2011 (11) TMI 682 - AT - Income Tax

TDS u/s 194C - Disallowance u/s 40(a)(ia) - non tds on direct expenses include the freight paid - Held that - As the present assessee, who is carrying on the business of clearing and forwarding agents, is not a person responsible for deducting the tax at source in terms of sec. 194C of the Act in as much as the assessee is only an intermediary between the exporters and the shipping lines and it merely facilitates the contract for carrying the goods. Since the assessee was not a person responsible for deduction of tax at source in terms of sec. 194C of the Act, the question of failure on the part of the assessee to deduct tax at source from the payment made to shipping lines for and on behalf of its client would not arise, and, consequently, provisions of sec. 40(a)(ia) cannot be invoked in respect of the payment made by the assessee to shipping lines for and on behalf of assessee s client i.e. ultimate exporter or importer. We, therefore, reverse the order of authorities below and delete the disallowance made u/s 40(a)(ia) of the Act by the AO. - Decided in favour of assessee.

Summary

Issues Involved:
1. Non-provision of opportunity of being heard by the CIT(A)
2. Disallowance of Rs. 2,04,72,855/- under Section 40(a)(ia) of the Income Tax Act due to non-deduction of TDS under Section 194C

Issue-wise Detailed Analysis:

1. Non-provision of Opportunity of Being Heard by the CIT(A):

The appellant did not press Grounds No. 1 and 2, which revolved around the issue of not being provided an opportunity of being heard by the CIT(A). Consequently, these grounds were rejected.

2. Disallowance of Rs. 2,04,72,855/- under Section 40(a)(ia) of the Income Tax Act:

The core issue in Grounds No. 4, 5, and 6 was the disallowance of Rs. 2,04,72,855/- under Section 40(a)(ia) due to non-deduction of TDS under Section 194C.

Facts and Submissions:

- The assessee, a partnership firm engaged in logistics, declared gross receipts of Rs. 3,33,44,575/- and claimed direct expenses of Rs. 3,08,91,654/-, which included freight paid to various parties.
- The AO noticed that the assessee did not deduct TDS on payments exceeding Rs. 50,000/- as required under Section 194C.
- The AO tabulated the names of parties and amounts paid without TDS, totaling Rs. 2,04,72,855/-.
- The AO issued a show-cause notice to the assessee, who replied that the payments were not for any work contemplated under Section 194C but were reimbursements made on behalf of clients.
- The AO rejected this explanation, stating that the payments were contractual and thus required TDS, leading to disallowance under Section 40(a)(ia).

CIT(A) Decision:

- The CIT(A) upheld the AO's decision, questioning the purpose of the assessee's intermediary role and the nature of the payments.
- The CIT(A) noted the absence of contracts or documents proving that the payments were reimbursements or for business purposes, thus justifying the disallowance under Sections 40(a)(ia) and 37.

Tribunal's Analysis and Decision:

- The Tribunal considered the assessee's role as a clearing and forwarding agent, facilitating contracts between exporters/importers and shipping lines.
- The Tribunal found that the shipping companies billed the ultimate consumers (exporters/importers), and the assessee merely paid these bills on behalf of its clients, later getting reimbursed.
- The Tribunal referenced the Delhi High Court's decision in Commissioner of Income Tax vs. Cargo Linkers, which held that a C&F agent is only an intermediary and not responsible for TDS under Section 194C.
- Based on this precedent, the Tribunal concluded that the assessee was not responsible for TDS under Section 194C, and therefore, the provisions of Section 40(a)(ia) were not applicable.

Conclusion:

The Tribunal reversed the orders of the authorities below and deleted the disallowance of Rs. 2,04,72,855/- made under Section 40(a)(ia), allowing the appeal filed by the assessee. The decision was pronounced in open court on 4th November 2011.