2014 (4) TMI 1009 - HC - Income Tax

TDS u/s 194C / 195 - Additions u/s 40(a)(ia) - Whether payment made to the four several agents or any part of such payments were in fact made to the non-resident foreign carrier Held that - Each of the four agents are the agents of the foreign carriers - the airway bill contain the name of the issuing carrier's agents - The name of the agent appearing in the airway bill corresponds with the name of the agents to whom payments were actually made by the assessee - no elaborate reasoning is required to show that each of the four agents was acting for a disclosed principal - Any payment made to any such agent is on behalf of its principal - The agents was merely the collecting hand insofar as the airfreight is concerned - Payment made to such agents is in fact a payment made to the principal. Chargeability of payments made to Non-resident Airfreight payment Held that - Relying upon GE India Technology Centre Private Ltd. Versus Commissioner of Income Tax & Anr. 2010 (9) TMI 7 - SUPREME COURT OF INDIA - The payer is obliged to deduct tax at source only if tax upon such payment is assessable in the country - Section 195 specifically excludes the liability to deduct tax at source when payment is made to a foreign company which is not chargeable to tax in the country - The payments are as such not chargeable to tax - the assessee had no obligation to deduct any tax Decided in favour of Assessee. Liability to deduct TDS u/s 194(C) of the Act Held that - The assessee was not liable to deduct any tax at source in so far as the payment of airfreight made to the foreign carrier was concerned - But the other payments were in fact made to the resident agent and to that extent tax was deductible - Payments made to the resident agent otherwise than on account of airfreight payable to his principal are open to deduction at source u/s 194(C) thus, the order of the CIT(A)is set aside and the matter is remitted back to the AO Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Whether payment made to the agents was in fact made to a non-resident foreign carrier.
2. Whether the payments made to the non-resident on account of airfreight are chargeable to tax under the provisions of the Income-Tax Act, 1961.
3. If the payments are not chargeable to tax, whether there is any liability on the part of the assessee to deduct tax at source under section 194(C).

Detailed Analysis:

Issue 1: Payment Made to Agents
The court examined whether the payments made to the four agents were in fact payments made to the non-resident foreign carrier, Lufthansa Airlines. The agents were identified as Bag Global (I) Ltd., H.T.L. Logistics (I) Pvt. Ltd., The Express Pvt. Ltd., and Green Ways Shipping Corporation. The court concluded that each agent acted for a disclosed principal, Lufthansa Airlines. The airway bills contained the names of the issuing carrier's agents, confirming that payments made to these agents were effectively payments made to Lufthansa. Therefore, the court answered this question in the affirmative, establishing that the payments were indeed made to the non-resident foreign carrier.

Issue 2: Chargeability of Payments to Tax
The court referred to the Supreme Court judgment in GE India Technology Centre P. Ltd. v. Commissioner of Income-Tax and Another, which clarified that tax is deductible at source only if the payment is chargeable to tax in India. The Double Taxation Avoidance Agreement (DTAA) between India and Germany was also considered, specifically Article 8, which states that profits from the operation of aircraft in international traffic are taxable only in the country where the enterprise's effective management is situated. Since Lufthansa is a German company, the payments were not chargeable to tax in India. Thus, the court answered this question in the negative, indicating that the payments made to Lufthansa were not chargeable to tax under the Income-Tax Act, 1961.

Issue 3: Liability to Deduct Tax at Source
Given the negative answer to Issue 2, the court concluded that the assessee was not liable to deduct tax at source for the airfreight payments made to the foreign carrier, Lufthansa. However, the court also noted that other payments made to the resident agents, not related to airfreight, were subject to tax deduction at source under section 194(C). The court rejected the argument that bifurcation of payments was not possible, as discussed in the case of Associated Cement Co. Ltd. v. Commissioner of Income-Tax and Another. The court clarified that the bifurcation in this case was between airfreight payments to the foreign carrier and other payments to the resident agents. Therefore, while the airfreight payments were not subject to tax deduction, the other payments to resident agents were.

Conclusion:
The appeal succeeded, and the orders passed by the Tribunal, CIT (appeals), and the assessing officer were set aside. The matter was remitted to the assessing officer to ascertain the total amount of airfreight paid to Lufthansa and allow it as a deductible expenditure. Other payments made to resident agents were not deductible due to the failure to deduct tax at source. The assessing officer was instructed to complete the assessment within three months and process the refund with interest as per law.