2012 (7) TMI 300 - AT - Income Tax

Disallowance under section 40(a)(ia) of the Income Tax Act - on the ground that the payments made by the assessee to Indian agents of foreign airlines, were not deducted to deduction of tax at source under section 194 C of the Act Held that - Assessee did not have any obligations to deduct tax at source - whether under section 194 C or under section 195 - from payments made to the foreign airlines for airfreight. In this view of the matter, the impugned disallowances under section 40(a)(ia) are devoid of any merits, nor can these disallowances be made under section 40(a)(i) either - appeals are allowed

Summary

Issues:
- Whether the CIT(A) was justified in upholding the disallowance under section 40(a)(ia) of the Income Tax Act, 1961, regarding payments made by the assessee to Indian agents of foreign airlines without deduction of tax at source under section 194 C.

Analysis:
1. The appeals involved a common issue concerning the disallowance under section 40(a)(ia) of the Income Tax Act, 1961, related to payments made by the assessee to Indian agents of foreign airlines. The appeals were consolidated for convenience.

2. The core issue was whether the CIT(A) was correct in upholding the disallowance under section 40(a)(ia) due to non-deduction of tax at source under section 194 C from payments made to agents of foreign airlines. The assessment years were 2007-08 and 2008-09, with the CIT(A)'s orders dated 15th September 2011 and 14th October 2011.

3. The Assessing Officer contended that the assessee should have deducted tax at source under section 194 C from payments made to agents of foreign airlines. The assessee argued that payments were made to non-resident airlines through agents and relied on circular no. 723, exempting tax deduction under section 194C for payments to agents of foreign shipping companies.

4. The ITAT analyzed the nature of payments for airfreight made by the assessee to agents acting on behalf of foreign airlines. It was established that the agents acted as intermediaries, and the payments were ultimately for the benefit of foreign airlines. The ITAT concluded that the payments were not made to resident companies, thus section 194 C did not apply.

5. Referring to the requirement of moving an application under section 195(2) for payments to non-residents, the ITAT cited the Supreme Court's decision in GE India Technology Centre case, emphasizing the payer's discretion in determining tax liability. The ITAT highlighted that the payments to foreign airlines were not taxable in India as per tax treaties with the respective countries.

6. Considering the legal position and factual matrix, the ITAT ruled that the assessee was not obligated to deduct tax at source under section 194 C or section 195 from payments to foreign airlines. Consequently, the disallowances under section 40(a)(ia) were deemed unjustified, and the Assessing Officer was directed to delete the disallowances, granting relief to the assessee.

7. In conclusion, the ITAT allowed the appeals, overturning the disallowances under section 40(a)(ia) for non-deduction of tax at source from payments made to Indian agents of foreign airlines, based on the legal and factual analysis presented.