2020 (10) TMI 370 - HC - Income Tax

TDS u/s 194C - payments made to C F agents - Whether it is outright reimbursement of freight charges having no element of profit ? - whether Hon'ble Tribunal was right in law in upholding the disallowance under Section 40(a)(ia) of IT Act when said section cannot be applied in the instant case ? - HELD THAT - Unless the paid amount has any income element in it, there will arise no liability to pay any income tax upon such amount - in such a situation, there will also arise no liability of any deduction of tax at source upon such amount. Section 190 of the IT Act is to be found in Chapter XVII of the IT Act concerning the collection and recovery of tax. Sub section (2) of Section 190 of IT Act provides that nothing in this Section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of Section 4. Section 190 of IT Act states the general rule where provisions of Chapter XVII apply. Section 194(C) of the IT Act which is a part of Chapter XVII specifically concerns payments to be made to contractors which would include C F agents. Liability to deduct or collect income tax at source is upon such income as referred to in Section 190(1) of the IT Act. The expression such income would ordinarily relate to any amount which has an income element in it and not otherwise. This is because the regime of TDS was enacted for the purpose of easy collection of income tax or to prevent the tax evasion. From bare reading of text of Section 190 and other provisions to be found in Chapter XVII, it deals with collection and recovery of tax . It is clear that the TDS regime is nothing but an alternate mode of recovery or collection of income tax. In Krupp Udhe GMBH 2010 (3) TMI 287 - BOMBAY HIGH COURT the Division Bench of this Court speaking through Dr. D. Y. Chandrachud, as His Lordship then was, held that the question as to whether the reimbursement of expenses will form a part of the taxable income is not res integra in so far as this Court is concerned. Reference was then made to the decision in Siemens Aktiongesellschaff 2008 (11) TMI 74 - BOMBAY HIGH COURT wherein another Division Bench of this Court agreed with the view taken by the Calcutta High Court in CIT Vs Dunlop Rubber Co. Ltd. 1982 (2) TMI 24 - CALCUTTA HIGH COURT and Industrial Engineering Projects (P) Ltd., 1992 (7) TMI 38 - DELHI HIGH COURT amounts by way of reimbursement expenses do not constitute income as such and liable to any income tax. Assessees only contend that in clear cases where separate bills have been raised by the C F agents towards the reimbursement of freight charges, they are not liable to deduct tax at source upon payment towards such reimbursement components, since, such payment has no income element embedded in it. According to us, the Assessees' contention deserves to be upheld in the facts and circumstances of the present case. There are decided cases which support the contention of the Assessees and reference can be usefully made to some such cases. - Decided in favour of assessee.

Summary

Issues Involved:
1. Liability to deduct tax at source under Section 194C of the IT Act on payments made to C & F agents.
2. Validity of disallowance under Section 40(a)(ia) of the IT Act.
3. Deduction under Section 80IB of the IT Act (conditional upon the outcome of the second issue).

Detailed Analysis:

1. Liability to Deduct Tax at Source under Section 194C of the IT Act:
The core issue was whether the appellant was liable to deduct tax at source on payments made to C & F agents, which were claimed as outright reimbursement of freight charges with no profit element.

- Appellant's Argument: The appellant argued that the C & F agents raised separate bills for service charges and reimbursement of freight charges. Since the reimbursement had no income element, there was no obligation to deduct TDS. They relied on several precedents, including *Director of Income Tax v Krupp Udhe Gmbh* and *CIT v Siemens Aktiongesellschaff*, which held that reimbursement of expenses does not constitute income.

- Respondent's Argument: The respondent emphasized the binding nature of CBDT Circular No.715, which mandates TDS on payments made to contractors, including C & F agents. They argued that the ITAT's decision was consistent with this Circular.

- Court's Analysis: The court referred to Sections 4 and 190 of the IT Act, which clarify that TDS is applicable only on amounts with an income element. It noted that the appellant had provided sufficient evidence showing separate billing for service charges and freight reimbursement. The court found that the ITAT had misread the bills and incorrectly identified Jet Air Freighters as carriers instead of C & F agents. The court also noted that the CBDT Circular should be interpreted in line with the IT Act and existing judicial precedents.

- Judgment: The court held that the appellant was not liable to deduct TDS on the reimbursement of freight charges, as these payments did not have an income element. The first substantial question of law was answered in favor of the appellant.

2. Validity of Disallowance under Section 40(a)(ia) of the IT Act:
The second issue was whether the disallowance under Section 40(a)(ia) was valid when the section was not applicable to the case.

- Appellant's Argument: The appellant contended that since there was no obligation to deduct TDS on the reimbursement of freight charges, the disallowance under Section 40(a)(ia) was not justified.

- Court's Analysis: The court reiterated its findings on the first issue, emphasizing that the reimbursement did not constitute income and thus did not attract TDS. It also reviewed the ITAT's reasoning and found apparent errors in the interpretation of the bills and the amounts involved.

- Judgment: The court concluded that the disallowance under Section 40(a)(ia) was not applicable in this case. The second substantial question of law was answered in favor of the appellant.

3. Deduction under Section 80IB of the IT Act:
This issue was conditional and would only be considered if the disallowance under Section 40(a)(ia) was upheld.

- Court's Decision: Since the court ruled in favor of the appellant on the first two issues, there was no need to address the third issue.

Conclusion:
The appeals were allowed, and the impugned orders were modified accordingly. The first two substantial questions of law were answered in favor of the appellant, and the third question was rendered moot. The court emphasized that the CBDT Circular should be interpreted in line with the IT Act and judicial precedents, and there was no obligation to deduct TDS on the reimbursement of freight charges.