2012 (4) TMI 607 - AT - Income Tax

Summary

Issues involved: Appeal against disallowance of freight and commission payments to non-resident entities u/s 40(a)(ia) of the Income Tax Act, 1961.

Freight Disallowance Issue:
The assessee, a partnership firm engaged in export business, challenged the disallowance of ocean freight expenses amounting to Rs. 2,38,07,595 paid to foreign shipping companies. The Assessing Officer disallowed the expenses under section 40(a)(i) for not deducting tax at source. The CIT(A) upheld the AO's decision. However, the assessee argued that the expenses were actually paid without remaining payable as of the previous year-end. Citing the Merilyn Shipping case, the Tribunal ruled in favor of the assessee, stating that if payments were made without TDS deduction and not payable by the year-end, disallowance cannot be justified. The issue was remanded to the AO for further examination.

Commission Disallowance Issue:
Similarly, the assessee contested the disallowance of commission payments amounting to Rs. 83,06,053 to overseas agents for services related to exports. The AO disallowed the commission under section 40(a)(i) for failure to deduct TDS. The CIT(A) affirmed the AO's decision. The assessee argued that the commission was paid to non-residents for services rendered outside India, and thus, TDS was not required. Relying on the Merilyn Shipping case, the Tribunal held that if payments were actually made without TDS deduction and not remaining payable by the year-end, disallowance cannot be sustained. The issue was remanded to the AO for further review.

Conclusion:
The Tribunal accepted the assessee's arguments based on the Merilyn Shipping case and set aside the CIT(A)'s order, remanding both the freight and commission disallowance issues to the AO for reconsideration. The appeal was allowed for statistical purposes, emphasizing the importance of actual payment status and TDS obligations under section 40(a)(ia) of the Income Tax Act, 1961.