2012 (2) TMI 137 - AT - Income Tax

TDS - Payments made to agents of foreign shipping Co. - No application filed with AO under 195(2) - Held That - Payments made to the agents of foreign shipping companies are claimed to be not taxable in India and there is no material produced before us to controvert the said claim. As per Circular no. 723 dated 19.9.95 in case of ships belonging to non-resident, provisions of section 194C and 195 are not applicable. Apex court in view of G.E.India Technology Centre was of the same view that provisions of 195 and 195(2) cannot be applied.

Summary

Issues:
Dispute over disallowance of payments to foreign shipping companies under section 40(a)(i) of the Income Tax Act for Assessment Year 2007-08.

Detailed Analysis:

1. Background and AO's Decision:
The AO disallowed payments made to foreign shipping companies totaling to `.5,33,26,726/- under section 40(a)(i) as taxes were not deducted. The AO referred to section 195(2) and a High Court judgment stating that tax deduction under section 195 is necessary, even if the income is not taxable in India.

2. Arguments Before CIT(A):
The assessee contended that section 40(a)(i) did not apply as the payments were not taxable in India. The assessee relied on Circular No. 723 of CBDT and section 172 to support their claim. The CIT(A) agreed with the assessee and directed the AO to delete the addition.

3. Tribunal's Analysis and Decision:
The Tribunal reviewed the contentions and found that the payments to foreign shipping companies were not taxable in India. The Tribunal noted that the AO did not dispute this claim and relied on an outdated High Court judgment. The Tribunal cited a Supreme Court judgment stating that section 195 applies only when there is no doubt about taxability in India. Since the payments were not taxable, section 40(a)(ia) did not apply, as per Circular No. 723 of CBDT. The Tribunal upheld the CIT(A)'s decision to delete the addition.

4. Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming that the disallowance under section 40(a)(ia) was unwarranted as the payments to foreign shipping companies were not taxable in India. The Tribunal emphasized the importance of considering taxability before invoking tax deduction provisions under section 195. The judgment highlighted the significance of Circulars issued by CBDT in interpreting tax laws accurately.