Cipro Pharmaceuticals, Hyderabad vs Assessee

This appeal is preferred by the assessee against the order of the CIT (A)-IV, Hyderabad, dated 18.07.2014 relating to A.Y 2006-07.

2. Brief facts are that the assessee is a partnership firm carrying on business in manufacture of formulations and trading in bulk drugs. The assessee supplies material to the foreign markets. The transportation is either through air or sea. In so far as air liting is concerned, the goods are transported through GBR Freight Forwarders Private Ltd and in so far as shipments are concerned, they are through Balaji Shipping Services.

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3. Assessee had deducted tax at source on a sum of Rs.20,250 in the case of GBR Freight Forwarders Private Ltd and no TDS was deducted in the case of Balaji Shipping Srvices. Assessee submitted that the two parties were merely shipping agents who did not undertake the freight work themselves but got the work done on behalf of the assessee. The assessee submitted that in case of GBR, the payment consisted of firstly, reimbursement of expenses incurred on the assessee's behalf and secondly, service charges and TDS had been deducted on the service charges paid. The appellant submitted that in case of BSS, there was no service charge component and therefore, no TDS had been deducted.

4. The Assessing Officer was of the view that the shipping/forwarding agents were under contract with the appellant for undertaking shipping/forwarding work on behalf of the assessee and it was irrelevant whether they undertook the work themselves or got it done through other appropriate means. The Assessing Officer relied on sec.194C(1) which requires that tax is to be deducted on 'any sum' paid for carrying out 'any work' and held that the tax should have been deducted on the gross amount paid by the appellant. The Assessing Officer also noted that it was neither possible nor permissible for an assessee to determine what part of the payment by it constituted the income of the contractor.

5. The Assessing Officer also observed that merely because BSS had not specified the service charge component in its bills, it did not mean that they had not taken any profit portion of the

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amount charged to the appellant. The Assessing Officer also held that even in the case of GBR, Rs.20,250 was a very meager fraction of the total turnover of Rs.13,84,047 and that the service charges were not marked in all the bills raised by them and tax was required to be deducted on the gross amount. The Assessing Officer relied on the decision in the case of Associated Cement Co.Ltd vs. CIT [1993] 201 ITR 441 (SC) for the view that on express language of the section, it is impossible to hold that the deduction of tax has to be confined to the income component of the contractor, that there is nothing in the language of the section which permits exclusion of an amount paid to the contractor and that the words 'on income comprised therein' used at the concluding part of the section 194C( 1) cannot be construed to mean that deduction should be from the income of the contractor as Parliament cannot be attributed with the intention of enacting an impractical and unworkable provision which casts impossible burdens on the payer.

6. The Assessing Officer, therefore, disallowed a sum of Rs.24,76,442 u/s 40(a)(ia).

7. Aggrieved, assessee preferrred appeal before the CIT (A). Before the CIT (A) the AR submitted that reimbursement of expenses did not represent a revenue payment nor did it represent income in the hands of the recipient, that reimbursement did not mean consideration for services rendered and that reimbursement meant expenses incurred on behalf of another person were recovered. The AR further submitted and relied on the following decisions for the view that reimbursable

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expense were separate from fees, that what constitutes fee shall be the consideration for the services rendered by the recipients but not the amount of reimbursement and that expenses incurred by the recipients on behalf of the assessee are to be reimbursed to that person:

i. CIT vs. Industrial Engineering Projects Pvt Ltd [1993] 202 ITR 1014 (Del) ii. CIT vs. Sandersons & Morgans [1970] 75 ITR 433 (Cal) iii. CIT vs. Tanubai D. Desai [1972] 84 ITR 713 (Bom) iv. DDIT(International Taxation)-I vs. Louis Berger International Inc (ITA No. 242/Hyd/10 and 243/Hyd/10)

8. The AR pointed out that GBR included service charges and that tax had been deducted on the service charges but not on the amounts reimbursed. The AR submitted that BSS on the other hand did not receive any service charges, that it got commission from the transporters, that the entire amount paid to BSS was for reimbursement of shipment charges and that therefore, no tax was deducted at source.

9. The ld CIT (A) observed as follows:

"11. I have considered the facts on record and the submissions of the AR. The bills raised by GBR show a slew of services rendered by it, including freight charges. The bills submitted by BSS refer only to freight charges. It is the appellant's claim that the freight charges, referred to in these bills was merely reimbursement of expenses incurred by these two parties and therefore, the appellant was not obliged to deduct tax on the payment made towards such reimbursement. There is nothing in these bills to show that the freight charges were merely being reimbursed to the two parties".

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10. The CIT (A) further pointed out that CBDT Circular No.715, dated 8.8.1995, (215 ITR (St) 12) states as follows:

"Question 30 : Whether the deduction of tax at source under section 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses? Answer: Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source".

11. The CIT (A) concluded that a plain reading of the sec.194C, along with the clarification as per the CBDT Circular, shows that the appellant was obliged to deduct tax on the entire payment made to the two shipping agents and relied on the following decisions:

i. Arthur Andersen & Co 94 TTJ 736 (Mum) ii. Cochin Refineries Ltd v CIT [1996] 222 ITR 354 (Kar) iii. HNS India VSAT Inc v DDlT [2005] 95 ITD 157 (Del) iv. Hindalco Industries Ltd. v ACIT [2005] 278 ITR(AT)125 (AT).

12. The CIT (A) further stated that these decisions no doubt relate to sec.195. However, the ratio of their decision apply to all reimbursements.

13. The CIT (A) held as under:

"14. In the case of BSS, the appellant has claimed that the payment was made only for freight charges and there was not component of service charges in the bill raised by BSS. I find this highly improbable. There would be no need for BSS to raise a bill at all if all that it was charging the appellant was the amount claimed for reimbursement. Further, there is nothing in the bills themselves to suggest that the claim was by way of reimbursement.

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15. I, therefore, uphold the disallowance of the sum of Rs.24,76,442 u/s 40(a)(ia). In the result, the appeal is dismissed".

14. Aggrieved, assessee is in appeal before us. Before us the ld Counsel for the assessee reiterated the submissions made before the CIT (A). The ld Counsel for the assessee also placed reliance on the decision in the case of CIT vs. S.K. Tekriwal (361 ITR 432 (Cal.) wherein the facts are as follows:

"The assessee deducted tax under section 194C(2) of the Income-tax Act, 1961,from payments made to sub- contractors. According to the Revenue, the payments were in the nature of machinery hire charges falling under the head "rent" and the provisions of section 194-1 were applicable. On the ground that the assessee had deducted tax at 1 per cent under section 194C(2) as against the actual deduction to be made at 10 per cent under section 194-1 the payments were disallowed proportionately invoking the provisions of section 40(a)(ia). The Tribunal held that where tax was deducted by the assessee, though under a bona fide wrong impression under wrong provisions, the provisions of section 40(a)(ia) could not be invoked and that if there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various tax deduction at source provisions, the assessee could be declared to be an assessee in default under section 201 but no disallowance could be made invoking the provisions of section 40(a)(ia). On appeal:

Held, dismissing the appeal, that no substantial question of law arose from the order of the Tribunal."

15. The ld Counsel submitted that though this argument for short deduction of tax was not raised before the CIT (A), this claim of the assessee may be considered in the present case before the Bench. It was also submitted by the ld Counsel that all amounts were paid before the end of the relevant accounting

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year and hence section 40(a)(ia) is not applicable and relied on the decision of Ushodaya Enterprises in ITA No.676/Hyd/2009 & 411/Hyd/2010 dated 7.1.2015 wherein it has been held as follows:

"7.2 The assessee also submitted that the Allahabad High Court in its judgment in the case of CIT vs. Vector Shipping Services (P) Ltd (38 Taxmann.com 77 (357 ITR 641) upheld the finding of the ITAT that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year. A copy of the decision of the Hon'ble High Court was also submitted by the assessee and the ITAT followed the ratio of the Special Bench decision in the case of M/s. Merilyn Shipping & Transport Ltd (136 ITD 23(SB).

7.3 The assessee further submitted that the Hon'ble Andhra Pradesh High Court in its judgment dated 24.06.2014 in the case of CIT vs. M/s. Janapriya Engineers Syndicate (ITA No.352 of 2014) held until and unless the decision of the Special Bench in the case of M/s Merilyn Shipping & Transport is upset by the Hon'ble jurisdictional Court, it binds smaller and coordinate ITA Nos.676 of 09 and 411 of 2010 Ushodaya Enterprises Ltd Hyderabad bench of the Tribunal. The assessee pray that in the light of the decision of the jurisdictional High Court, ITAT may direct the disallowance u/s 40(a)(ia) may not be made in so far as the assessee has already made payments before the end of the relevant accounting year, out of the amounts disallowed which have been upheld by the CIT (A).

8. We have heard both the parties. We direct that the AO may follow the decision of the Special Bench in the case of Merilyn Shipping & Transports v. ACIT in ITA No.477/Viz/2008 dated 29.03.2012 and the disallowance u/s 40(a)(ia) may not be made by the AO for the amounts/payments which have already been paid before the end of the relevant accounting year, out of the amounts disallowed which have been upheld by the CIT (A). This ground is partly allowed for statistical purposes".

16. We heard both parties. We are of the opinion that as far as GBR Freight Forwarders (P) Ltd is concerned, assessee has made

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a short deduction. Neverthless, the decision in the case of CIT vs. S.K. Tekriwal (361 ITR 432 (Cal.) is applicable and hence no disallowance can be made invoking the provisions of section 40(a)(ia) of the I.T. Act.

17. With respect to the payments made to Balaji Shipping Services, the amounts paid are only towards reimbursement of shipment charges and therefore, no tax was deducted at source. Assessee did not attract the provisions of section 40(a)(ia) of the Act as reimbursement of expenses do not consist the income of the recipient and the payments are not governed by the provisions of section 194C of the Act. We also rely on the decision of the Coordinate Bench in the case of Ushodaya Enterprises in ITA No.676/Hyd/2009 & 411/Hyd/2010 dated 7.1.2015.

18. In the result, appeal of the assessee is allowed.

Order pronounced in the Open Court on 17th June, 2015.

Sd/- Sd/- (B. Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 17th June, 2015.

Vnodan/sps Copy to:

1. Shri S. Rama Rao, Advocate, Flat No.102, Shriyas Elegance, 3-6-643, Street No.9, Himayatnagar, Hyderabad 500029

2. The Asstt. Commissioner of Income Tax, Circle 6(1) IT Towers, AC Guards, Masab Tank, Hyderabad

3. CIT(A)-IV Hyderabad

4. CIT -III Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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