Income Tax. In this regard a certificate issued from Income Tax Department, Government of India Dated 27.03.2008 is submitted as sample. These shipping Companies are not assessed to tax in India. M/s IAL Container Line (UK) through its agent M/s IAL Container Line (India), 4th Floor, Darragh Small Centre, W.Islard, Kochi-682 003 is not assessed to tax in India. In the same way Saturn Container Line PTE Limited is not assessed to tax in India. Circular No. 723 Dated 19.09.1995, is followed in this regard.”

Circular No. 723 dated 1995 reads  as under:

1. Representation have been received regarding the scope of sections 172, 194C and 195 of the Income-Tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.

2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non- resident, which carries analysis of the provision of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non- resident, undertakes from any port in India. Section 172 is a self- contained code for the levy and recovery of the tax, ship-wise, and journey wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.

3. The provisions of section 172 are to apply, not withstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.

4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any “resident” (termed as contractor). It is clear from the section that area of operation of TDS is confined to payments made to any “resident”. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.

5. There would, however, be cases where payments are made to shipping agents of nonresident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply.”

Observations of the Ld. CIT (A) , Faridabad on the issue of section 194C and 195 as far as payment to Non resident shipping companies are concerned without deduction of TDS not attracting disallowance u/s 40(a)(ia) .

 I have considered the facts of the case, the detailed submissions of the appellant along with the material available on record. The AO disallowed payment amounting to Rs.4,61,811/- u/s 40(a)(ia), since he held that the payment made to Saturn Ship Agency Pvt. Ltd. and IAL Containership (India) Ltd. attracted TDS u/s 194C of the Income Tax Act. The AO thus concluded that by not deducting TDS, the appellant violated provisions of section 194C resulting in disallowance of payment made to these parties to the tune of Rs.4,61,811/-. During the appellate proceedings, the appellant drew attention towards Circular 723 as per which payment made to shipping agents of non- resident ship owners or charteres for carriage of passengers etc. shipped at a Port in India did not attract provision of Section 194C and 195 of the Income Tax Act. In addition, the appellant gave a certificate issued by ITO International Tax-I, Kochi Office of ADI (International) Tax, C.R. Building, 15 Press Road, Kochi, Kerala as per which M/s IAL Containership (India) Ltd. was the Indian agent of the non-resident company, M/s IAL Containership (UK) Ltd. having its place of effective management in United Kingdom. The certificate further goes to add the income earned by way of shipping business by the non-resident company is not taxable in India as per Article 9 of the Double Taxation Avoidance Agreement between India and United Kingdom. Hence, on the basis of the certificate issued by ITO (IT-1, Kochi), the appellant has been able to substantiate the fact that M/s IAL Containership (India) Ltd. is the agent of the non-resident company. If we read this certificate along with Circular 723 issued by the CBDT, it becomes amply clear that section 194C is not applicable in case of payments made to M/s IAL Containership (India) Ltd. However, the appellant has not been able to give corresponding corroborative evidence in case of M/s Saturn Ship Agencies Pvt. Ltd., as a result of which it is held that the disallowance u/s 40(a)(ia) made by the AO to the extent of payments made to M/s Saturn Ship Agencies Pvt. Ltd. was correctly made and hence the same is upheld. Thus, the appellant gets partial relief on this issue.

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Qualification: LL.B / Advocate
Company: S.K.Jain & Co.
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I am S.K.Jain , Tax Consultant cum Advocate practising in Income Tax , GST , Company Matters . The name of the concern is S.K.Jain & Co. and I am prop. of this concern . I am in practice for the last 30 years . Those who have joined the profession recently and want to discuss on the particular i View Full Profile

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