Case Law Details
DCIT Vs Nirma Limited (ITAT Ahmedabad)
Introduction: The Income Tax Appellate Tribunal (ITAT) Ahmedabad recently upheld the decision in favor of Nirma Limited, dismissing the appeal filed by Revenue. The dispute centered around the nature of payments made by Nirma Limited for vessel damage, with the ITAT ruling that the payments were reimbursements and of a capital nature, not falling under Section 5(2) of the Income Tax Act.
Background: The case, DCIT Vs Nirma Limited, was brought before the ITAT Ahmedabad following an order dated 10.04.2023 passed by the Ld. Commissioner of Income Tax (Appeals)-12, Ahmedabad, arising from the order dated 03.10.2017 by the DCIT (Intl. Taxn.)-1, Ahmedabad under Section 195(2) of the Income Tax Act for the Assessment Year 2018-19.
Key Points of the Case:
Payment Details and Application Under Section 195(2): Nirma Limited, being an Indian Company, applied under Section 195(2) of the Act to determine the tax liability on the remittance of USD 4,50,000 to Titan Shipping Limited, Marshal Islands, for damage charges related to vessels.
AO’s Observation and TDS Deduction: The Assessing Officer (AO) observed that the payment fell under Section 5(2) of the Act, and since there was no Double Tax Avoidance Agreement (DTAA) between India and Marshal Islands, TDS @20% was directed under Section 195 of the Act.
Assessee’s Appeal and Arguments: Nirma Limited appealed the decision, arguing that the agent, acting on behalf of the non-resident owner, falls under Section 172 of the Act. The company presented Circular 723 issued by CBDT dated 19.09.1995, supporting the applicability of Section 172. Additionally, the company claimed that the payments were reimbursements and capital in nature.
Settlement Deed and Nature of Payments: The settlement deed revealed that the damages claimed were for physical damage sustained by the vessel, injuries to the crew, damage to port infrastructure, and losses incurred. The Ld. CIT(A) found these payments to be reimbursements and capital in nature.
Ld. CIT(A) Decision and ITAT Upholding: The Ld. CIT(A) quashed the order under Section 195 of the Act, and the ITAT upheld this decision. It concurred that the payments were not within the purview of Section 5(2) of the Act, and the direction to deduct TDS on such payments was incorrect.
Conclusion: The ITAT Ahmedabad’s decision in the case of DCIT Vs Nirma Limited reaffirms the nature of payments for vessel damage as reimbursements and capital in nature, leading to the dismissal of the Revenue’s appeal. This outcome provides clarity on the tax treatment of such payments and highlights the importance of considering the specific provisions of the Income Tax Act in such cases.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The instant appeal and cross objection filed at the behest of the Revenue and assessee are directed against the order dated 10.04.2023 passed by the Ld. Commissioner of Income Tax (Appeals)-12, Ahmedabad (in short ‘CIT(A)’) arising out of the order dated 03.10.2017 passed by the DCIT (Intl. Taxn.)-1, Ahmedabad under Section 195(2) of the Income Tax Act, 1961, (hereinafter referred to as ‘the Act’) for Assessment Year 2018-19.
2. Direction to the Ld. AO to cancel the order of deduction of TDS @20% on the payment of USD 4,50,000 to Titan Shipping Limited, Marshal Islands passed by the Ld. CIT(A) is under challenge before us by the Revenue.
3. We have heard the rival submissions made by the respective parties and we have also perused the relevant materials available on record.
4. The assessee is an Indian Company applied under Section 195(2) of the Act for determining tax liability on the remittance to the Titan Shipping Limited, Marshal Islands, towards damage charges for physical damage sustained by vessels and losses caused to the owner of the vessels to the tune of USD 4,50,000/-. In terms of the Office order dated 05.07.2017, the details of the copy of contract, copy of order delivery of product in Indian Port, documents of delivery of goods at Porbandar Port India, documents supporting liability on buyer for any damage to vessels and documents supporting the damage happened to the vessels in Port of Porbandar, India on 08.2017 submitted before the Ld. AO upon perusal of which, it was found that the damage to the vessels has happened in India during the business carried out by the ship in India. Upon perusal of said documents, the Ld. AO observed as follows:
“It is observed that Marshal Island based company ‘Titan Shipping Limited’ has received lump sum consideration towards its claim of damage charges of vessels which was initially denied by remitted but finally to be paid as per quadripartite agreement entered on 13.06.2017. The lump sum consideration paid to be paid does not fall within income receipt as defined in section 172 of the Act. Therefore applying provision of section 172 is not correct. It is a fact that it is an income in the hand of remitter and falls under section 5(2) of the Act and therefore section 195 is applicable. The only thing that which rate of TDS under section 195 is applicable is to be ascertained. There is no DTAA between Indian and Marshal Island and remitter has not provided TRC and other details provided in rule 37BB, therefore provision of section 206AA is applicable and TDS@20% is to be deducted under section 195 of the Act”
5. Thus, according to him, the lump sum consideration paid by the assessee does not fall within income /receipt as defined in Section 172 of the According to him, it is an income in the hands of the remitter falls under Section 5(2) of the Act and hence applying under Section 195 of the Act, particularly, when there is no DTAA between India and Marshal Islands and remitter has not provided TRC. TDS @ 20% was directed under Section 195 of the Act. Against which, the assessee preferred appeal before the First Appellate Authority.
6. Before the First Appellate Authority, the assessee submitted as follows:
“1. Order u/s..195(2) of IT Act dtd. 03-10-2017 was passed by ld. DCTT, International Taxation-1, Ahmedabad. Ld. DCIT, International Taxation). Ahmedabad has observed the following
“That Marshal Island based company “Titan Shipping Limited” has received lump sum consideration towards its claim of damage charges of vessels which was initially denied by remitted but finally to be paid as per quadripartite agreement entered on 13-06-2017 The lump sam consideration paid to be paid does not fall within income/receipt as defined in section 172 of the Act. Therefore, applying provision of section 172 is not correct. It is an income in the hand of remitter and falls us.5(2) of the Act and therefore section 195 is applicable. The only thing that which rate of TDS us 195 is applicable to be ascertained. There is no DTAA between India and Marshal Islands and remitter has not provided TRC and other details as provided in Rule 378B therefore provision of section 206AA is applicable and TDS @ 20% is to be deducted u/s. 195 of the Act.
On the basis of above para to deduct TDS @ 20% on the payment of USD 4.50,000 to the Titan Shipping Limited, Marshal Islands.”
2. Assessing Officer has, as reproduced hereinabove, in the order passed u/s 195(2) of LT. Act. determined the liability of tax @20% on payment of USD 4.50,000 to the Titan Shipping Limited, Marshal Islands us 195(2) of IT Act. Ld. Assessing Officer observed that section 172 cannot be applied and correct section is section 195 of 1.T. Act. He has also observed that there is no DTAA between India and Marshal Islands and remitter has not provided various details in Rule 37BB and therefore, TDS @ 20% should be applicable u’s 195 of LT. Act, as per provision of section 206AA of IT Act
3. In our humble submission, the findings of Id Assessing Officer are not correct as mentioned herein above in details.
3.1 Circular 723 issued by Central Board of Direct Tax did. 19-09-1995 provides that provision of section 172 is applicable. Copy of Circular is enclosed herewith marked as Annexure-Cl. The relevant para- 4 and 5 of the circular are as under
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 (i) of sub section (1) to any “resident” (termed as contractor). It is clear from the section that the 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 non-resident ship-owners or characters for carriage of passengers etc., shipped at a port in India. Since the agent acts on behalf of the non-resident ship owner or character, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those sections 194C and 195 will not apply.’
Perusal of the above circular clearly support the view that section 172 will be applicable and sections 1940 and 195 of IT Act will not be applicable.
32 As per section 172 of the IT Act, TDS will be @7.5% of the proposed amount. The section 172 of the IT Act provides as under:
“Shipping business of non-residents.
25 172. 26 (1) The provisions of this section shall, morwithstanding anything contained in the other provisions of the Act apply for the purpose of the levy and recovery of tax in the case of any ship belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India 27[***]
(2) Where such a ship carries passengers, livestock mail or goods shipped at a port in India 28/seven and a half) per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage.
(3) Before the departure from any port India of any such ship, the master of the ship shall prepare and furnish to the 29[Assessing]Officer a return of the full amount paid or payable to the owner or charterer or any person on his behalf, on account of the carriage of all passengers, livestock mail or goods shipped at that port since the last arrival of the ship thereat: Provided that where the 29/Assessing) Officer is satisfied that it is not possible for the master of the ship to furnish the return required by this sub-section before the departure of the ship from the port and provided the master of the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf, the 29[Assessing] Officer may of the return is filed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this sub-section.
(4) On receipt of the return, the 29[Assessing] Officer shall assess the income referred to in sub-section (2) and determine the sum payable as tax thereon at the rate or rates 30[in force] applicable to the total income of a company which has not made the arrangements referred to in section 194 and such sum shall be payable by the master of the ship.
31[(4A) No order assessing the income and determining the sum of tax payable thereon shall be made under subsection (4) after the expiry of nine months from the end of the financial year in which the return under sub-section (3) is furnished: Provided that where the return under sub-section (3) has been furnished before the 1st day of April, 2007, such order shall be made on or before the 31st day of December, 2008]
(5) For the purpose of determining the tax payable under sub-section (4), the 29/Assessing] Officer may call for such accounts or documents as he may require.
(6) A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duly authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof.
(7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to hi, as the case may 33(8) For the purposes of this section, the amount referred to in subsection (2) shall include the amount paid or payable by way of demurrage charge or handling charge or any other amount of similar nature.]”
As per sub section 2 of 172 of the IT Act, the income-tax will be @7.3% which comes to USD 33,750 of payment of USD 4,50,000 The identity of the remitter is established and the payment is made to the party on account of damage charges for physical damage sustained by vessels and losses canned to the owner for sum of USD 4,50.000 Thus, the withholding tax may be @7.5% amounting to USD 33,750.
Please note that, this is without prejudice to the contention of the appellant that no tax is required to be paid at all.
4. At the time of making application is 193(2) of LT Act the appellant had not received TRC und other details from Titan Shipping Limited, Marshal Islands which have been subsequently provided by them Accordingly we are submitting copy of following documents, marked in Annexure D1 which may be admitted as additional evidence These documents were not submitted before i Dy Commissioner of Income tax, (International Taxation)-1, Ahmedabad while making application u/s. 195/2) of I.T. Act.
(i) Copy of Cernficute of Incorporation did 9 December, 2013
(ii) Copy of Tax Residency Certificate
(iii) Copy of Certificate No P-01335-01/18 issued by Special Agent of the Republic of the Marshall Islands
5. Accordingly, provisions of section 205 AA of IT Act will not be applicable to the fact of our case.
6. Moreover, provisions of section 195 of IT Act will not be applicable to the fact of our cane Hence no tax should be levied.
7. Reliance is placed on the following decision in support of our contentions:
Kuloday Technopack P Lid v/s ITO 8/2/2) (2017) 86 raxmann.com 74 (Mum Tril. The gist of the said decision is reproduced hereunder:
“1. Section 122 read with sections 194C, 195 and 40 (a)(ia) of the Income tax Act 1961- Nom resident- Shipping business of (Applicability of TDS provisions) Assessment years 2009-10 and 2010-11-Whether in view of CBDT Circular No. 723, dated 19.09.1995, ocean freight, demurrage charge, handling charges or other amount of similar mature which are paid on behalf of foreign shipping companies to Indian agents or authorized representative of non-resident shipping company who carry passengers, livestock mail or good shipped of port in India are merely reimbursement of expenses not covered for deduction of tax at source under provision of sections 194C and 195-Held yes – Whether thus they could not have been disallowed by invoking provision of section 40(a)(ia) – Held yes [Para 7] [In favour of assessee]”
The copy of the said decision is enclosed as Annexure-E1.”
As submitted hereinabove, it is submitted that our main contention is that there is no withholding tax at all as submitted in Ground No.3
However, alternately, without prejudice, it is submitted that withholding tar at most can be @ 7.5% amounting to USD 33,750 as mentioned in details of the above referred Ground No.3.”
7. The Ld. CIT(A) quashed the order passed by the Ld. AO under Section 195 of the Act. Hence, the instant appeal before us.
8. The crux of the argument of the assessee is this that as the agent acts on behalf of the non-resident owner or character, he steps into the shoes of the principal and accordingly provision of Section 172 of the Act only will be applicable and not the provision of Section 194C or 195 of the Act. In support of the same, he relied upon the Circular 723 issued by CBDT dated 19.09.1995. Further that, as per Section 172 of the Act, TDS will be @ 7.5% of the proposed amount. In fact, the assessee objected that such remittance as damage charges is not chargeable to tax in India but without prejudice under Section 172 of the Act 7.1% will be applicable. Apart from that, as to whether payments of USD 4,50,000/- made by the assessee company is covered as income of the recipient under the provision of Section 195 of the Act to be looked into. The assessee produced the letter from Winter Scott Solicitors in London in respect to the compensation proceeding initiated by the shipping company wherein following charges were required to be paid by the assessee as per the sale contract with the shipping company:
(i) An indemnity in respect of claims by the Gigarur Marime Board for damage to port infrastructure and to hire
(ii) Repco in respect physical damage the vessel to her shell associated
(iii) Damages in respect of loss of time for carrying csit the requisite surveys repairs,
(iv) Costs and expenses incurred by virtue of the incident itself, and the investigation thereof.
9. Total damages claimed by the said company were USD 6,51,845. The assessee on 13.06.2017 filed the settlement deed were from compensation or damages were found to be raised on the following causes:-
“i. the physical damage sustained by the Vessel,
ii. the injury sustained by a member of the Vessel’s crew,
iii. The physical damage caused to the Discharge Port Berth’s facilities/installations and
iv. The losses and damages sustained by the Owners”
10. It is a fact that once the hired Vessel left the Porbandar Port and reached Durban South Africa, the charterer handed back the vessel to the owners who, in turn, raised these damages on the buyer e. the assessee before us. Thereafter, only upon arbitration and negotiation, the assessee was required to pay USD 4,50,000/- within 14 days from the date of settlement. It was further found from the settlement deed that the payments were reimbursements in nature and other damages raised are capital in nature. In that view of the matter, the Ld. CIT(A) declined to consider the same as income to the ship owner within the purview and scope of the provision of Section 5(2) of the Act and the direction passed by the Ld. AO to deduct tax at source on such payments in terms of the provision of Section 195(2) of the Act was found to be wrong, which, in our considered opinion also found to be just and proper for the reason as discussed hereinabove. We, therefore, confirm the order passed by the Ld. CIT(A). The appeal preferred by the Revenue is, thus, found to be devoid of any merit and hence dismissed.
11. In the result, appeal preferred by Revenue is dismissed.
Cross Objection No. 17/Ahd/2023
12. As the appeal filed by Revenue is dismissed, the cross objection supporting the order became infructuous and hence dismissed.
13. In the combined result, Revenue’s appeal and Assessee’s CO both are dismissed.
This Order pronounced on 28/11/2023
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