2022 (4) TMI 576 - AT - Income Tax

TDS u/s 194C - disallowance under section 40 (a) (ia) for non-deduction of TDS on reimbursement of Transport charges and CFS charges paid - as per revenue when the assessee has made the payment on behalf of its customers to CFS agents, then the assessee shall deduct TDS on said payments - HELD THAT - In this case, the assessee is a Custom House Agent has made payment to CFS Agents on behalf of its customers and claimed that payment is in the nature of reimbursement of expenses and thus, outside the scope of Sec.194C of the Act. We do not find merits in the arguments of the assessee, because as per Sec.194C of the Act, it is abundantly clear that a person, who makes payment is required to deduct TDS and thus, we are of the considered view that there is no merit in the arguments of the assessee that payments made to CFS Agents, is outside the scope of Sec.194C . We further noted that the very same issue is covered by the decision of ITAT, Chennai, in the case of M/s.Prahari Agency Pvt. Ltd. 2021 (11) TMI 82 - ITAT CHENNAI wherein, the Tribunal had considered identical issue of payment made by custom house agent to CFS agents and held that provisions of Sec.194C of the Act, is applicable when the Custom House Agent makes payment to CFS Agents. We are of the considered view that payment made by the assessee to CFS Agents is covered u/s.194C of the Act and thus, for non-deduction of TDS on such payments, the AO has rightly disallowed expenses u/s.40(a)(ia) Scope of amendment made by the Finance Act, 2010 to the provisions of Sec.194C - assessee claimed that if at all, payment is required to be disallowed, then only 30% of expenses needs to be disallowed, but not the total amount paid by the assessee without deduction of TDS - We find that the provisions of Sec.40(a)(ia) of the Act, has been amended from time to time to give relaxation to the assessee for not complying with TDS provisions. The said amendments have been considered by various Courts, including the Hon ble Supreme Court in the case of CIT v. Calcutta Export Co. 2018 (5) TMI 356 - SUPREME COURT and held that amendment made by the Finance Act, 2010 to provisions of Sec.40(a)(ia) of the Act, is curative in nature and should be given retrospective operation from the date of insertion of the provision i.e. w.e.f. AY 2005-06. Since, provisions of Sec.40(a)(ia) of the Act, has been amended so as to disallow 30% of any sum payable on which tax is deductible at source under Chapter-XVIIB and such tax has not been deducted or after deduction, has not been paid on or before the due date specified in sub-sec.(1) of sec.139 of the Act, and such amendment is held to be retrospective in nature and applicable from AY 2005-06. Therefore, we are of the considered view that only 30% of expenses incurred by the assessee without TDS should be disallowed u/s.40(a)(ia) of the Act. Hence, we direct the AO to restrict the disallowance of payment made to CFS Agents without deduction of TDS @30% of such payments. Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) for non-deduction of TDS on reimbursement of Transport charges and CFS charges.
2. Applicability of Section 194C for payments made towards CFS charges.
3. Whether the disallowance should be limited to 30% of the expenses as per the amendment to Section 40(a)(ia).

Detailed Analysis:

1. Disallowance under section 40(a)(ia) for non-deduction of TDS on reimbursement of Transport charges and CFS charges:

The assessee firm, a Custom House Agent, filed returns for the assessment years 2009-10 and 2010-11. During assessment proceedings, the AO noticed non-deduction of TDS on CFS charges paid at Chennai Port, despite deduction at Tuticorin Port. The AO disallowed ?24,01,000/- under Section 40(a)(ia) for non-deduction of TDS under Section 194C. The assessee argued that these payments were reimbursements and thus outside the scope of Section 194C. The CIT(A) upheld the AO's disallowance. The Tribunal found no merit in the assessee's argument, stating that as per Section 194C, the person making the payment is required to deduct TDS, irrespective of whether the payment is made on behalf of a third party.

2. Applicability of Section 194C for payments made towards CFS charges:

The Tribunal referenced the ITAT Chennai decision in M/s. Prahari Agency Pvt. Ltd. v. ITO, which held that payments made by a Custom House Agent to CFS agents fall under Section 194C. The Tribunal reiterated that the person making the payment, even if on behalf of clients, is responsible for TDS deduction. Payments made by the assessee to CFS agents were not considered reimbursements but direct payments between principal parties. Therefore, the Tribunal upheld the AO's decision that the payments were subject to TDS under Section 194C.

3. Whether the disallowance should be limited to 30% of the expenses as per the amendment to Section 40(a)(ia):

The assessee argued that only 30% of the expenses should be disallowed based on the retrospective amendment to Section 40(a)(ia) by the Finance Act, 2010, which was upheld by the Supreme Court in CIT v. Calcutta Export Co. The Tribunal agreed that the amendment is curative and applies retrospectively from AY 2005-06. Consequently, the Tribunal directed the AO to restrict the disallowance to 30% of the expenses incurred without TDS.

Conclusion:

The Tribunal concluded that the payments made to CFS agents were subject to TDS under Section 194C, and upheld the disallowance under Section 40(a)(ia) for non-deduction of TDS. However, it directed the AO to limit the disallowance to 30% of the expenses, following the retrospective amendment to Section 40(a)(ia). The appeals for both assessment years 2009-10 and 2010-11 were partly allowed.