2014 (9) TMI 208 - HC - Income Tax

Charges paid to clearing and forwarding agents disallowed u/s 40(a)(ia) TDS not deducted u/s 194C - Held that - Payment made to a travel agent or airline for purchase of the air ticket for travel was not required to be subjected to deduction of tax at source - in case of a chartered flight or bus etc., provisions of Section 194C would be attracted - Payment made to clearing and forwarding agents for carriage of goods would be subjected to tax at source u/s 194C of the Act - The Tribunal has held that the bills, subject matter of the dispute were for reimbursement of the air freight charges paid to airlines - Air freight charges would not include commission, handling or other charges, which were payable for the services rendered by the clearing and forwarding agents - For the services, separate bills were issued and tax at source was deducted u/s 194C - The payment towards air freight was required for exporting the goods as the respondent assessee was an exporter and the consignor relying upon Commissioner of Income Tax Vs. Hardarshan Singh 2013 (1) TMI 314 - DELHI HIGH COURT - on applying principle of privity of contract, mere reimbursement of charges would not require deduction of taxes at source - the parties had raised separate bills, which were reimbursed, as it was paid to the airlines for export of goods - the factual findings of the Tribunal are correct and the plea and stand taken by the Revenue is incorrect and wrong the order of the Tribunal is upheld Decided against revenue.

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of tax at source on payments to clearing and forwarding agents.
2. Interpretation of "carrying out any work" under Section 194C of the Income Tax Act, 1961.
3. Applicability of Explanation III to Section 194C regarding carriage of goods and passengers.
4. Treatment of reimbursement of air freight charges in relation to TDS obligations.

Detailed Analysis:

Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:
The appeals pertain to assessment years 2006-07 and 2008-09, where the Revenue challenged the Tribunal's orders disallowing expenditures due to non-deduction of tax at source under Section 194C. For the assessment year 2006-07, the respondent-assessee filed a return declaring a loss, but the Assessing Officer disallowed Rs. 92,27,420/- for failure to deduct 2% tax at source on payments to clearing and forwarding agents. Similarly, for the assessment year 2008-09, Rs. 48,61,509/- was disallowed on the same grounds.

Interpretation of "carrying out any work" under Section 194C:
Section 194C mandates tax deduction at source for payments made to a contractor for carrying out any work. The term "work" has been interpreted by the Delhi High Court in S.R.F. Finance Ltd. to exclude professional services and brokerage. The Supreme Court in Birla Cement Works vs. CBDT held that "any work" includes a wide range of activities but does not cover payments to transport contractors before Explanation III was added in 1995.

Applicability of Explanation III to Section 194C:
Explanation III, relevant to the assessment years in question, includes carriage of goods and passengers by any mode of transport other than railways within the definition of "work". The CBDT Circular No. 715 clarified that payments to clearing and forwarding agents for carriage of goods are subject to TDS under Section 194C, unlike payments to travel agents for air tickets.

Treatment of reimbursement of air freight charges:
The Tribunal found that the disputed bills were for reimbursement of air freight charges paid to airlines, which did not include commission or handling charges for services rendered by clearing and forwarding agents. Separate bills were issued for these services, and TDS was deducted under Section 194C. The Tribunal's factual finding, supported by the Delhi High Court in Commissioner of Income Tax Vs. Hardarshan Singh, held that mere reimbursement of charges does not require TDS deduction.

The Tribunal's decision was based on factual findings that the payments of Rs. 48,61,509/- were towards air freight charges reimbursed to airlines and did not include service charges to clearing and forwarding agents, which were separately billed and subjected to TDS. The Commissioner of Income Tax's affidavit confirmed this separation of charges.

For the assessment year 2006-07, the Tribunal and Commissioner of Income Tax (Appeals) found that none of the parties were paid in excess of Rs. 50,000/-, thus not requiring TDS under Section 194C(5). The Revenue's request for remand was denied due to the age of the assessment years and the Assessing Officer's failure to conduct the necessary exercise earlier.

Conclusion:
The appeals were dismissed based on the Tribunal's factual findings, affirming the Commissioner of Income Tax (Appeals)'s decision that the payments were reimbursements not subject to TDS, and the amounts paid to clearing and forwarding agents were below the threshold requiring TDS. The court found no merit in the Revenue's appeals.

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