Tax Exemption for Reimbursement of Freight Charges to C&F Agents: A Legal Analysis, Lecture notes of Commercial Law

Download Tax Exemption for Reimbursement of Freight Charges to C&F Agents: A Legal Analysis and more Lecture notes Commercial Law in PDF only on Docsity! [2020] 122 taxmann.com 124 (Bombay)/[2021] 276 Taxman 305 (Bombay)/[2020] 428 ITR 398 (Bombay)[07-10-2020] INCOME TAX : Where assessee-company made payment of certain amount to its Forwarding & Clearing agent (C&F agent) towards reimbursement of freight charges paid by them to carriers, since such payment towards reimbursement had no income element embedded in it, assessee was not liable to deduct tax at source on same ■■■ [2020] 122 taxmann.com 124 (Bombay) HIGH COURT OF BOMBAY Zephyr Biomedicals v. Joint Commissioner of Income Tax* M.S. SONAK AND DAMA SESHADRI NAIDU, JJ. TAX APPEAL NOS. 47 TO 49 OF 2015 AND 9 & 10 OF 2016 OCTOBER 7, 2020 Section 194C of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to (Reimbursement) - Assessment years 2009-10 and 2010-11 - Assessee-company made payment of certain amount to its Forwarding & Clearing agent (C&F agent) towards (i) reimbursement of freight charges paid by C & F agent to carriers and (ii) actual service charges of C&F agent - C&F agent had raised seperate bills for both these payments - Assessee had deducted TDS on payment towards bills raised for services rendered by C&F agents - Assessing Officer disallowed an amount paid towards reimbursement of freight charges under section 40(a)(ia) on which TDS was not deducted - Whether since payment towards reimbursement of freight charges to C & F agent had no income element embedded in it, assessee was not liable to deduct tax at source on same - Held, yes [Paras 18, 22 and 31] [In favour of assessee] Circulars and Notifications : CBDT circular No. 715 dated 8-8-1995 CASE REVIEW DIT (International Taxation) v. Krupp Udhe GMBH [2013] 40 taxmann.com 38/219 Taxman 138 (Mag.)/354 ITR 123 (Bom.); CIT v. Dunlop Rubber Co. Ltd. [1982] 10 Taxman 179/[1983] 142 ITR 493 (Cal.); CIT v. Industrial Engineering Projects (P) Ltd. [1993] 202 ITR 1014 (Delhi) (para 19); GE India Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456 (SC)(para 21); CIT v. Kalyani Steels Ltd. [2018] 91 taxmann.com 359/254 Taxman 350 (Kar.) (para 27); Pr. CIT v. Consumer Marketing (India) (P.) Ltd. [2015] 64 taxmann.com 16 (Guj.) (para 28) and Om Satya Exim (P.) Ltd. v. ITO [IT Appeal No. 1335 (Ahd.) of 2010, dated 13-5-2011] (para 29) followed. CASES REFERRED TO DIT (International Taxation) v. Krupp Udhe GMBH [2013] 40 taxmann.com 38/219 Taxman 138 (Mag.)/354 ITR 123 (Bom.) (para 5), CIT v. Siemens Aktiongesellschaff [2009] 177 Taxman 81/310 ITR 320 (Bom.) (para 5), Pr. CIT v. Consumer Marketing (India) (P.) Ltd. [2015] 64 taxmann.com 16 (Guj.) (para 5), Transmission Corpn. of A.P. Ltd. v. CIT [1999] 105 Taxman 742/239 ITR 587 (SC) (para 5), GE India Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456 (SC) (para 5), CIT v. Kalyani Steels Ltd. [2018] 91 taxmann.com 359/254 Taxman 350 (Kar.) (para 6), CIT v. Dunlop Rubber Co. Ltd. [1982] 10 Taxman 179 [1983] 142 ITR 493 (Cal.) (para 19), CIT v. Industrial Engineering Projects (P.) Ltd. [1993] 202 ITR 1014 (Delhi) (para 19) and Om Satya Exim (P.) Ltd. v. ITO [IT Appeal No. 1335 (Ahd.) of 2010, dated 13-5-2011] (para 29). Pramod Vaidya and Ms. G. Almeida, Advs. for the Appellant. Ms. Susan Linhares, Standing Counsel and Ms. S. Pinto, Adv., set out in Circular No. 715. In particular, she makes reference to answers to Question Nos.7 and 30 in Circular No. 715 and submits that since the view taken by the ITAT is entirely consistent with the answers in Circular No. 715, there is no case made out to interfere with the impugned orders or to answer the substantial questions of law as raised in favour of the Assessees and against the Revenue, in all these appeals. She therefore submits that all these appeals may be dismissed. 10. The rival contentions now fall for our determination. 11. In order to appreciate the rival contentions, reference is necessary to the provisions in Section 4 and Section 190 of the IT Act which explain the basis of charge of income tax and the TDS regime respectively. 12. Section 4(1) provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, the income tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income tax) of, this Act in respect of the total income of the previous year of every person. Proviso to section 4(1) provides that where by virtue of any provision of IT Act, the income tax is to be charged in respect of the income of a period other than the previous year, the income tax shall be charged accordingly. 13. Sub-section (2) of section 4 of the IT Act provides that in respect of income chargeable under sub-section (1) of section 4, the income tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of the IT Act. 14. Therefore, what is important is that the income tax is a tax payable in respect of "total income" of the previous year of every person. Further, such income tax shall have to be deducted at source or paid in advance, where it is so deductible or payable under any of the provision of the IT Act. From this, it follows that unless the paid amount has any "income element" in it, there will arise no liability to pay any income tax upon such amount. Further, in such a situation, there will also arise no liability of any deduction of tax at source upon such amount. 15. Section 190 of the IT Act is to be found in Chapter XVII of the IT Act concerning the collection and recovery of tax. Sub-section (1) of section 190 of the IT Act provides that notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment, or by payment under sub-section (1A) of Section 192, as the case may be, in accordance with the provisions of this Chapter. Sub- section (2) of Section 190 of IT Act provides that nothing in this Section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4. Section 190 of IT Act states the general rule where provisions of Chapter XVII apply. section 194(C) of the IT Act which is a part of Chapter XVII specifically concerns payments to be made to contractors which would include C&F agents. 16. Again, the liability to deduct or collect income tax at source is upon "such income" as referred to in Section 190(1) of the IT Act. The expression "such income" would ordinarily relate to any amount which has an "income element" in it and not otherwise. This is because the regime of TDS was enacted for the purpose of easy collection of income tax or to prevent the tax evasion. From bare reading of text of section 190 and other provisions to be found in Chapter XVII, it deals with "collection and recovery of tax". It is clear that the TDS regime is nothing but an alternate mode of recovery or collection of income tax. 17. In all these appeals, there is no dispute or in any case, there is overwhelming material on record which establishes the following position :— (i) The C&F agents have raised two separate sets of bills :— (a) first towards the services rendered by the C&F agents; and (b) second towards the reimbursement of freight charges paid to the carriers. (ii) These are not cases where any composite bills were raised by the C&F agents without indicating the service charge components and reimbursement components separately; (iii) There are ample evidences in the form of ledger entries, bills, payment vouchers etc., placed on record to establish that separate sets of bills were invariably made towards the service charge components and reimbursement components by the Assessees to the C&F agents; (iv) The Assessees have invariably deducted tax at source when it comes to payment towards the first set of bills i.e. towards the services rendered by the C&F agents without any demur; (v) Even in cases where composite bills were issued or where there was any ambiguity about payment towards reimbursement components, the Assessees have deducted tax at source; (vi) It is only in cases where separate bills were raised by the C&F agents towards reimbursement and the freight charges, backed by proper evidence that the Assessees have not deducted any tax at source before making payments towards such reimbursement. 18. Thus, the Assessees only contend that in clear cases where separate bills have been raised by the C&F agents towards the reimbursement of freight charges, they are not liable to deduct tax at source upon payment towards such reimbursement components, since, such payment has no income element embedded in it. According to us, the Assessees' contention deserves to be upheld in the facts and circumstances of the present case. There are decided cases which support the contention of the Assessees and reference can be usefully made to some such cases. 19. In Krupp Udhe GMBH (supra), the Division Bench of this Court speaking through Dr. D. Y. Chandrachud, as His Lordship then was, held that the question as to whether the reimbursement of expenses will form a part of the taxable income is not res integra in so far as this Court is concerned. Reference was then made to the decision in Siemens Aktiongesellschaff (supra), wherein another Division Bench of this Court agreed with the view taken by the Calcutta High Court in CIT v. Dunlop Rubber Co. Ltd. [1982] 10 Taxman 179/[1983] 142 ITR 493 and Delhi High Court in CIT v. Industrial Engineering Projects (P.) Ltd. [1993] 202 ITR 1014 that the amounts by way of reimbursement expenses do not constitute income as such and