2024 (1) TMI 745 - AT - Income Tax

TDS u/s 195 OR 172 - remittance to Marshal Island based company towards damage charges for physical damage sustained by vessels and losses caused to the owner of the vessels - as submitted damage to the vessels has happened in India during the business carried out by the ship in India - as per Assessee lump sum consideration paid by the assessee does not fall within income /receipt as defined in Section 172 and is an income in the hands of the remitter falls under Section 5(2) and hence applying u/s 195, particularly, when there is no DTAA between India and Marshal Islands and remitter has not provided TRC, TDS @ 20% was directed as levied Crux of the argument of the assessee is this that as the agent acts on behalf of the non-resident owner or character, he steps into the shoes of the principal and accordingly provision of Section 172 only will be applicable and not the provision of Section 194C or 195 of the Act. HELD THAT - It is a fact that once the hired Vessel left the Porbandar Port and reached Durban South Africa, the charterer handed back the vessel to the owners who, in turn, raised these damages on the buyer i.e. the assessee before us. Thereafter, only upon arbitration and negotiation, the assessee was required to pay USD 4,50,000/- within 14 days from the date of settlement. It was further found from the settlement deed that the payments were reimbursements in nature and other damages raised are capital in nature CIT(A) declined to consider the same as income to the ship owner within the purview and scope of the provision of Section 5(2) of the Act and the direction passed by the Ld. AO to deduct tax at source on such payments in terms of the provision of Section 195(2) of the Act was found to be wrong, which, in our considered opinion also found to be just and proper for the reason as discussed hereinabove. We, therefore, confirm the order passed by the Ld. CIT(A). Decided against revenue.

Summary

Issues Involved:
1. Direction to cancel the order of deduction of TDS @20% on the payment of USD 4,50,000 to Titan Shipping Limited, Marshal Islands.
2. Applicability of Section 172 vs. Section 195 of the Income Tax Act.
3. Consideration of remittance as income under Section 5(2) of the Act.
4. Applicability of DTAA and TRC requirements.

Summary:

Issue 1: Direction to cancel the order of deduction of TDS @20% on the payment of USD 4,50,000 to Titan Shipping Limited, Marshal Islands.
The Revenue challenged the CIT(A)'s direction to cancel the TDS deduction order at 20% on the payment of USD 4,50,000 to Titan Shipping Limited. The assessee, an Indian company, had applied under Section 195(2) of the Act to determine tax liability on this remittance. The AO had directed a TDS deduction at 20% under Section 195, as there was no DTAA between India and Marshal Islands, and the remitter had not provided a TRC.

Issue 2: Applicability of Section 172 vs. Section 195 of the Income Tax Act.
The assessee argued that Section 172, which deals with the shipping business of non-residents, should apply instead of Section 195. They relied on Circular No. 723 issued by CBDT, which clarifies that Section 172 applies to non-resident shipping businesses, and not Sections 194C and 195. The CIT(A) accepted this argument, noting that the payments were reimbursements and capital in nature, and thus not taxable under Section 195.

Issue 3: Consideration of remittance as income under Section 5(2) of the Act.
The AO considered the lump sum payment as income under Section 5(2) of the Act, asserting that TDS should be deducted at 20% under Section 195. However, the CIT(A) found that the payments were reimbursements for damages and not income, thus not falling under the purview of Section 5(2).

Issue 4: Applicability of DTAA and TRC requirements.
The AO's decision was partly based on the absence of a DTAA between India and Marshal Islands and the lack of a TRC from the remitter. The assessee later provided the TRC and other relevant documents, which were accepted as additional evidence. The CIT(A) ruled that Section 206AA, which mandates higher TDS in the absence of a PAN, was not applicable.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the provisions of Section 172 were applicable, and not Section 195. The appeal by the Revenue was dismissed, and the cross-objection by the assessee became infructuous. The Tribunal concluded that the payments were not taxable as income under Section 5(2) and that the TDS deduction at 20% was not justified.