2018 (2) TMI 2037 - AT - Income Tax

TDS u/s 195 - remittances to non-residents - disallowance made u/s 40(a)(i) - freight charges and cargo handling charges paid by the assessee in foreign currency to non-residents for services rendered outside India - HELD THAT - CIT(A) has rightly concluded that the freight charges and cargo handling charges paid by the assessee in foreign currency to non-residents for services rendered outside India is not susceptible to provisions of section 195 of the Act. It is an admitted position that the recipients did not have any permanent establishment in India or any agent in India. Consequently the chargeable income thereof under s.4 did not accrue or arise in India in the hands of the non-residents having regard to section 5 r.w.s.9(1) of the Act. Accordingly where the income in the hands of non-residents in question i.e. foreign remittances made by the assessee was not taxable in India the remittance was not susceptible to withholding of taxes (TDS) under s.195 of the Act. In the absence of abligation cast upon the assessee to deduct TDS under s.195 section 40(a)(i) has no application in the instant case for disallowance of the expenses. The CIT(A) has rightly concluded the issue in favour of assessee

Summary

Issues:
Applicability of section 195 and section 40(a)(i) of the Income Tax Act, 1961 on foreign remittances to non-residents for freight charges and cargo handling services.

Analysis:
The appeal involved a single issue concerning the applicability of section 195 and section 40(a)(i) of the Income Tax Act, 1961 on foreign remittances totaling ?33,65,658 made to non-residents for freight charges and cargo handling services. The Assessing Officer (AO) observed that tax was not deducted at the source for these payments, invoking section 40(a)(i) to deny the deductions claimed by the assessee. The assessee contended that tax was not deductible as the services were rendered outside India, and the recipients were not taxable in India due to the absence of a permanent establishment. The Commissioner of Income Tax (Appeals) reversed the AO's decision, granting relief to the assessee. The CIT(A) noted that the expenses were incurred in foreign currency and remitted to non-residents for services provided outside India, thus not subject to TDS under section 195. The CIT(A) relied on precedents and held that the AO erred in disallowing the expenses, ultimately allowing the appeal.

The Tribunal, after hearing both parties, upheld the CIT(A)'s decision. It concurred that the freight charges and cargo handling payments made in foreign currency to non-residents for services outside India were not covered under section 195 of the Act. Since the recipients had no permanent establishment or agent in India, the income did not accrue or arise in India, making it non-taxable in India under section 4 read with sections 5 and 9(1) of the Act. Consequently, the Tribunal agreed that the remittances were not subject to TDS under section 195, and therefore, section 40(a)(i) did not apply for disallowance of expenses. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's appeal.

In conclusion, the Tribunal affirmed the CIT(A)'s decision, emphasizing that the foreign remittances for freight charges and cargo handling services to non-residents were not liable for TDS under section 195 and, consequently, section 40(a)(i) did not apply. The judgment highlighted the importance of considering the location of service provision and the taxability of income in determining the applicability of TDS provisions on foreign remittances to non-residents.