2015 (11) TMI 536 - AT - Income Tax

TDS u/s 194C - payment for freight charges on goods received by the assessee - Held that - It is clear from the bill dt.17.04.2004 available on record that Kanakadurga Lorry Office was not the owner of the lorry. For application of Section 194C of the Act, it is essential that there is a contract between the assessee and the person who is transporting the goods. Question before us is whether Shree Gajanan Industries who was the supplier to goods the assessee had engaged the lorry owner through Kanakadurga Lorry Office at the behest of the assessee or on its own. If it was on the direction of the assessee that the lorry was engaged by the supplier, then we can construe the contract as one between the assessee and the lorry office. It might be true that the assessee paid to the lorry owner the balance of the amount due for the transportation. However, existence of agreement for transportation, whether oral or written, if any, between the assessee and Shree Gajanan Industries, as to how the supplies were to be made, viz., whether it was the responsibility of the seller to find the transporter and transport it to the assessee s premises, or it was under direction of the latter the former was doing so, was never verified by the lower authorities. We are of the opinion that this issue requires a fresh look by the AO for verifying all aspects of the payment of freight charges.- Decided in favour of assessee for statistical purpose. Payments effected to Hariharan Logistics for freight and forwarding of goods exported by the assessee - Held that - As assessee can always plead that recipient of the amounts had accounted the income and filed returns and hence the rigors of Section 40(a)(ia) of the Act could not be applied to it. However, question whether the recipients of payments had indeed accounted the amounts and returned the income therefrom in their return of income requires to be verified. We are of the opinion therefore that this issue also requires a fresh look by the AO. - Decided in favour of assessee for statistical purpose.

Summary

Issues Involved:
1. Disallowance of freight on purchase under Section 40(a)(ia) of the Income Tax Act.
2. Disallowance of freight forwarding expenses under Section 40(a)(ia) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Freight on Purchase under Section 40(a)(ia):
The assessee, an exporter of spices and food items, filed its income return for the assessment year declaring an income of Rs. 1,25,16,914/-. During the assessment proceedings, the AO noted that the assessee had made payments for freight on purchases without deducting tax at source, as mandated by CBDT circular No.715 dated 08.08.1995. The AO disallowed Rs. 10,23,138/- for freight on purchases under Section 40(a)(ia) of the Income Tax Act. The assessee contended that the lorries were engaged by the suppliers, and payments to individual lorry drivers did not fall under Section 194C of the Act. The CIT (A) upheld the AO's decision, stating that the supplier was only a facilitator for transportation, and the transport agency issued the lorry receipts. The CIT (A) found the assessee's submissions contradictory and concluded that the assessee was obligated to deduct tax on the freight expenditure.

Upon appeal, the tribunal noted that for the application of Section 194C, a contract between the assessee and the transporter is essential. The tribunal found that the lower authorities did not verify whether the supplier engaged the transporter at the behest of the assessee or on its own. The tribunal remitted the issue back to the AO for a fresh verification of all aspects of the payment of freight charges.

2. Disallowance of Freight Forwarding Expenses under Section 40(a)(ia):
The assessee also paid Rs. 36,16,957/- to clearing and forwarding agents during its export business without deducting tax at source. The assessee argued that these payments were reimbursements for expenses incurred by the forwarding agents, who had already declared these amounts as their income. The AO disallowed these expenses under Section 40(a)(ia), and the CIT (A) upheld this decision, noting that the payments claimed as reimbursements were not actual reimbursements and that the forwarding agents were under a contractual obligation to provide multiple services.

The tribunal considered the legislative history and amendments to Section 40(a)(ia) and noted that if the recipient of the payments had accounted for the income and paid taxes, the rigors of Section 40(a)(ia) could not be applied to the payer. The tribunal cited the decision in DCIT v. Ananda Marakala, which held that if the recipient had accounted for the income, the payer could not be held liable for non-deduction of tax at source. The tribunal remitted the issue back to the AO to verify whether the recipients had indeed accounted for the amounts and returned the income in their returns.

Conclusion:
The tribunal set aside the orders of the lower authorities and remitted both issues back to the AO for fresh verification in accordance with the law. The appeal of the assessee was allowed for statistical purposes. The order was pronounced in the open court on October 1, 2015.