2013 (4) TMI 143 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(ia) - The assessee has made payment of freight charges without deducing tax at source - Held that - he payment of freight charges was made by the assessee on account of air fare and not shipping charges and even the said air fare was not directly paid to the airlines but the same was paid to the different parties who acted as freight booking agents. - CIT has not given any reason or basis to show as to how the said payments were exempt either under the relevant tax treaties or under the Board s circular. No opportunity was also given by him to the AO to examine the various details and documents filed by the assessee for the first time before him before giving relief to the assessee relying on the said details and documents Matter remanded back to AO for fresh decision.

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 50,91,541/- made by the AO under Section 40(a)(ia) due to non-deduction of TDS on air freight paid to foreign airline companies.
2. Reliance on Article 8 of the DTAA by the CIT(A) without giving an opportunity to the AO to examine the details, allegedly violating Rule 46A of the I.T. Rules.

Detailed Analysis:

1. Deletion of Disallowance under Section 40(a)(ia):

The primary issue in this appeal concerns the deletion by the CIT(A) of the disallowance of Rs. 50,91,541/- made by the AO under Section 40(a)(ia) of the Income Tax Act. The AO had disallowed this amount on the grounds that the assessee failed to deduct tax at source on air freight payments made to foreign airline companies. The AO argued that the income of these foreign airlines was deemed taxable in India unless specifically exempted by an order under Section 195(2), which was not produced. Additionally, the AO noted that the CBDT Circular No. 723, which exempts shipping companies, does not apply to airline companies. The payments were also made to freight booking agents rather than directly to the airlines.

In response, the assessee contended that the payments were covered under Double Taxation Avoidance Agreements (DTAA) with the respective countries, and thus, no tax deduction was required. The CIT(A) accepted this explanation, stating that the principles governing non-resident shipping companies and airlines are similar, and the circular should apply to both. The CIT(A) also relied on Article 8 of the DTAA, which exempts such payments from TDS.

2. Reliance on Article 8 of the DTAA and Violation of Rule 46A:

The Revenue argued that the CIT(A) erred in relying on Article 8 of the DTAA without giving the AO an opportunity to examine the details and documents submitted by the assessee for the first time during the appellate proceedings. This, the Revenue claimed, was a violation of Rule 46A of the I.T. Rules.

The Tribunal observed that the CIT(A) did not provide a clear basis for how the payments were exempt under the DTAA or the CBDT circular. Furthermore, the CIT(A) did not give the AO a chance to verify the new details and documents provided by the assessee. The Tribunal also noted discrepancies in the CIT(A)'s order, such as the mention of certificates issued under Section 197 for non-deduction of tax, which contradicted the AO's findings.

Conclusion:

Given these inconsistencies and procedural lapses, the Tribunal decided to set aside the CIT(A)'s order and remand the matter back to the AO. The AO is directed to re-examine the issue afresh, considering the details and documents submitted by the assessee, and provide a fair opportunity for the assessee to present their case. The appeal of the Revenue is thus allowed for statistical purposes.