2014 (7) TMI 418 - AT - Income Tax

Disallowance of Freight and insurance charges paid to Shipping Companies u/s 40(a)(ia) - TDS u/s 194C / 195 Held that - The assessee has to show that the shipping companies to whom payments were made are not only non-residents, but also he has to show they were assessed u/s 172 of the Act - only if the assessee is able to prove the facts, then he will be relieved of from the liability to deduct tax at source from the payments made to them towards freight and insurance charges - the legal position will not change if the payments to the non-resident shipping companies are made through their Indian agents also - the assessee has furnished a certificate obtained from M/s MSC Agency (India ) Pvt Ltd, wherein it is stated that the concern is the General Agents of MSC Mediterraneal Shipping Company - this certificate was not considered by both the tax authorities - the fact relating to the assessment of shipping companies to whom or on behalf of whom the charges were paid by the assessee were not brought on record - the issue requires fresh examination at the end of the AO thus, the order of the CIT(A) is set aside and the matter is to be remitted back to the AO for fresh adjudication Decided in favour of revenue.

Summary

Issues:
Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for freight and insurance charges paid to Shipping Companies.

Detailed Analysis:

Issue 1: Disallowance under section 40(a)(ia) of the Income Tax Act
The cross-appeals were filed challenging the order related to the assessment year 2008-09. The main issue was the disallowance made by the Assessing Officer under section 40(a)(ia) of the Income Tax Act for freight and insurance charges paid to Shipping Companies. The Assessee imported marbles and granites and incurred expenses on freight and insurance charges. The Assessing Officer disallowed the deduction as tax was not deducted at source. The Assessee relied on a CBDT Circular stating that tax deduction provisions do not apply to foreign shipping companies. However, the AO disagreed based on a Bombay High Court decision and disallowed the deduction.

Issue 2: First Appellate Proceedings
In the first appellate proceedings, it was noted that payments were made to both foreign and Indian companies. The CIT(A) held that the Circular applied only to foreign companies, not Indian ones. He deleted the disallowance for payments to foreign companies but confirmed it for payments to Indian companies, leading to appeals from both parties.

Issue 3: Tribunal's Analysis and Decision
The Tribunal analyzed the CBDT Circular and emphasized that the exemption from tax deduction applied only if the non-resident shipping companies were assessed under section 172 of the Act. The Tribunal disagreed with the CIT(A)'s approach of differentiating based on residential status and emphasized the need to prove the assessment under section 172. As crucial facts were missing, the Tribunal directed a fresh examination by the assessing officer, considering the CBDT Circular. The Tribunal clarified that the Bombay High Court decision on demurrage charges was not directly applicable to the current case.

Conclusion
The Tribunal allowed the appeals for statistical purposes, setting aside the CIT(A)'s order and directing a fresh examination by the assessing officer. The decision highlighted the importance of proving the assessment status of the shipping companies to determine the applicability of tax deduction rules.