2019 (6) TMI 1470 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Port Handling Charges under the head Works Cost during the relevant year and also the assessee has not deducted TDS on the said payment - HELD THAT - At the time of assigning the job itself, the assessee and the agent are aware that majority of the payment made to agent are towards payment to shipping companies, freight charges, container hiring charges, container movement charges etc. All the above charges are supported by the invoices from respective agencies. The assessee is required to make advance payment to the clearing agent and clearing agent will submit the actual expenditure details with the supporting invoices to the assessee by way of Memo . Assessee is actually utilizing their services for the above purpose and they are compensated with the service charges, which also part of quotation submitted at the time of offer. This is the regular practice in the customs clearance. Assessee gave customs clearance job to ICMS and paid advance as per the quotation. The agents have submitted the Memo of expenses which is placed on record at pages 9 10 of the paper book. From the above Memo, it is clear that all the expenses incurred by the agents were supported by invoices and certain expenses were incurred by ICMS on the field and the service charges for the services of ICMS. TDS provision can be invoked only on the compensation for the services rendered by the agents and all other expenses are supported with the relevant supporting papers. AO cannot insist to deduct taxes on the payment, which is not the income of the agent. In the shipping line of business, the agents are utilized to collect the charges on behalf of the shipping companies and container charges. The office of agents are passing entity. Payment made by the assessee towards port handling are not completely to the agent and for their services. Therefore, assessee is liable to deduct TDS only on the service charges to the agent and expenses which are not properly supported or the agent has taken services of other agents. The charges paid to shipping companies are not taxable, they are not expected to come under TDS provision. Imagine a situation, the agent renders services for the compensation of let us say 5% of the total port handling charges and he pays the above 95% to the shipping company and gets the required invoices. If the assessee deducts TDS on total amount, can the service agent survive. AO and first appellate authority have to understand the trade practice before coming to a conclusion, which may end up enforcing hardship on the assessee as well as on service provider. CIT(A) has categorized the expenses in 4 categories, viz., 1) Expenses incurred towards services rendered by third parties to ICMS on behalf of the assessee, which amounted to ₹ 24,50,980/- 2) Expenses incurred towards services rendered by ICMS on its own for the assessee, but without outsourcing the same to a third party, which amounted to ₹ 6,56,774/-. 3) Expenses incurred towards service charges paid to ICMS towards various services rendered by ICMS, some on its own and some other services by outsourcing to a third party amounting to ₹ 64,000/-. 4) Expenses incurred towards service tax on service charges paid to ICMS amounting to ₹ 6,592/-. The assessee is not expected to deduct tax on category 1. Therefore, AO is directed to restrict the disallowance u/s 40(a)(ia) to the extent of category 2 3 only. Item 4 is service tax. Therefore, ground raised by the assessee in this regard is allowed.

Summary

Issues: Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS on Port Handling Charges.

Analysis:
1. The appeal was filed against the order of the CIT(A) upholding the disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for the Assessment Year 2012-13.
2. The Assessing Officer (AO) disallowed an amount incurred towards Port Handling Charges under the head "Works Cost" as TDS was not deducted on the payment made by the assessee.
3. The CIT(A) upheld the disallowance to the extent of a specific amount after considering various case laws.
4. The grounds of appeal raised by the assessee challenged the CIT(A)'s decision, arguing that the disallowance was not justified and that the payments were not reimbursement of expenses.
5. The assessee contended that the Memo of Expenses was not a composite invoice but an account rendered by the agent, supported by invoices from service providers.
6. The Tribunal noted that the practice in customs clearance involved agents handling various charges on behalf of the assessee, and TDS should only apply to service charges, not all expenses.
7. The Tribunal differentiated between expenses for services rendered by third parties, services by the agent, service charges, and service tax, directing the AO to restrict the disallowance to specific categories only.
8. Consequently, the appeal was partly allowed, and the disallowance under section 40(a)(ia) was limited to certain expenses, while the service tax component was excluded.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision on the disallowance under section 40(a)(ia) of the Income Tax Act, 1961.