Poddar Sons Ex. L. (P.) Ltd. vs Commissioner of Income Tax

The Court: The subject matter of challenge in this appeal is a judgment and order dated 15th May 2010 by which the learned Tribunal dismissed the appeal preferred by the assessee upholding the views of the CIT (Appeals) who had upheld the views of the assessing officer refusing to allow deduction of a sum of Rs. 37,33,527/- on the ground that "the assessee did not deduct tax at source for the said expenses even till-date. Hence Rs. 37,33,527/- is added back to the total income of the assessee for the previous year relevant to Asst. Year 2005-06 as per provisions of section 40(a)(ia) of the income tax Act, 1961. Mr. Shome, learned senior advocate appearing for the assessee appellant drew our attention to various bills included in the paper book which were also before the learned Tribunal in order to show that the goods exported by the assessee were carried by Lufthansa Airlines. For the purpose of availing the service of the aforesaid carrier assistance of four several agents of the aforesaid carrier was taken, particulars whereof and the amount paid to them are as follows:--

Mr. Shome submitted that the appellant was under no obligation to deduct tax at source in respect of freight paid to a foreign carrier. He drew our attention in support of his contention to the judgment in the case of G.E. India Technology Centre Private Ltd. Vs. Commissioner of Income Tax and Another, wherein the Apex Court opined as follows:--

...The most important expression in section 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the income tax Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and the payments does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the income tax Act. It may be noted that section 195 contemplates not merely amounts, the whole off which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in section 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728 dated October 30, 1995 the Central Board of Direct Taxes has clarified that the tax deductor can take into consideration the effect of the DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that section 195(1) is in identical terms with section 18(3B) of the 1922 Act. In Commissioner of Income Tax, Bombay City 1 Vs. Cooper Engineering Ltd., it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application u/s 18(3B) (now section 195(2) of the income tax Act). The application of section 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a nonresident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the income tax Officer (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the income tax Officer (TDS) that the question of making an order u/s 195(2) will arise. In fact, at one point of time, there was a provision in the income tax Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to the RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company and Another Vs. Income Tax Officer, A-Ward and Others, that an application for NOC cannot be said to be an application u/s 195(2) of the Act. While deciding the scope of section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of section 195.

Mr. Shome also drew our attention to a judgment of the Income Tax Appellate Tribunal, Kolkata ''B'' Bench, Kolkata in (2012) 52 SOT 228 wherein the learned Tribunal opined that payment made to the issuing carrier agent on account of airfreight payable to the foreign carrier was not deductible at source u/s 194(C). To be precise the view expressed by the learned Tribunal are as follows:--

It is an admitted position that so far as the airfreight is concerned, it is paid to the agents on the actuals basis and that the bills and airfreight documents have been directly issued to the foreign airlines. PDP and DHL, while accepting payments for airfreight components, have acted merely as agents of the respective airlines and have not received the airfreight payments in their own right. In copies of airway bills, which have been filed before us in the paperbook, the name of these agents is shown as "Issuing carrier''s agents and the city" as also the agent''s code is given as "Agent''s IATA code". There is thus enough material to demonstrate that the persons having received money for the airfreight have received the same in their capacity as "issuing carrier''s agent" i.e. agent of the airline concerned. The airfreight payment is thus made to the foreign airlines, namely SIA, Emirates, British Airways and Lufthansa-though through the agent, i.e. PDP and DHL etc.

In view of the above discussions, in our considered view, the payments cannot be said to have been made to a resident company, and, accordingly, the provisions of section 194C, which apply only on the resident recipients, do not come into play.

Mr. Shome also drew our attention to a division bench judgment of this Court in the case of ABN Amro Bank, N.V. Vs. Commissioner of Income Tax and Another, wherein the following views were expressed;--

An unnecessary complication has been created by the interpretation made of section 40(a)(i) of the income tax Act read with section 195 of the Act by both the appellant and the respondents. First of all, a proper meaning has to be ascribed to the expression "chargeable" under the provisions of this Act. Section 195(1) says that, if any interest is paid by a person to a foreign company, which interest is chargeable under the provisions of this Act tax should be deducted at source. The word "chargeable" is not to be taken as qualifying only the phrase "any other sum" only but it qualifies the word "interest" also. This interpretation is supported by the phrase in parenthesis, namely, not being income chargeable under the head "salaries". Therefore, the meaning of this section is that such interest must be chargeable under the provisions of this Act. To simplify the matter, this interest must be accounted for or credited in the account of some person who is chargeable under the Act. In other words, this remittance of interest must result in an income which is chargeable under the Act. In those circumstances tax may be deducted at source. But where this interest is not so chargeable, no tax is deducted. In this case, by virtue of the above convention, the head office of the appellant is not liable to pay any tax under the Act. Therefore, in our opinion, there was and still is no obligation on the part of the appellant''s said branch to deduct tax while making interest remittance to its head office or any other foreign branch.

Therefore, in the circumstances there is no scope for any argument that for the purpose of computation of expenditure the branch and the head office are to be taken as separate entities but for the purpose of payment of tax to be deducted at source on interest payment, it is to be taken as one bank and no deduction is to be made as sought to be made by the learned counsel for the appellant. Such contentions are totally unfounded in our opinion. The permanent establishment and the head office have to be taken as separate entities for all purposes. But in the making of payment of interest no tax has to be deducted u/s 195(1), for the reasons above.

Mr. Saraf, on the other hand contended that the plea of the assessee has always been that due to ignorance he had omitted to deduct tax at source. He drew our attention to the assessment order as also the order of the CIT (Appeals) wherein the defence of the assessee has specifically been recorded. He submitted that in a desperate attempt to avoid disallowance, the assessee, after the assessment was made and during pendency of the appeal before the CIT (Appeals) paid the requisite amount of tax which should have been deducted but such delayed payment, he contended, could not have cured the defect and the payments made by the assessee were not allowable. Therefore, they were rightly disallowed by the assessing officer, CIT as also the Tribunal. He submitted that the obligation to deduct tax at source is firmly established u/s 194C and the omission to make such deduction is incurable.

Consequences are that the payments made cannot be deducted from out of income of the assessee.

Replying to the submission of Mr. Shome, Mr. Saraf contended that the point as regards the applicability of section 195 of the income tax Act or the fact that the payment was in fact made to a foreign carrier who is a non-resident has been made for the first time in this Court. He submitted that even assuming that the major part of the amount paid was on account of airfreight, the fact, according to him, is well established that besides airfreight payable to Lufthansa other payments were also made as would appear from the bills disclosed by the assessee himself. As a matter of fact the various heads of such payments made by the assessee have been tabulated and those tabulations are on the record. Payments were made on account of (a) AIR/SEA Freight (b) Dues Carrier Fuel S.CH. etc. (c) Local Transport (d) Agency Ch. (e) Other Cost. He contended that in the facts of the case it cannot be said that deduction was claimed only as regards payments claimed to have been made to the foreign carrier. Deduction has also been claimed on account of various other charges indicated above. Where payments are of a composite nature, like in the case before us, he submitted, the Supreme Court in the case of The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, took the following views:--

The above decision cannot be of any help to the appellant for it does not lay down that the percentage amount deductible u/s 194C(1) should be out of the income of the contractor from the sum or sums credited to the account of or paid to him. The words in the sub-section "on income comprised therein" appearing immediately after the words "deduct an amount equal to two per cent of such sum as income tax" from their purport, cannot be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account or paid to him in pursuance of the contract. Moreover, the concluding part of the sub-section requiring deduction of an amount equal to two per cent of such sum as income tax, by use of the words "on income comprised therein" makes it obvious that the amount equal to two per cent of the sum required to be deducted is a deduction at source. Indeed, it is neither possible nor permissible for the prayer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible to think that Parliament could have intended to cast such impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision. Hence, on the express language employed in the sub-section, it is impossible to hold that the amount of two per cent required to be deducted by the payer out of the sum credited to the account of or paid to the contractor has to be confined to his income component out of that sum. There is also nothing in the language of the sub-section which permits exclusion of an amount paid on behalf of the organization to the contractor according to clause 13 of the terms and conditions of the contract in reimbursement of the amount paid by him to workers, from the sum envisaged therein, as was suggested on behalf of the appellant.

After hearing the learned advocates, we are of the opinion that the following questions of law arise in this case:

(a) Whether payment made to the four several agents indicated above or any part of such payments were in fact made to the non-resident foreign carrier?

(b) Whether the payments made to the non-resident on account of airfreight is chargeable to tax under the provisions of the income tax Act, 1961?

(c) If an answer to the question (b) is in the negative, whether there is any liability on the part of the assessee to deduct tax at source u/s 194C?

Each of the four agents indicated above are undisputedly the agents of the foreign carriers. As a matter of fact, the airway bill contain the name of the issuing carrier''s agents. The name of the agent appearing in the airway bill corresponds with the name of the agents to whom payments were actually made by the assessee.

Therefore, no elaborate reasoning is required to show that each of the aforesaid four agents was acting for a disclosed principal. Any payment made to any such agent is on behalf of its principal. The agents was merely the collecting hand insofar as the airfreight is concerned. Payment made to such agents is in fact a payment made to the principal. Therefore, the first question is answered in the affirmative.

The views expressed by the Apex Court in the case of GE India Technology Centre (P.) Ltd. (supra) have already been quoted above from which it will appear that the payer is obliged to deduct tax at source only if tax upon such payment is assessable in this country. The Apex Court has also referred to the double taxation avoidance agreement. Section 195 of the income tax Act specifically excludes the liability to deduct tax at source when payment is made to a foreign company which is not chargeable to tax in this country. Evidently, major part of the aforesaid sum of Rs. 37,33,527/- was paid to the foreign company namely Lufthansa. There exists agreement between the Govt. of the Republic of India and the Govt. of the Federal Republic of Germany for the avoidance of double taxation. Article 8 of the aforesaid agreement provides as follows:--

(1) Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(2) If the place of effective management of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship is a resident.

(3) For the purposes of this article, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest.

(4) The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

The payments are as such not chargeable to tax. The assessee, therefore, had no obligation to deduct any tax. For the aforesaid reason question (b) formulated above is answered in negative.

Since the question (b) has been answered in the negative, we are of the opinion that the assessee was not liable to deduct any tax at source insofar as the payment of airfreight made to the foreign carrier was concerned. But we are of the opinion that the other payments made indicted above were in fact made to the resident agent and to that extent tax was deductible. The submission of Mr. Saraf that this bifurcation is not possible on the basis of the judgment in the case of Associated Cement Co. Ltd. (supra) is according to us, not tenable. The bifurcation which was being considered by the Apex Court in that case was with regard to an attempt on the part of the assessee to find out the element of profit made by the contractor. Payments made to the resident agent otherwise than on account of airfreight payable to his principal are open to deduction at source u/s 194C. There is no question of bifurcation. To that extent the question is answered in affirmative.

In the result, the appeal succeeds. The orders passed by the Tribunal CIT (Appeals) and the assessing officer are all set aside. The matter is remitted to the assessing officer. He shall ascertain the total amount of airfreight paid to the foreign carrier Lufthansa and shall permit deduction thereof as a proper expenditure. The balance payments claimed to have been made by the assessee to the resident agents are not however deductible because the assessee omitted to deduct tax at source.

The assessing officer shall complete the assessment within three months and shall pass appropriate orders for refund together with interest according to law within the aforesaid period. G.A. No. 433 of 2014 also stands disposed of with this appeal