Subject: Disallowance on account of non-deduction of TDS on airfreight
Referred Sections:
section 40(a)
Section 44BBA of I.T. Act
Section 40(a)(i) of the I.T. Act
Section 194C
section 195
Sections 194C and 195
Section 194C of the I.T. Act.
section 143(3) or under section 143(1) of the I.T. Act.
section 143(1) of the I.T. Act.
section 154 of the I.T. Act
section 143(3).
section 133(6) of the I.T. Act
section 44B r.w.s.172 of the I.T. Act
Sections 194C and 195
Section-7 of the I.T. Act
Section 195(1)
section 195 of the I.T. Act,
sections 30 to 38 of I.T. Act,
section 143(3)/143(1) of the I.T. Act,
section 154 of the I.T. Act
section 194C
section 40(a)(ia) of the I.T. Act”.
Section 44B r.w.s. 172 of the I.T. Act
sections 172, 194C and 195 of the Income-tax Act,
section 40A(3) of the I.T. Act.
sections 234A, 234B, 234C and 234D of the I.T. Act.
Referred Cases/judgments
G.E. India Technology Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC)
ITO vs. Universal Traffic Co. (2014) 42 CCH 55 (Mumbai-Tribu.)
CIT vs. Cargo Linkers (2008) 218 CTR 695
M/s. Hindustan Coca Cola Beverages Pvt. Ltd., vs. CIT (2007) 293 ITR 226 (SC)
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES "D" : DELHI
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND
SHRI L.P. SAHU, ACCOUNTANT MEMBER
ITA.No.301/Del./2018
Assessment Year 2014-2015
M/s. KGL Network (P) Ltd.,
Delhi 110 037.
PAN AACCK8195R The ACIT, Circle-14(2),
C/o. M/s. RRA Tax India, Vs New Delhi.
D-28, South Extension,
Part-I, New Delhi 110 049.
(Appellant) (Respondent)
Shri Ashwani Taneja, Advocate,
Shri Saurabh Goyal, C.A.
For Assessee : Shri Priyansh Jain, C.A. &
Shri Anil Sharma &
Ms. M. Poorva.
For Revenue : Shri Vijay Verma, CIT-D.R.
Date of Hearing : 10.05.2018
Date of Pronouncement : 02.07.2018
ORDER
PER BHAVNESH SAINI, J.M.
This appeal by assessee has been directed against
the Order of the Ld. CIT(A)-18, New Delhi, Dated 28.12.2017,
for the A.Y. 2014-2015, on the following grounds :
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Network (P) Ltd., Delhi.
1. "That having regard to the facts and circumstances of
the case, Ld. CIT(A) has erred in law and on facts in
confirming the action of Ld. AO in making disallowance of
Rs. 120,86,24,827/- on account of non deduction of TDS
u/s 40(a)(i), more so when such amount was not claimed
as deduction and it was reimbursement on actual basis.
2. That in any case and any view of the matter, action of
Ld. CIT(A) in confirming the action of Ld. AO in making
disallowance of Rs. 120,86,24,827/- on account of non
deduction of TDS u/s 40(a)(i), is bad in law and against
the facts and circumstances of the case.
3. That having regard to the facts and circumstances of
the case, Ld. CIT(A) has erred in law and on facts in
confirming the action of Ld. AO in making disallowance of
Rs.8,17,807/- u/s 40A(3) of Income Tax Act, 1961.
4. That having regard to the facts and circumstances of
the case, Ld. CIT(A) has erred in law and on facts in not
reversing the action of Ld. AO in charging interest u/s
234A, 234B, 234C and 234D of the Income tax Act, 1961."
2. We have heard the Learned Representatives of both
the parties and perused the material on record.
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Network (P) Ltd., Delhi.
3. Ground Nos. 1 and 2 have been raised for
disallowance on account of non-deduction of TDS on airfreight.
3.1. During the year, the assessee-company was engaged
in the business of total logistic solutions providers, general
cargo agents, charter party contractors, shipping agents,
packing agents, salvors, wreck removers, wreck raisers,
auctioneers, baggage transporters, forwarding and clearing
agents, wholesale warehousemen, booking agents of goods,
articles or things on behalf of customers from one place to
another place in any part of the world.
3.2. During the assessment proceedings, the basic
financial statements along with computation of income and Tax
Auditor report were filed. On perusal of the records, it was
noticed that Assessee-Company had made certain payments to
non-resident parties with respect to airfreight in tune of
Rs.120,86,24,827/-. The assessee-company was asked to file
details with regard to such airfreight payments, which were
filed.
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Network (P) Ltd., Delhi.
3.3. The A.O. on perusal of the same noted that under
column 21(b) inadmissibility of certain payments had been
reported. Column 21(b) of tax audit report talks about amounts
inadmissible under section 40(a) and further, sub-column (b)(i)
talks about amounts inadmissible as payments to non-resident
referred to in sub-clause (i). When some amounts are reported
as inadmissible in tax audit report, such amounts are to be
added back to profits and gains from business and profession.
On perusal of the computation of income, A.O. found that the
amounts inadmissible as per tax audit report had not been
added back. The details of transactions/payments made to non-
residents which have been shown as inadmissible on account
of non-deduction of TDS have been reproduced by the A.O. from
pages 3 to 46 of the assessment order. The A.O, therefore, noted
that these details clearly indicate that freight charges., in tune
of Rs. 120,86,24,827/- have been made to various non-resident
agents and parties of vivid nationalities. The Assessee-Company
has failed to deduct any TDS with regard to such airfreight
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Network (P) Ltd., Delhi.
charges and the same contentions has duly been raised by the
Auditor in tax audit report. The explanation of assessee was
called for as to why the above amounts should not be disallowed
in the absence of TDS being deducted. The A.O. noted in the
show cause notice to explain whether provisions of Section
44BBA is applicable in the case of assessee and that assessee
failed to provide tax residence certificate of all concerned parties
and that Article 8 of DTAA with concerned State/Country
governs the air transport and freight related things for most of
the DTAA's. The assessee explained Section 44BBA of I.T. Act is
not applicable to the assessee because it is a resident company.
Valid tax residence certificates of all the Companies are
enclosed. Article 8 of DTAA with the concerned State/Country
governs the air transport and freight related things for most of
DTAA's. The A.O. however noted that tax audit is prepared by
an Independent Auditor which gives fair and true picture of the
accounts of the assessee, in which, Auditor has mentioned that
the payments made to non-residents are inadmissible,
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Network (P) Ltd., Delhi.
therefore, these should have been added back by the assessee-
company.
4. The assessee-company further submitted before A.O.
that it has reimbursed air-freight to non-residents on behalf of
Indian resident customers without deducting TDS. Section
40(a)(i) of the I.T. Act is not applicable because the assessee-
company has never claimed the airfreight as expenses in the
Profit & Loss Account. Such type of payments are also exempt
in consonance with India's DTAA. Section 194C is also not
applicable because the payments are made to foreign non-
resident agents. As per provisions of the respective tax treaties,
it has been clearly provided that international traffic are taxable
only in the State, in which, respective enterprises are fiscally
domicile. The assessee-company has no obligation to deduct tax
at source whether under section 194C or under section 195 for
the payments made to non-residents towards airfreight. It was
submitted that all the payments are towards freight to
companies registered outside India and no tax is required to be
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Network (P) Ltd., Delhi.
deducted on payments to them since the payments to non-
residents are covered by provisions of Double Taxation
Avoidance Agreement ("DTAA") with those Countries. Further,
more payments to non-residents on account of airfreight are not
taxable in India. It is an admitted position that airfreight is paid
to the agents on the actual basis and that bills and airfreight
documents have been directly issued by foreign airlines. The
agents while accepting the payments for airfreight components
have been acted merely as agents of the respective airlines and
have not received the airfreight payments in their own right. In
copy of airway bills, name of these agents is mentioned as
"Issuing Carrier's" Agent. Further, Agent's code is given as
Agent's IATA Code. There is, thus, enough material to
demonstrate that persons having received money for the
airfreight, have received the same in their capacity as "Issuing
Carrier's Agent i.e., Agent of Airline concerned. The airfreight
payment is thus made to foreign airlines, though through the
agents, therefore, the payments cannot be said to have been
made to resident company. Accordingly, provisions of section
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194C do not apply. The assessee-company relied upon the
decisions of the Hon'ble Supreme Court in the case of G.E. India
Technology Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC) in
which it was held that "any person paying any sum to a non-
resident is not liable to deduct tax if such sum is not chargeable
to tax under the Act." The assessee-company also relied upon
other decisions of Hon'ble jurisdictional Delhi High Court in the
case of CIT vs. Estel Communications (P) Ltd., (2008) 217 CTR
102 (Del.) and decision of Karnataka High Court in the case of
Jindal Thermal Power Co. Ltd., 182 Taxman 252 in which it was
held that "there was no obligation to deduct tax at source since
there was no tax liability of non-resident in India. The assessee
bound to deduct TDS only if the freight payments to non-resident
is assessable in India." If the freight payment is not so
assessable, there is no question of deducting tax at source.
Sections 194C and 195 are not applicable to the case in case of
freight payment to non-resident. The assessee-company also
filed revised tax audit report. The A.O, however, did not accept
the contention of assessee-company. The assessee-company is
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Network (P) Ltd., Delhi.
basically a logistic and Cargos handling entity. M/s. Samsung
India Ltd., is a major client for the assessee company along
with others and 80% of the total business comes from M/s.
Samsung India Ltd., for the assessee-company. The assessee-
company handles shipment or cargos arriving at Air Ports and
dispatches such shipment to various locations as per client's
requirements. The assessee-company in its accounting
recognition taking revenue excluding freight charges in its P &
L A/c, whereas as per the assessee-company, the client's
including M/s. Samsung India Ltd., are deducting TDS on the
gross amount. M/s. Samsung India Ltd., and other clients are
treating it as reimbursement of expenses under section 194C
and deduct TDS accordingly. Whereas the assessee-company is
not deducting or withholding tax on the payment made to non-
resident agents. The A.O. noted that it has not been established
that payments made to non-residents were in the nature of
airfreight with any supporting documents. The assessee-
company has failed to establish the fact that whether payments
made to foreign agents are related to airfreight or it is mere
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reimbursement of expenses. The assessee-company failed to
provide details. Therefore, in the opinion of the A.O. the
assessee-company is required to deduct TDS on the amount of
payments made to various non-resident agents/parties for
freight. Therefore, A.O. disallowed the amount in question
because assessee-company failed to deduct TDS on the same.
[
5. The assessee-company challenged the addition
before Ld. CIT(A). The written submissions of the assessee-
company is reproduced in the appellate order in which the
assessee-company reiterated the facts stated before the A.O. It
was also explained that though the payments have been made
to non-resident agents of the foreign airlines, but such freights
have not been paid by the assessee-company as its expenses
but have been paid primarily for and on behalf of M/s. Samsung
India Ltd., for which, the assessee-company, does work of
logistic solutions. In fact, the assessee-company, is reimbursed
on actual basis the amount of all expenses including freight by
M/s. Samsung India Ltd., and there is no profit element
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Network (P) Ltd., Delhi.
involved in such reimbursement. This fact is evident from the
details filed in the paper book and supported by sample copies
of the bills raised on the assessee-company and the bills raised
by the assessee-company in turn on M/s. Samsung India Ltd.,
which would show that amount actually paid as freight has
been reimbursed to the assessee-company by M/s. Samsung
India Ltd. The assessee-company did not make any claim of the
deduction of the expenses, therefore, no disallowance could be
made. The A.O. has not made out any case, if assessee-company
made any claim of deduction of such expenses. The assessee-
company relied upon order of ITAT, Mumbai Bench in the case
of ITO vs. Universal Traffic Co. (2014) 42 CCH 55 (Mumbai-
Tribu.) in which the Tribunal relied upon the decision of the
Hon'ble jurisdictional Delhi High Court in the case of CIT vs.
Cargo Linkers (2008) 218 CTR 695 in which the Hon'ble High
Court held that "Assessee being a Clearing and Forwarding
Agent, is an, intermediary who booked Cargo for and on behalf
of importers and exporters and facilitated the contract for
carrying goods, therefore, not liable to withhold tax under section
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Network (P) Ltd., Delhi.
194C from payments made towards airfreight on behalf of its
customers, decided the issue in favour of the assessee." The
Tribunal agreed with above proposition. It was noted that the
Privity of Contract is between the clients and not with the
assessee. There was no contact between the assessee and the
authorities, rather the assessee has acted as a mere
facilitator/agent between the parties and the authorities. It is
well understood that TDS is deductible under section 194C on
the payments made to the contractors/sub-contractors. Thus,
the basic premise for deducting tax is on the contracting
parties. In the absence of any contractual relationship between
the assessee and the airlines/shipping lines/authorities,
assessee agent is not liable to withhold tax or deduct tax under
section 194C of the I.T. Act. The Apex Court in the case of M/s.
Hindustan Coca Cola Beverages Pvt. Ltd., vs. CIT (2007) 293
ITR 226 (SC) held that "where the deductee concern have
already paid tax on the payments made by the assessee-payer,
then the department, could not deduct tax from the deductor of
this same income by treating the later to be an assessee-in-
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Network (P) Ltd., Delhi.
default." In the present case, the payees have offered the
corresponding income in the returns, therefore, alleged TDS
liability raised upon the assessee was not enforceable. Since the
contract was between the exporter and the shipping lines and
the assessee merely acted as an Agent, therefore, it is not liable
to deduct tax in terms of Section 194C of the I.T. Act. It was
further submitted that freight charges paid to the non-resident
agents, in any case, are not chargeable to tax in India in view of
Article-8 of respective DTAA. It was further submitted that such
payments have been made in earlier and in subsequent years
also and the nature of business of assessee-company remains
the same. A.O. has not made any disallowance under section
143(3) or under section 143(1) of the I.T. Act.
6. The Ld. CIT(A), however, did not accept the
contention of the assessee-company and noted that copies of
the sample invoices have been furnished. M/s. Samsung India
Ltd., makes payment to the assessee-company after deducting
TDS, which needs to be routed through P & L A/c. The assessee-
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Network (P) Ltd., Delhi.
company made payment to foreign vendors corresponding to the
invoices raised in its name by such vendors, therefore, such
expenses also needed to be routed through the P & L A/c. The
Ld. CIT(A), thus, did not accept the contention of assessee-
company that since the assessee-company did not make any
claim of deduction of these expenditure, therefore, no
disallowance should be made. This plea of the assessee-
company was rejected. The Ld. CIT(A) as regards the
submission of the assessee-company that such expenses are
only reimbursement of the expenses, there is no need to deduct
TDS and that the payment made to non-resident parties is not
chargeable to tax in India, asked the A.O. to file the remand
report.
6.1. The A.O. filed the remand report which is noted in
the appellate order, in which, the A.O. highlighted that Top-10
Agents Accounts for 96% of the payments made by assessee-
company is considered. Out of Top-10 Agents, most of the
payments have been made to KGL group companies. The
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Network (P) Ltd., Delhi.
payments made to group companies have not been disclosed in
the tax audit report or in audited books of account which
creates doubts. The payments have been made by assessee-
company to foreign agents and not to foreign airline companies.
Article-8 of DTAA is valid only for payments made to airline
companies. Since the assessee-company made payments to
foreign agents, therefore, Article-8 of DTAA is not applicable.
The A.O. also reported that Article-8 of DTAA signed by India
with foreign Countries does not give a blanket relief from TDS
on freight paid to foreign airline companies. Details of same is
noted in the remand report in which the Place of Effective
Management ("POEM") was needed to be settled while deciding
on the taxability of the profits/income generated. Further for
claiming relief under DTAA, Tax Residence Certificate is
mandatorily required. The assessee-company filed few TRCs of
foreign airlines companies, in which, discrepancies have been
noted by the A.O. But some were found in order. The A.O. also
reported that total receipts as per 26AS are of Rs.165.38 crores
but the turnover as per Profit & Loss Account is Rs.35.06
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crores. The difference is not reconciled. The assessee-company
is required to deduct TDS on such payments.
7. The assessee-company filed rejoinder in which the
assessee-company explained the same facts as were explained
earlier. It was submitted that the payments have been made to
the agents of the airlines, therefore, it should be treated as
payments made to airlines. The assessee-company did not claim
deduction of the expenditure as the same have been reimbursed
by the Principal. For the payments made by M/s. Samsung
India Ltd., , they have deducted TDS on the entire amount that
is why, the entire figure is coming up in 26AS but the entire
amount so received is not income of the assessee-company
because substantial portion was on account of reimbursement
of the freight and other expenses. Therefore, there is no
question of showing the entire amount in the P & L A/c. The
assessee-company relied upon several decisions in support of
the contention that assessee-company was not required to
deduct TDS.
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Network (P) Ltd., Delhi.
8. The Ld. CIT(A), however, rejected the contention of
the assessee-company and noted that Article-8 of respective
DTAA is applicable for making payments to foreign airlines and
not to other parties including foreign agents. A.O. has pointed
out in consistencies in TRCs filed by the assessee-company. The
theory of reimbursement of the expenses was also not accepted.
This ground of appeal of assessee-company was accordingly
dismissed.
9. The Learned Counsel for the Assessee reiterated the
submissions made before the authorities below. PB 660 to 669
are the break-up of the amounts paid to the agents and
reimbursed to the assessee-company by the parties. Whatever
amounts that are paid by the assessee-company, are exactly
reimbursed to the assessee-company. The assessee-company
merely acted on behalf of M/s. Samsung India Ltd., and Others.
PB-627 is gist of the amounts paid by the assessee-company
with reference to amounts in USD and date of invoice bill in the
name of the assessee-company with reference to the paper
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Network (P) Ltd., Delhi.
book. PB-4 to 21 is the consolidated P & L A/c and balance-
sheet of the assessee-company, in which, no amount has been
shown as income and no expenditure have been claimed by
assessee-company, of the impugned amounts paid. Note-15 is
income from operation and Note-17 is direct operation expenses
details. Assessee-Company did not debit the impugned
amounts in the P & L A/c and did not make any claim of the
expenditure. PB-1048 is the details of assessments made from
A.Ys. 2008-2009 to 2015-2016. In earlier A.Ys. 2008-2009 to
2011-2012, A.O. accepted this similar claim of assessee-
company while accepting the return under section 143(1) of the
I.T. Act. In A.Y. 2012-2013, A.O. allowed the claim of assessee-
company under section 154 of the I.T. Act of the same nature.
In A.Ys. 2013-2014 and 2015-2016, the A.O. allowed similar
claim of assessee-company in scrutiny assessments under
section 143(3). Copies of the assessment orders under section
143(3) for these years are filed in PB Nos.1013 and 1016. PB-
1025 to 1030 are the similar replies filed before A.O. on merit
for A.Y. 2015-2016, on which, identical claim of assessee-
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Network (P) Ltd., Delhi.
company has been allowed. PB-1031 to 1047 are the details of
TDS enquiry conducted by the Revenue Department on the
same issue and after calling the complete details and
information under section 133(6) of the I.T. Act as well, the
Department did not take any adverse view against the assessee-
company and similar claim of assessee-company has not been
disturbed. PB-1066 to 1095 are the intimation under section
143(1) of I.T. Act issued by the Department for several preceding
assessment years under section 143(1), in which, similar claim
of assessee-company has been allowed. Learned Counsel for the
Assessee submitted that rule of consistency do apply to the
income tax proceedings. Therefore, on the same set of facts,
when Income Tax Department accepted similar claim of the
assessee-company for preceding as well as subsequent
assessment years, then, for assessment year under appeal, the
similar claim of assessee-company should not be disallowed on
account of non-deduction of TDS without bringing any new
material on record. In support of this contention, he has relied
upon the decisions of the Hon'ble Supreme Court in the case of
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Network (P) Ltd., Delhi.
CIT vs. Excel Industries Ltd., (2013) 358 ITR 295 (SC) and
Radhasoami Satsung Saomi Bagh vs. CIT (1992) 193 ITR 321
(SC). Since no expenses have been claimed by the assessee-
company in its P & L A/c and in the computation of income, so
no disallowance should be made because it was a case of
reimbursement by the Principal to the Assessee-Company.
Learned Counsel for the Assessee further submitted that the
amounts in question were paid to non-resident agents on behalf
of non-resident airlines/shipping companies. These amounts
are not chargeable to tax in India under the domestic Law.
Payments made to shipping company shall have to be
considered in the light of specific provisions of Law contained
under section 44B r.w.s.172 of the I.T. Act because the shipping
is liable to pay tax. Circular 723 dated 19.09.1995 clarified the
above position that in such circumstances, Sections 194C and
195 shall not apply. Copy of the same is filed at PB-1349.
Learned Counsel for the Assessee further submitted that for
airlines, Section 44BBA is applicable. Since no amount of
freight is received in India and assessee-company remitted the
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Network (P) Ltd., Delhi.
amount of the freight outside India. So, this Section will not
apply to the assessee-company. Section-7 of the I.T. Act will not
apply in this case because income deemed to be received is not
applicable to assessee-company, since payment was made to
non-resident, therefore, Article-8 of DTAA will apply and no
disallowance could be made. Copies of the same are filed at PB-
526 to 555. The benefit is allowable to the assessee-company
because DTAA of the concerned States specify that the profit
from operation of ship or aircraft or interest thereon is taxable
only in that State i.e., the non-resident companies. Learned
Counsel for the Assessee referred to various case Laws in
support of the above proposition that assessee-company is not
responsible for deduction of the TDS on the amounts in
question. Copies of the same are filed in the paper book, which
we shall refer to in the Order. Learned Counsel for the Assessee,
therefore, submitted that authorities below were not justified in
making the addition against the assessee-company. He has also
filed written submissions.
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Network (P) Ltd., Delhi.
10. On the other hand, Ld. D.R. relied upon the orders of
the authorities below and submitted that Explanation-2 is
inserted to Section 195(1) w.e.f. 01.04.1962 which is
retrospective in nature. Assessee-Company filed revised audit
report without any cause. The client raises invoice for the work
assigned to the assessee-company and deducts tax under
section 194C for these services and the assessee claims the
entire TDS in its return. The Ld. CIT(A), reproduced the remand
report furnished by the A.O. in the appellate order in which the
A.O. has highlighted the reasons for making the addition
against the assessee-company. In the reply of assessee-
company filed at PB-1032, the assessee-company claimed
reimbursement of expenses, but, M/s. Samsung India Ltd.,
treats it as contract and deducts TDS. It is not a case of no
profit, therefore, TDS is required to be deducted. The assessee-
company is an Agent of M/s. Samsung India Ltd., who gets
profit share from foreign counterparts and there is no
reimbursement of expenses between the two parties. It is a
service being rendered by the assessee-company, so TDS is
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liable to be deducted. The rule of res judicata does not apply.
Since new facts have been pleaded, so the case may be decided
on merits. The Ld. D.R. also filed two written submissions in
which the same submissions have been reiterated, in which, Ld.
D.R. also explained that audit report was given by an
Independent Auditor who opined that such amounts shall have
to be disallowed. The assessee-company shall have to route the
payments and expenditure through P & L A/c. He has
submitted that the issue shall have to be decided according to
principles of Law and not in accordance with the Accounting
Practice and relied upon the decision of the Hon'ble Apex Court
in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.,
reported in (1997) 227 ITR 172 (SC). The assessment order
passed by the A.O. under section 143(3) is cryptic in nature and
notice issued under section 133(6) would not help the assessee-
company. It is not clear whether sample invoice, airway bills
were provided before A.O. The bills referred to by the Learned
Counsel for the Assessee, at the most, establish that assessee-
company is rendering services to its clients and is getting
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Network (P) Ltd., Delhi.
payment for the said services. The break-up of the bills into
different components does not change the character of the
payment. He has relied upon the order of the ITAT, Ahmedabad
Bench in the case of Mayurbyhai Mangaldas Patel, Mehsana vs.
ITO, Ward-2, Mehsana in ITA.No.3451/Ahd./2014, Dated
30.11.2017 on the proposition that "error cannot be perpetuated
in the name of reverence to binding judicial precedents".
11. We have considered the rival submissions and gone
through material on record. It is not in dispute that during the
year, assessee-company was engaged in the business of inter
alia, Clearing and Forwarding Agent. During the year, assessee-
company has had major work for and on behalf of M/s.
Samsung India Ltd. In this regard, assessee-company has made
payment to foreign shipping/airline companies through their
Agents aggregating to Rs.120.86 crores. According to A.O,
assessee-company should have withheld tax at source on these
payments under section 195 of the I.T. Act, 1961. Since, the
assessee-company has failed to deduct TDS, therefore, A.O.
25
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
disallowed the same under section 40(a)(i) of the I.T. Act, 1961.
The assessee-company, however, submitted that for invoking
Section 40(a)(i) of the I.T. Act, the A.O. should establish that
assessee-company has made a claim of deduction of expenses
under sections 30 to 38 of I.T. Act, on which, assessee-company
has failed to deduct tax at source. It is not in dispute that
assessee-company has not made claim of expenses in its P & L
A/c. In the instant case, though the payments have been
released to foreign shipping/airlines through their non-resident
Agents towards freight, but these payments have not been made
by the assessee-company on account of its expenses, but, have
been made for and on behalf of its clients/customers namely
M/s. Samsung India Ltd., and other Companies, for whom,
assessee-company does the work of logistics solutions. In fact,
the assessee-company is reimbursed on actual basis, the
amount of all expenses including freight by M/s. Samsung India
Ltd., and others and there is no profit element involved in such
reimbursement. The assessee-company explained and proved
that payments have been made to non-resident Agents of
26
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
foreign airline/shipping companies. Freight is paid by the
assessee-company on behalf of M/s. Samsung India Ltd., and
others. There is no Privity of Contract between the assessee-
company and the non-resident Agents of foreign
airlines/shipping companies. Assessee-Company worked as a
Facilitator/Agent between the parties. PB-660 to 669 is copy of
the chart giving details of payments remitted to non-resident
Agents by the assessee-company along with the details of
payments reimbursed by the client to the assessee-company, of
the exact amount in question. PB-627 to 659 is the chart of
complete details of invoice bill raised on assessee-company and
bills raised by assessee upon M/s. Samsung India Ltd.,
amounts in US Dollar, date of invoice, bill in the name of
assessee-company with reference to documents filed in the
paper book. The same are supported by copy of the sample bills
raised upon assessee-company and bills raised by assessee in
turn, upon M/s. Samsung India Ltd., which would establish
that amounts actually paid as freight, has been reimbursed to
the assessee-company. PB-4 to 21 is the copy of the P & L A/c
27
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
which would not show any claim for such expenses made by
assessee-company. It would established that assessee-
company is a Clearing and Forwarding Agent and is not a
person responsible for deduction of TDS. PB-1048 is a chart
showing in earlier and subsequent assessment years, similar
payments have been accepted by A.O. without deducting of tax
at source under section 143(3)/143(1) of the I.T. Act, 1961. In
A.Ys. 2008-2009 to 2011-2012, A.O. accepted the claim of
assessee-company under section 143(1) of the I.T. Act, 1961. In
A.Y. 2012-2013 A.O. accepted the similar claim of assessee-
company under section 154 of the I.T. Act and in the remaining
years, A.O. accepted the similar claim of assessee-company in
scrutiny assessments under section 143(3) of the I.T. Act.
Copies of the assessment orders under section 143(3) for A.Ys.
2013-2014 and 2015-2016 along with submissions of the
assessee-company on merit are filed in the paper book at pages
1013 to 1030. PB-1066 to 1095 are the orders under section
143(1) for several assessment years, in which, A.O. accepted
similar claim of assessee-company. PB-1031 to 1047 are the
28
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
copy of the notice under section 133(6) from ITO, TDS, Ward-
(International Taxation), Dated 17.02.2010 along with
submissions of the assessee-company and details, in which, the
assessee-company similarly explained that assessee-company
handled Cargo imported by Indian manufacturer, for which,
freight is paid and assessee-company is not liable to deduct
TDS. No action have been taken by the Department against the
assessee-company for non-deduction of TDS. Since in earlier
years and in subsequent years, no disallowances have been
made by the authorities below on the same set of facts,
therefore, the Revenue Authorities should follow the rule of
consistency and should not have disallowed the amount in
question. The opinion of the Auditor is not conclusive because
the issue shall have to be considered and decided as per Law.
Further, the assessee-company has filed the revised audit
report to clarify the above position.
12. The Hon'ble Supreme Court in the case of CIT vs.
Mahalaxmi Sugar Mills Co. Ltd., (1986) 160 ITR 920 (SC) held
29
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
that "duty caste on A.O. to apply relevant provisions of Law for
the purpose of determining the true figure of assessee's taxable
income". The Hon'ble Supreme Court in the case of Radhasoami
Satsang Saomi Bagh vs. CIT (1992) 193 ITR 321 (SC) held that
"revenue authorities should follow rule of consistency." The
Hon'ble Supreme Court in the case of CIT vs. Excel Industries
Ltd., (2013) 358 ITR 295 held in para-31 as under :
"31. It appears from the record that in several assessment
years, the Revenue accepted the order of the Tribunal in
favour of the assessee and did not pursue the matter any
further but in respect of some assessment years the matter
was taken up in appeal before the Bombay High Court but
without any success. That being so, the Revenue cannot be
allowed to flip-flop on the issue and it ought let the matter
rest rather than spend the tax payers' money in pursuing
litigation for the sake of it."
30
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
13. ITAT, Mumbai Bench, in the case of ITO vs. Rajeswari
Shipping and Logistic (2016) 49 ITR 120 (Tribu.) (Mum.) held as
under :
"Assessee having made payments on behalf of its clients,
there was no liability to deduct tax at source on Assessee.
No disallowance u/s.40(a)(ia) could be made for alleged
failure of Assessee to deduct tax at source on payment
made on behalf of importers/clients."
14. ITAT, Kolkata Bench in the case of Mitra Logistic (P.)
Ltd., vs. ITO (2012) 139 ITD 420 held as under :
"If business expenditure is claimed as reimbursement, and
in fact reimbursed, then no disallowance could be made
u/s.40(a)(ia)"
15. The Hon'ble Delhi High Court in the case of CIT vs. -
Cargo Linkers (2009) 179 Taxman 151 held as under :
31
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
"Clearing and forwarding agent is not person responsible
for deduction of tax at source under section 194C; further,
both CIT(A) and Tribunal, had concurrently found that there
was reasonable cause not to deduct tax at source; no
substantial question of law arises."
16. The Hon'ble jurisdictional Delhi High Court in the
case of CIT vs. Hardarshan Singh (2013) 350 ITR 427 (Delhi)
held as under :
"In the case of CIT v. Cargo Linkers: (2009) 179 Taxman
151 (Del) the Tribunal had also noted and found as a matter
of fact that the assessee was nothing but an intermediary
between the exporters and the airlines as it booked cargo
for and on behalf of the exporters and mainly facilitated the
contract for carrying goods. The principal contract was
between the exporter and the airline. It had also been found
as a matter of fact that the contract was actually between
the exporter and the airline and the assessee was only an
32
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
intermediary and, therefore, it was not the `person
responsible' for deduction of tax at source u/s 194C".
17. The ITAT, Delhi Bench in the case of Hah Logistics,
New Delhi vs. DCIT, Circle-26(1), New Delhi, in
ITA.No.1864/Del./2011 Dated 04.11.2011 following the
decision of Hon'ble jurisdictional Delhi High Court in the case
of CIT vs. Cargo Linkers (supra), it was, held as under :
"Therefore, from the various details filed by the assessee
and nature of assessee's business of clearing and
forwarding agents, we find that the assessee is nothing but
an intermediary between the exporters and the shipping
lines. The assessee facilitates the contract for carrying
goods for and on behalf of its client i.e., exporters or
importers, or importers, and the principle contract for
carrying goods is between the exporter/importer and the
shipping lines. Therefore, deleted the disallowance made
under section 40(a)(ia) of the I.T. Act".
33
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
18. ITAT, Mumbai Bench in the case of ITO vs. Universal
Traffic Co. (2014) 42 CCH 55 (Mum-Tribu.) held as under :
"A custom house agent (CHA) is not liable to deduct TDS
under section 194C, on payment made towards freight
charges, detention charges and de-stuffing charges, etc.,
paid to foreign lines or to their agents or shipping lines for
transportation of cargo, since CHA only act as an
intermediary and the privity of contract is not between
assessee and foreign lines/shipping lines to whom such
charges were paid."
19. The assessee-company further submitted that, in
this case, it is not in dispute that it is a case of reimbursement
only and, therefore, assessee-company is not liable to deduct
TDS. In support of this contention, Learned Counsel for the
Assessee relied upon the decision of ITAT, Mumbai Bench in the
case of DCIT vs. Rank Shipping Agency (P) Ltd., ITA.No.5946/
Mum/2008, Dated 21.11.2012 and Order of ITAT, Delhi Bench
34
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
in the case of DCIT vs. Jay Kay Freighters Pvt. Ltd.,
ITA.No.3407/Del./2011 Dated 08.08.2012.
19.1. In the instant case, since the amount paid to the non-
resident agents was on behalf of non-resident shipping
company or non-resident airline company, therefore, these
amounts are not chargeable to tax in India under the domestic
Law and the assessee-company was not liable to deduct TDS on
these payments. It is well settled law that no TDS is required to
be deducted by the payer, if the income of non-resident payee
is not liable to tax in India. We, rely upon the decision of the
Hon'ble Supreme Court in the case of G.E. India Technology
Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC).
19.2. Learned Counsel for the Assessee, referred to
provisions of Section 44B r.w.s. 172 of the I.T. Act because these
provisions deal with the shipping business of the non-residents
and in such cases, provisions of Section 194C and 195 relating
to tax deduction at source are not applicable. The assessment
of income of shipping company is to be done as per provisions
35
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
of Section 44B r.w.s. 172 of the I.T. Act. These are specific
provisions which deals with taxability of income of non-resident
shipping companies in India. According to these provisions, the
taxes on the income assessed in this section shall be paid by
the Master of the Ship. Further, the CBDT Circular No.723
dated 19.09.1995 clarified the position of Law that provisions of
Section 172 are to be applied where the payment is made to a
non-resident carrying-out shipping business and as such,
Sections 194C and 195 will not be applicable. The Circular is
reproduced as under :
"Circular No. 723, dated 19-9-1995.
SECTION 172 SHIPPING BUSINESS OF NON-RESIDENTS
913. Tax deduction at source from payment made to foreign
shipping companies
1. Representations have been received regarding the
scope of sections 172, 194C and 195 of the Income-tax Act,
1961, in connection with tax deduction at source from
payments made to the foreign shipping companies or their
agents.
36
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
2. Section 172 deals with shipping business of non-
residents. Section 172(1) provides the mode of the levy and
recovery of tax in the case of any ship, belonging to or
chartered by a non-resident, which carries passengers,
livestock, mail or goods shipped at a port in India. An
analysis of the provisions of section 172 would show that
these provisions have to be applied to every journey a ship,
belonging to or chartered by a non-resident, undertakes
from any port in India. Section 172 is a self-contained code
for the levy and recovery of the tax, ship-wise, and journey
wise, and requires the filing of the return within a maximum
time of thirty days from the date of departure of the ship.
3. The provisions of section 172 are to apply,
notwithstanding anything contained in other provisions of
the Act. Therefore, in such cases, the provisions of sections
194C and 195 relating to tax deduction at source are not
applicable. The recovery of tax is to be regulated, for a
voyage undertaken from any port in India by a ship under
the provisions of section 172.
4. Section 194C deals with work contracts including
carriage of goods and passengers by any mode of transport
other than railways. This section applies to payments made
by a person referred to in clauses (a ) to (j) of sub-section (1)
37
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
to any "resident" (termed as contractor). It is clear from the
section that the area of operation of TDS is confined to
payments made to any "resident". On the other hand,
section 172 operates in the area of computation of profits
from shipping business of non-residents. Thus, there is no
overlapping in the areas of operation of these sections.
5. There would, however, be cases where payments are
made to shipping agents of non-resident ship-owners or
charterers for carriage of passengers etc., shipped at a port
in India. Since, the agent acts on behalf of the non-resident
ship-owner or charterer, he steps into the shoes of the
principal. Accordingly, provisions of section 172 shall apply
and those of sections 194C and 195 will not apply."
19.3. Learned Counsel for the Assessee also referred to the
provisions of Section 44BBA of the I.T. Act with regard to
payments made to Airline companies. Section 44BBA is
reproduced as under :
Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents
38
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
44BBA. (1) Notwithstanding anything to the contrary,
contained in sections 28 to 43A, in the case, of an assessee,
being a non-resident, engaged in the business of operation of
aircraft, a sum equal to five per cent. of the aggregate of the
amounts specified in sub-section (2) shall be deemed to be
the profits and gains of such business chargeable to tax
under the head "Profits and gains of business or profession".
(2) The amounts referred to in sub-section (1) shall be the
following, namely: --
(a) the amount paid or payable (whether in or out of India)
to the assessee or to any person on his behalf on
account of the carriage of passengers, live-stock, mail or
goods from any place in India; and
(b) the amount received or deemed to be received in India
by or on behalf of the assessee on account of the
carriage of passengers, live-stock, mail or goods from
any place outside India."
On perusal of the same, it shows that amount of freight income
received by the foreign airline company for carrying of goods
from any place outside India is not taxable in India and more
so, when no amount of freight is received or deemed to be
39
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
received in India by or on behalf of the said airline company.
Learned Counsel for the Assessee explained that substantial
foreign airline companies lifted the goods outside India and all
the payments are remitted outside India to foreign agents, non-
resident agents of non-resident airlines. The ITAT, Delhi Bench,
in the case of Welspring Universal vs. JCIT, Range-27, New
Delhi (2015) 56 taxmann.com 174 (Delhi-Trib.) held as under :
"Where commission paid by assessee to non-resident agent
for procuring export orders was not chargeable to tax in
hands of said agent, assessee was not liable to deduct tax
at source."
19.4. Thus, the impugned payments made by the assessee-
company to such airline companies or its different agents are
not liable to be taxed in India even under the domestic Law and
therefore, assessee-company was not liable to deduct tax in
India. Further, it may be noted that such non-resident entities
have not rendered any services in India. They do not have any
40
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
P.E. in India and they do not have any business connection in
India. No such case is also made out by the A.O.
19.5. Assessee-Company also pleaded that freight charges
paid to non-resident shipping/airline companies directly or
through their agents is exempt under Article-8 of DTAA, copies
of various relevant DTAAs are filed at pages 526 to 555 of the
paper book, which clearly provides that profits from operation
of ships or aircraft, including interest on funds connected with
that operation, derived by a resident of one of the Contracting
States shall be taxable only in that State. Therefore, the
impugned payments are not taxable to tax in India, therefore,
there is no liability to deduct TDS under section 195 of the I.T.
Act.
20. The A.O. observed that Article-8 of DTAA is valid only
for payments made to airline companies since payments have
made to their Agents, therefore, DTAA will not apply. It may be
noted here that it is well known fact that agents of shipping
41
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
airline companies are merely collection agents and coordinating
agency. They receive payment on behalf of airline/shipping
companies only. These facts would also be evident from the
bills/invoices raised by these agents showing that these have
been raised by them on the basis of Master Airway Bill of
corresponding Airline/Shipping companies, copies of which, are
filed in the paper book at pages 627 to 659 and others. The
ITAT, Kolkata Bench in the case of Taj Leather Works vs. ACIT,
Circle-32, Kolkata (2012) 23 taxmann.com 58 (Kol.) held as
under :
"Where assessee-exporter made payments to Indian agents
of foreign airlines on account of airfreight, assessee did not
have any TDS obligations either under section 194C or
under section 195."
21. Under these circumstances, the payments made to
the agents shall be undoubtedly of the nature of payment made
to airline/shipping company and these would be covered under
Article-8 of respective DTAAs. Since in none of the cases, these
42
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
non-resident agents have P.E. in India and A.O. has also not
pointed out their existence of P.E. of any agent in India,
therefore, there is no question of deduction of tax on these
payments. We, rely upon the decision of ITAT, Mumbai Bench
in the case of Gujarat Reclaim & Rubber Products Ltd., vs.
ACIT-10(2), (2013) 35 taxmann.com 587 (Mumbai-Trib.) in
which it was held as under:
"Where non-resident agent did not have PE in India,
Commission paid by assessee to non-resident agent for
rendering services in foreign countries cannot be disallowed
under section 40(a)(i).
22. Since the amount in question is not taxable in India,
therefore, A.O. was not justified in asking for filing of the
certificates in case of non-resident agents.
23. Considering the facts of the case/material evidence
and above discussion, it is clear that assessee-company made
payments on behalf of its clients as Clearing and Forwarding
Agent which were reimbursed to the assessee-company. The
43
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
assessee-company did not make claim of deduction in the P &
L A/c. Similar claim of assessee-company has been allowed in
earlier and subsequent year, therefore, rule of consistency do
apply to the income tax proceedings. There were no justification
for the authorities below to take a different view on same set of
facts. Even no action have been taken while scrutinizing the
issue of TDS against the assessee-company. The assessee-
company has not violated the provisions of Section 44B r.w.s.
172 of the I.T. Act as well as 44BBA of the I.T. Act. Since, under
the domestic Law as well as under DTAA, the income received
by non-resident airline/shipping companies or their Agents, are
not taxable in India, therefore, assessee is not liable to deduct
TDS. In this view of the matter, we set aside the orders of the
authorities below and delete the entire addition. In the result,
ground Nos. 1 and 2 of the appeal of the assessee are allowed.
24. On ground No.3, assessee-company challenged the
order of the Ld. CIT(A) in confirming the disallowance of
Rs.8,17,807/- under section 40A(3) of the I.T. Act, 1961.
44
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
25. The A.O. noted from the tax audit report that the
assessee-company has incurred expenditure covered under
section 40A(3) of the I.T. Act because the payments have been
made in excess of Rs.20,000/- by cash. The details of same are
noted in the assessment order for a sum of Rs.8,17,807/-. The
A.O. accordingly disallowed the same.
25.1. The assessee-company challenged the addition
before the Ld. CIT(A) and it was submitted that payments have
been made to various airlines. The assessee-company pleaded
that these are reputed airlines and have PAN and genuine
payments have been made, therefore, no disallowance could be
made under section 40A(3) of the I.T. Act. The Ld. CIT(A),
however, did not accept the contention of assessee-company
and noted that Rule 6DD have been amended in 2008. The Rule
in its present form does not include any such circumstances
like business exigency or exceptional circumstances, under
which, such cash payments can be made as a business
expenditure under section 40A(3) of the I.T. Act, 1961. The
45
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
addition was confirmed and Ground No.3 of appeal of assessee-
company was dismissed.
26. Learned Counsel for the Assessee submitted that
since the genuineness of the payments have not been doubted
by the authorities below, therefore, for business expediency,
such amount should not be disallowed. He has relied upon the
order of ITAT, Delhi Bench in the case of ACIT, Central Circle-
2, Faridabad vs. M/s. Marigold Merchandise (P) Ltd., New Delhi,
in ITA.No.5170/Del./2014 for the A.Y. 2006-2007, in which the
Tribunal vide Order dated 11.09.2017 dismissed the
Departmental Appeal. The relevant portion of the order of the
Delhi Tribunal in paras-6 to 8 is reproduced as under :
"6. We have heard both the parties and perused the
records available on record especially the impugned order.
With regard to disallowance u/s. 40A(3) of the Income Tax
Act is concerned, we find that assessee has purchased the
land at Village Nangli Umarpur Distt. Gurgaon for a sum of
Rs. 3.69 Cr. from the seller parties namely Sh. Pohap Singh,
46
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
Sh. Chet Singh, Sh. Chandra, Sh. Kishan, Smt. Vidhya, Smt.
Jagwati, Smt. Veerwati and Smt. Lali. The purchase of
agriculture land is evidenced through sale deed and the
payment is also evidenced by way of the sale deed
executed before the Sub Registrar. There is no dispute on
the fact that the identity of e payee is proved, the
genuineness of the transaction is proved and the source
payment is also established in as much as such amount is
found to be withdrawn from the HDFC bank account of the
appellant company. The AO's case is that the provisions of
sec. 40A(3) are of mandatory nature whereas the assessee-
relying on the decision of the Hon'ble Jurisdictional
Rajasthan High Court in the case of Harshee a Chordia vs.
CIT supra has contended that when identity of the payee,
genuineness of the transaction and source of payment is
established then provision of section 40A(3) cannot be
applied. The Hon'ble Rajasthan High Court while
interpreting the provisions of Sec. 40A(3) in the case of
Harshila Chordia vs, ITO supra has clearly held that when
47
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
the genuineness of the transaction/payment is not disputed
and the identity of the payee / received is established then
such case will fall under the exceptional circumstances
covered under-rule 6DD of IT Rules. The decision of the
Hon'ble Jurisdictional ITAT in the case of the M/s Ace India
Abodes Ltd. vs. ACIT CC-2, Jaipur in ITA no.
79/JP/20110rder dated 12.2.2011 and in the case of the
M/s Shree Salaaar Overseas Pvt. Ltd.: vs. DCIT, Circ1e-2 in
ITA no. 56/JP/2 10, order dated 21.2.2011 also supported
the assessee's contention. The decision of the Jurisdictional
High Court and the Jurisdictional ITAT are also of binding
nature. Therefore respectfully following the ratios of
judgment of the Jurisdictional High Court as well as ITAT
decisions, Ld. CIT(A) has rightly held that the assessee's
case is found to be covered under the exceptional
circumstances under rule 6DD of IT Rules. Accordingly, the
addition made by the AO amounting to Rs. 60 lacs was
rightly deleted by the Ld. CIT(A). Also we find no force in the
arguments advanced by the Ld. DR, in view of the decision
48
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
of the ITAT, `B' Bench, Kolkata vide Order dated 18.11.2015
passed in ITA No. 1448/Kol/2011 AY 2008-09 in the case
of Sri Manoranjan Raha vs. ITO wherein the Tribunal has
held as under:-
4.3 We have heard the rival submissions and perused the
materials available on record. We find that the payments
made by cash in violation of Section 40A(3) of the Act have
been duly acknowledged by the recipient Sh. Amit Dutta who
had deposed before the Ld. AO and confirmed the fact of
receipt of monies in cash. Hence the genuinity of payments
made by the assessee stands clearly established beyond
doubt. Even for the amounts enhanced by Ld. CIT(A) in the
sum of Rs. 54,01,473/-, the genuineness of the payments
and the necessity to incur the said expenditure for the
purpose of business of the assesseee was never disputed
by the Ld. CIT(A). We hold that since the genuinity of the
payments made to the parties is not doubted by the revenue,
the provisions of section 40A(3) could not be made applicable
to the facts of the instant case. It will be pertinent to go into
the intention behind introduction of provisions of section
49
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
40A(3) of the Act at this juncture. We find that the said
provision was inserted by Finance Act 1968 with the object
of curbing expenditure in cash and to counter tax evasion.
The CBDT Circular No. 6P dated 6.7.1968 reiterates this view
that "this provision is designed to counter evasion of a tax
through claims for expenditure shown to have been incurred
in cash with a view to frustrating proper investigation by the
department as to the identity of the payee and
reasonableness of the payment."
4.4. In this regard, it is pertinent to get into the following
decisions on the impugned subject:-
Attar Singh Gurmukh Singh vs. ITO reported in (1991) 191
ITR 667 (SC)
"Section 40A(3) of the Income-tax Act, 1961, which provides
that expenditure in excess of Rs.2,500 (Rs.10,000/- after
the 1987 amendment) would be allowed to be deducted only
if made by a crossed cheque or crossed bank draft (except
in specified cases) is not arbitrary and does not amount to a
restriction on the fundamental right to carry on business. If
read together with Rule 6DD of the Income-tax Rules, 1962,
50
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
it will be clear that the provisions are not intended to restrict
business activities. There is no restriction on the assessee in
his trading activities. Section 40A(3) only empowers the
Assessing Officer to disallow the deduction claimed as
expenditure in respect of which payment is not made by
crossed cheque or crossed bank draft. The payment by
crossed cheque or crossed bank draft is insisted upon to
enable the assessing authority to ascertain whether the
payment was genuine or whether it was out of income from
undisclosed sources. The terms of section 40A(3) are not
absolute. Consideration of business expediency and other
relevant factors are not excluded. Genuine and bona fide
transactions are not taken out of the sweep of the section.
It is open to the assessee to furnish to the satisfaction of the
Assessing officer the circumstances under which the
payment in the manner prescribed in section 40A(3) was not
practicable or would have caused genuine difficulty to the
payee. It is also open to the assessee to identify the person
who has received the cash payment. Rule 6DD provides that
an assessee can be exempted from the requirement of
payment by a crossed cheque or crossed bank draft in the
51
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
circumstances specified under the rule. It will be clear from
the provisions of section 40A(3) and rule 6DD that they are
intended to regulate business transactions and to prevent
the use of unaccounted money or reduce the chances to use
black money for business transactions."
CIT vs CPL Tannery reported in (2009) 318ITR 179 (Cal)
The second contention of the assessee that owing to business
expediency, obligation and exigency, the assessee had to
make cash payment for purchase of goods so essential for
carrying on of his business, was also not disputed by the AO.
The genuinity of transactions, rate of gross profit or the fact
that the bonafide of the assessee that payments are made
to producers of hides and skin are also neither doubted nor
disputed by the AO, On the basis of these facts it is not
justified on the part of the AO to disallow 20% of the
payments made u/s 40A(3) in the process of assessment.
We, therefore, delete the addition of Rs.17,90,571/-
and ground no.1 is decided in favour of the assessee.
CIT vs Crescent Export Syndicate in ITA No. 202 of 2008
dated 30.7.2008 - Jurisdictional High Court decision
52
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
"It also appears that the purchases have been held to
be genuine by the learned CIT(Appeal) but the learned
CIT(Appeal) has invoked Section 40A(3) for payment
exceeding Rs.20,000/- since it is not made by crossed
cheque or bank draft but by hearer cheques and has
computed the payments falling under provisions to
Section 40A(3) for Rs.78,45,580/- and disallowed
@20% thereon Rs.15,69,116/-. It is also made clear
that without the payment being made by beater
cheque these goods could not have been procured and
it would have hampered the supply of goods within the
stipulated time. Therefore, the genuineness of the
purchase has been accepted by the ld. CIT(Appeal)
which has also not been disputed by the department
as it appears from the order so passed by the learned
Tribunal. It further appears from the assessment order
that neither the Assessing Officer nor the CIT(Appeal)
has disbelieved the genuineness of the transaction.
There was no dispute that the purchases were
genuine."
53
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
Anupam Tete Services vs ITO in (2014) 43 Taxmann.com
199 (Guj)
"Section 40A( 3) of the Income-tax Act, 1961, read
with rule 6DD of the Income-tax Rules, 1962 -
Business disallowance - Cash payment exceeding
prescribed limits (Rule 6DD(j)-Assessment year 2006-
07 - Assessee was working as an agent of Tata Tele
Services Limited for distributing mobile cards and
recharge vouchers - Principal company Tata insisted
that cheque payment from assessee's co-operative
bank would not do, since realization took longer time
and such payments should be made only in cash in
their bank account -If assessee would not make cash
payment and make cheque payments alone, it would
have received recharge vouchers delayed by 4/5 days
which would severely affect its business operation -
Assessee, therefore, made cash payment - Whether in
view of above, no disallowance under section 40A (3)
was to be made in respect of payment made to
principal- Held, yes [ Paras 21 to 23] [in favour of the
assesse]"
54
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
Sri Laxmi Satvanaravana Oil Mill vs CIT reported in (2014)
49 taxmann.com 363 (Andhrapradesh High Court)
"Section 40A(3) of the Income-tax Act, 1961, read with
Rule 6DD of the Income-tax Rules, 1962 - Business
disallowance - Cash payment exceeding prescribed
limit (Rule 6DD) - Assessee made certain payment of
purchase of ground nut in cash exceeding prescribed
limit - Assessee submitted that her made payment in
cash because seller insisted on that and also gave
incentives and discounts - Further, seller also issued
certificate in support of this - Whether since assessee
had placed proof of payment of consideration for its
transaction to seller, and later admitted payment and
there was no doubt about genuineness of payment, no
disallowance could be made under section 40A(3) -
Held, yes [ Para 23] [In favour of the assessee]"
CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227
(P&H)
In this case the court upheld the view of the tribunal in
not applying section 40A( 3) of the Act to the cash
55
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
payments when ultimately, such amounts were
deposited in the bank by the payee.
4.5 It is pertinent to note that the primary object of
enacting section 40A(3) was two fold, firstly, putting a
check on trading transactions with a mind to evade the
liability to tax on income earned out of such transaction
and, secondly, to inculcate the banking habits amongst
the business community. Apparently, this provision
was directly related to curb the evasion of tax and
inculcating the banking habits. Therefore, the
consequence, which were to befall on account of non-
observation of section 40A(3) must have nexus to the
failure of such object. Therefore, the genuineness of
the transactions it being free from vice of any device
of evasion of tax is relevant consideration.
4.6. The Hon'ble Apex Court in the case of CIT vs
Swastik Roadways reported in (2004) 3 SCC 640 had
held that the consequences of non-compliance of
Madhya Pradesh Sales Tax Act , which were intended
to check the evasion and avoidance of sales tax were
significantly harsh. The court while upholding the
constitutional validity negated the existence of a mens
rea as a condition necessary for levy of penalty for non-
compliance with such technical provisions required
held that "in the consequence to follow there must be
nexus between the consequence that befall for non-
compliance with such provisions intended for
56
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
preventing the tax evasion with the object of provision
before the consequence can be inflicted upon the
defaulter." The Supreme Court has opined that the
existence of nexus between the tax evasion by the
owner of the goods and the failure of C & F agent to
furnish information required by the Commissioner is
implicit in section 57(2) and the assessing authority
concerned has to necessarily record a finding to this
effect before levying penalty u/s. 57(2).
Though in the instant case, the issue involved is
not with regard to the levy of penalty, but the
requirement of law to be followed by the assessee was
of as technical nature as was in the case of Swastik
Roadways (3 SCC 640) and the consequence to fall for
failure to observe such norms in the present case are
much higher than which were prescribed under the
Madhya Pradesh Sales Tax Act. Apparently, it is a
relevant consideration for the assessing authority
under the Income Tax Act that before invoking the
provisions of section 40A(3) in the light of Rule 6DD as
clarified by the Circular of the CBDT that whether the
failure on the part of the assessee in adhering to
requirement of provisions of section 40A(3) has any
such nexus which defeats the object of provision so as
to invite such a consequence. We hold that the purpose
of section 40A(3) is only preventive and to check
evasion of tax and flow of unaccounted money or to
57
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
check transactions which are not genuine and may be
put as camouflage to evade tax by showing fictitious
or false transaction. Admittedly, this is not the case in
the facts of the assessee herein. The payments made
in cash to Shri. Amit Dutta had been duly
acknowledged by him in an independent deposition
given by him before the Learned AO which was
admittedly taken behind the back of the assessee. It is
also pertinent to note that the Hon'ble Rajasthan High
Court in the case of Smt.Harshila Chordia vs ITO
reported in (2008) 298 ITR 349 (Raj) had held that the
exceptions contained in Rule 6DD of Income Tax Rules
are not exhaustive and that the said rule must be
interpreted liberally.
4.7. The assessee has also given the income tax
assessment particulars of Amit Dutta before the
Learned AO. Moreover, the Learned AO himself had
taken deposition from Sri Amit Dutta u/s 131 of the Act
wherein he had confirmed the receipt of monies in cash
as well as by cheque / DD from the assessee. Hence
the acknowledgement of the payments made by the
assessee by the payee is proved beyond doubt. The
assessee had also stated that the payee had duly
included these payments as his receipts in his returns.
4.8. We are unable to buy the argument of the
Learned AR that the assessee had made payment to
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Network (P) Ltd., Delhi.
his agent Mr.Arnit Dutta for purchase of sim cards and
others and hence would fall under the exception
provided in Rule 6DD(k) of the IT Rules. For the sake
of convenience, Rule 6DD(k) is reproduced herein
below:-
"Rule 6DD(k) of the IT Rules 1962 6DD. No
disallowance under sub-section (3) of section 40A shall
be made and no payment shall be deemed to the
profits and gains of business or profession under sub-
section (3A) of section 40A where a payment or
aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on
a bank or account payee bank draft, exceeds twenty
thousand rupees in the cases and circumstances
specified hereunder, namely:-
*** *** *** *** *** *** *** *** *** ***
*** *** *** *** *** *** *** *** *** ***
(k) where the payment is made by any person to his
agent who is required to make payment in cash for
goods or services on behalf of such person;"
The said rule says that if the payment is made by a
person to his agent who is required to make payment
in cash for goods and services on behalf of such
person: Admittedly, Shri.Arnit Dutta is only the agent
of Hutchison Essar Ltd and not the assessee as could
59
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
be seen very clearly from the Associate Distributor
Agreement entered into by the assessee which is on
records before us and before the lower authorities.
Hence the payment made by the assessee to Shri.Arnit
Dutta would not fall under the exception clause of Rule
6DD(k).
4.9. We find that one of the grounds raised by the
assessee is violation of principles of natural justice on
the part of the Learned CIT(A) to enhance the
assessment without giving enhancement notice to the
assessee. But from the order of the Learned CITA, it is
specifically mentioned that the assessee was given due
opportunity and show cause notice for enhancement of
assessment by Rs. 54,01,473/- for making further
additions on account of section 40A(3) of the Act. We
find that the assessee had not come on any affidavit
before us refuting this finding. Hence the enhancement
made by the Learned AO cannot be faulted with on
violation of principles of natural justice.
4.10. In view of the aforesaid facts and circumstances
and respectfully following the judicial precedents relied
upon hereinabove, we have no hesitation in deleting
the addition made in the sum of Rs. 60,50,8901- and
54,01,473/- u/s 40A(3) of the Act. Accordingly, the
grounds raised by the assesee in this regard are
allowed.
60
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
5. In the result, the appeal of the assessee is allowed."
7. After perusing the aforesaid decision of the ITAT,
Kolkata, we are of the considered view that the issue in
dispute is also squarely covered by the aforesaid decision,
because the facts and circumstances of the present case are
exactly similar and identical to the aforesaid case law.
Therefore, respectfully following the aforesaid decision
dated 18.11.2015 of the ITAT, `B' Bench, Kolkata passed in
ITA No. 1448/Kol/2011 AY 2008-09 in the case of Sri
Manoranjan Raha vs. ITO, the order of the Ld. CIT(A) is
upheld and grounds raised by the Revenue stand rejected.
7.1. We further find that assessee has filed a copy of
Application under Rule 27 of Appellate Tribunal Rules, 1963
dated 21.6.2017, but at the time of hearing, he has not
pressed the same, hence, the same is dismissed as such.
8. In the result, the appeal of the Revenue is dismissed."
61
ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
27. On the other hand, Ld. D.R. relied upon the orders of
the authorities below and submitted that Tax Auditor has
mentioned in the audit report that this amount shall have to be
disallowed. He has submitted that non-genuine payments are
disallowable under section 37 of the I.T. Act. After amendment
in Rule-6DDJ in 2008, Rule 6 DDJ will not apply, therefore,
disallowance is justified.
28. We have considered the rival submissions. Even
though there is an amendment in Rule 6DD of I.T. Rules as is
noted by the Ld. CIT(A), but in Section 40A(3) of the I.T. Act,
1961 itself, an exception is provided on account of nature and
extent of banking facilities available, consideration of business
expediency and other relevant factors. It is not in dispute that
assessee-company was engaged in the business of Clearing and
Forwarding Agent and acted on behalf of other companies. The
amounts in question have been tabulated in the assessment
order. These payments are made to airline companies. The
nature of business of assessee-company and the agency carried
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ITA.No.301/Del./2018 M/s. KGL
Network (P) Ltd., Delhi.
on by the assessee-company on behalf of others, clearly shows
that for business expediency in the line of business of assessee-
company, some times cash payments are made to complete the
work on behalf of Principal. The assessee-company, under such
compelling reasons, shall have to make payments in cash on
account of urgent need. The authorities below have not doubted
the identity of the payee and the genuineness of the transaction
in the matter. The source of payment is also not been doubted
by the authorities below, therefore, the decision of ITAT, Delhi
Bench in the case of ACIT, Central Circle-2, Faridabad vs. M/s.
Marigold Merchandise (P) Ltd., (supra), is squarely applicable
to the facts of the case. We, accordingly, set aside the orders of
the authorities below and delete the addition. Ground No.3 of
appeal of assessee-company is allowed.
29. On Ground No.4, the assessee-company challenged
the charging of interest under sections 234A, 234B, 234C and
234D of the I.T. Act. No arguments have been advanced on the
same. Since, charging of interest is of consequential in nature,
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Network (P) Ltd., Delhi.
therefore, ground No.4 of appeal of assessee-company is
rejected.
30. In the result, appeal of Assessee is allowed partly.
Order pronounced in the open Court.
Sd/- Sd/-
(L.P. SAHU) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Delhi, Dated 02nd July, 2018
VBP/-
Copy to
1. The appellant
2. The respondent
3. CIT(A) concerned
4. CIT concerned
5. D.R. ITAT "D" Bench
6. Guard File
// BY Order //
Asst. Registrar : ITAT Delhi Benches :
Delhi.
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