Case Law Details
Setting-off of sundry debtors against sundry creditors by a collection agent is not a remission of liability; withholding tax not applicable to payment for use of computer system to track freight shipments
In brief
a. Setting-off of sundry debtors against sundry creditors – not a remission of liability
In a recent decision, in the case Menlo Worldwide Forwarding India Pvt. Ltd. Vs. DCIT [2010-T11-164-ITAT-DEL-INTL](the “assessee”), the Delhi Income-tax Appellate Tribunal (the “Tribunal”) held that the recording the setting-off of sundry debtors against sundry creditors in the books would not constitute income, since the sundry creditors did not represent a trading liability and no deduction for the amount of the liability was claimed in earlier years.
b. Withholding tax not applicable to payment for use of computer system to track freight shipments
The Tribunal also held that payments made by the assessee towards fees for use of computer system for tracking freight shipments was a reimbursement of expenses and not a payment for the use of any industrial, commercial or scientific equipment. Accordingly, tax withholding and disallowance of payment under section 40(a)(i) of the Income-tax Act, 1961 (“the Act”) was not necessary.
The Tribunal also held that the provisions of section 40(a)(i) of the Act would not apply to the assessee for payments made to a non-resident in the absence of a similar provision regarding payments to residents due to the non-discrimination clause in Article 26 of the India-US tax treaty (the “tax treaty”).
Facts
a. Setting-off of sundry debtors against sundry creditors – whether remission of liability
The assessee provides transportation services. One of the billing systems used by the assessee was the ‘collect system’, under which the assessee received payment on behalf of Emery Airfreight Corporation, USA (“Emery”) from its customers in India. The assessee set-off amount payable to Emery against the amount receivable from the debtors of the Emery. The assessing officer (“AO”) taxed the amount of sundry creditors balance (i.e. the amount payable to Emery) set-off against that of sundry debtors (i.e. the amount receivable from Emery’s debtors) on the grounds that this was a remission of liability under section 41(1) of the Act.
The Commissioner of Income-tax Appeals (“CIT(A)”) held that provisions of section 41(1) of the Act would not apply since no deduction was claimed in the earlier year in relation to the amount of liability ceased. However, the CIT(A) placed reliance on the decision of the Supreme Court in the case of CIT v. TV Sundaram lyenger and Sons Ltd. [1996] 222 ITR 344 (SC) and held that the assessee’s liability reduced to the extent of the amount written-off by Emery, and accordingly, affirmed the AO’s order for treating the same as income of the assessee.
b. Payment for use of computer system to track freight shipments – whether subject to withholding tax
The assessee made a payment of fees to Emery for using its system for the tracking of freight shipments. The AO treated these as fees for technical services (“FTS”) and disallowed them under section 40(a)(i) of the Act since tax was not withheld under section 195 of the Act while remitting payment outside India.
The CIT(A) held that the payment made by the assesssee would not be treated as FTS under section 9(1)(vii) of the Act. However, the right to use Emery’s computer system for tracking its packages would constitute the use of equipment in terms of clause (iva) to Explanation 2 of section 9(1)(vi) of the Act and hence the deduction would not be allowed in view of the provision of section 40(a)(i) of the Act.
Issue
a. Whether a simple book entry for the setting-off of sundry creditors against sundry debtors by a collection agent without any credit to the profit and loss account would be deemed to be a remission of liability and thus become taxable under section 41(1) of the Act.
b. Whether payments made outside India for use of computer system for tracking freight shipments can be disallowed under section 40(a)(i) of the Act in absence of any withholding of tax under section 195 of the Act.
Assessee’s contentions
a. Setting-off of sundry debtors against sundry creditors
The assessee is a collection agent which recovers freight and sends it to Emery. The setting-off of sundry creditors against sundry debtors was not a trading liability of the assessee, nor was any deduction claimed for it or any amount credited to profit and loss account.
The amount set-off was not an income item under section 2(24) of the Act.
b. Payment for use of computer system to track freight shipments
The payment was for the reimbursement of communication expenses incurred by Emery on behalf of the assessee and was not income.
The payment was not for the use of any industrial, scientific or commercial equipment.
In terms of the non-discrimination clause under Article 26 of tax treaty, disallowing royalty payments made outside India cannot be carried out under section 40(a)(i) of the Act since the royalty payments made to resident could not be disallowed on account of non-withholding of taxes during the relevant assessment year (Note- 1).
Revenue’s contentions
a. Setting-off of sundry debtors against sundry creditors – whether remission of liability
The revenue contended that an amount which was not revenue at the time of receipt can subsequently become income for the assessee.
b. Withholding tax not applicable to payment for use of computer system to track freight shipments
The revenue contended that the assessee was liable to withhold tax on the payments and that therefore expenses would not be allowed as deductions in terms of section 40(a)(i) of the Act.
Tribunal Ruling
a. Setting-off of sundry debtors against sundry creditors not a remission of liability
The Tribunal held that merely recording the setting-off of sundry debtors against sundry creditors would not constitute income since the sundry creditors did not represent a trading liability, and no deduction for this amount had been claimed in the past.
b. Withholding tax not applicable to payment for use of computer system to track freight shipments
The Tribunal held that the payment made by the assessee was towards reimbursement for connectivity expenses and not for the use of any industrial, commercial or scientific equipment. Accordingly, no tax withholding nor dis allowance of payment under section 40(a)(i) of the Act would be necessary.
The Tribunal also held that, the provisions of section 40(a)(i) of the Act would not apply to the assessee for payment made to a non-resident, in absence of similar provision for payment made to resident in terms of non-discrimination clause in Article 26 of the tax treaty.
Conclusion
The Tribunal decision provides guidance in case of setting-off of balance sheet items without affecting the profit and loss account.
The Tribunal further held that mere use of a computer system for tracking freight shipments would not constitute use of equipment as intended by clause (iva) to Explanation 2 to section 9(1)(vi) of the Act. The Tribunal also held that no tax was required to be withheld in case of non-residents in the absence of provisions requiring withholding of tax from similar payments to residents.
Note-1
Royalty payment made to a resident without withholding of taxes is disallowed under section 40(a)(ia) of the Act after insertion of ‘royalty’ in section 40(a)(ia) w.e.f. 1 April, 2006.
