Txa47-15&Ors v. The Joint Commissioner Of Income Tax,Range-1, Aaykar Bhavan, Plot

1 TXA47-15&Ors. IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NOS.47, 48, 49 OF 2015, 9 AND 10 OF 2016 TAX APPEAL NO.47 OF 2015 M/s. Zephyr Biomedicals, Plot No.13, Sagar Society,Dona Paula, Panaji Goa.Represented by its Partner Shri Natarajan Sriram,56 years of age,S/o Sheshagiri Natarajan,Plot No.13, Sagar Society,Dona Paula, Panaji.Goa – 403004.…Appellant VersusThe Joint Commissioner of Income Tax,Range-1, Aaykar Bhavan, Plot No.5,EDC Complex,…Patto, Panaji Goa. Respondent WITH TAX APPEAL NO.48 OF 2015 M/s. Orchid Biomedical Systems,having office at Ground on Floor,Geetanjali Building, Dr. Rego Bagh,Alto Santacruz, Bambolim Goa.Represented by its Partner,Shri Natarajan Sriram,56 years of age, S/o Sheshagiri Natarajan,Plot No.13, Sagar Society, Dona Paula, Panaji,Goa 403004.…Appellant 2 TXA47-15&Ors. Versus The Joint Commissioner of Income Tax,Range-1, Aaykar Bhavan, Plot No.5,EDC Complex,…Patto, Panaji Goa. Respondent WITHTAX APPEAL NO.49 OF 2015 M/s. Zephyr Biomedicals, Plot No.13, Sagar Society,Dona Paula, Panaji Goa.Represented by its Partner,Shri Natarajan Sriram,56 years of age,S/o Sheshagiri Natarajan,Plot No.13, Sagar Society,Dona Paula, Panaji.Goa – 403004.…Appellant VersusThe Joint Commissioner of Income Tax,Range-1, Aaykar Bhavan, Plot No.5,EDC Complex,…Patto, Panaji Goa. Respondent WITH TAX APPEAL NO.9 OF 2016 M/s. Zephyr Biomedicals, Plot No.M46/47, Phase IIIB,Verna Industrial Estate, Verna Goa.Represented by its Partner Shri Natarajan Sriram,56 years of age, 3 TXA47-15&Ors. S/o Sheshagiri Natarajan,Plot No.13, Sagar Society, Dona Paula, Panaji,Goa – 403004. …Appellant VersusThe Joint Commissioner of Income Tax,Range-1, Aaykar Bhavan, Plot No.5,EDC Complex,…Patto, Panaji Goa. Respondent WITH TAX APPEAL NO.10 OF 2016 M/s. Orchid Biomedical Systems,having office at Ground Floor,Geetanjali Building, Dr. Rego Bagh,Alto Santacruz, Bambolim Goa.Represented by its Partner,Shri Natarajan Sriram,56 years of age, S/o Sheshagiri Natarajan,Plot No.13, Sagar Society, Dona Paula, Panaji,Goa 403004. …Appellant VersusThe Joint Commissioner of Income Tax,Range-1, Aaykar Bhavan, Plot No.5,EDC Complex,…Patto, Panaji Goa.Respondent Mr. Pramod Vaidya and Ms. G. Almeida, Advocates for the Appellants. Ms. Susan Linhares, Standing Counsel and Advocate Ms. S. Pinto, forthe Respondents. 4 TXA47-15&Ors. Coram : M. S. Sonak & Dama Seshadri Naidu, JJ. Reserved on : 29[th] September, 2020 Pronounced on : 7[th] October, 2020 JUDGMENT( Per M. S. Sonak, J) Heard Mr. P. Vaidya, learned counsel for the Appellantsand Ms. S. Linhares, learned counsel for the Respondents in all thesefive appeals. 2.The learned counsel for the parties agree that all theseappeals can be taken up and disposed of by a common judgment andorder since, at least two of the substantial questions of law which arise inthese appeals are common. 3.The two common substantial questions of law which arisein all these five appeals are as follows :- (i) Whether on the facts and in the circumstances of thecase, the Hon'ble Tribunal was right in law in holding thatthe Appellant is liable to deduct tax at source underSection 194C of IT Act on the payments made to C & Fagents which is outright reimbursement of freight chargeshaving no element of profit ? (ii) Whether on the facts and in the circumstances of thecase, the Hon'ble Tribunal was right in law in upholdingthe disallowance under Section 40(a)(ia) of IT Act whensaid section cannot be applied in the instant case ? 5 TXA47-15&Ors. 3.The two common substantial questions of law which arisein all these five appeals are as follows :- (i) Whether on the facts and in the circumstances of thecase, the Hon'ble Tribunal was right in law in holding thatthe Appellant is liable to deduct tax at source underSection 194C of IT Act on the payments made to C & Fagents which is outright reimbursement of freight chargeshaving no element of profit ? (ii) Whether on the facts and in the circumstances of thecase, the Hon'ble Tribunal was right in law in upholdingthe disallowance under Section 40(a)(ia) of IT Act whensaid section cannot be applied in the instant case ? 5 TXA47-15&Ors. 4.The learned counsel for the parties agree that there is yetanother substantial question of law relating to deduction under Section80IB of the Income Tax Act, 1961 (IT Act ) which arises in Tax AppealNos.47 of 2015, 49 of 2015 and 9 of 2016. However, they also agreethat this question will be required to be answered only if the substantialquestion of law (ii) above is answered in favour of the Revenue andagainst the Assessee. This means that only if we hold that thedisallowance under Section 40(a)(ia) of the IT Act was valid in the factsand circumstances of the present case, the occasion will arise to considerthe third substantial question of law relating to the deduction underSection 80IB of the IT Act. 5.Mr. Vaidya, learned counsel for the Appellants submits thatin the present case, the C & F agents had raised separate bills towardsreimbursement of freight charges paid to the carriers and the actualservice charges of the C & F agents. Therefore, the payments made bythe Assessees towards reimbursement never had any income elementtherein. In such circumstances, neither was there any obligation uponC & F agents to pay any income tax upon such reimbursed amountsnor was there any obligation upon the Assessees to deduct any tax atsource (TDS) upon such amounts. He submits that the TDS is nothingbut an alternate mode for recovery or collection of tax on income.Therefore, if no income element is involved in payments made, there isno obligation to deduct TDS. He relies on (i) Director of Income Tax 6 TXA47-15&Ors. v Krupp Udhe Gmbh354 ITR 173 (Bom); (ii) CIT v SiemensAktiongesellschaff310 ITR 320 (Bom); (iii) Principal CIT vConsumer Marketing (India) (P.) Ltd64 taxmann.com 16 (Guj);(iv) Transmission Corporation of A. P. Ltd. Vs CIT (239 ITR 587)and (v) GE India Technology Centre (P) Ltd v CIT 327 ITR 456(SC), in support of his contentions. 6.Mr. Vaidya submits that the ITAT has misconstrued theCBDT Circular No.715 dated 08.08.1995 and the interpretation of theITAT is not in consonance with the decisions of the Karnataka HighCourt in CIT Vs Kalyani Steels Ltd. (91 Taxmann. com 359 ) andthe Gujarat High Court in Principal CIT Vs Consumer Marketing(India) (P) Ltd. (64 Taxmann. Com 16 ). 7.Mr. Vaidya submits that there are errors apparent on theface of record of the impugned orders made by the ITAT. He pointsout that in this case “Jet Air Freighters” were the C & F agents and notcarriers as incorrectly held by the ITAT. Besides, the ITAT noted onlyone of the five bills on record and therefore incorrectly concluded thatthe freight charges were only 1,25,272/- and the payment of₹₹2,05,660/- had no nexus with the reimbursement of freight charges.He pointed out that in addition to this one bill, there were four otherbills and the amounts therein totalled upto 2,05,660/-.₹ 7 TXA47-15&Ors. 8.For all the aforesaid reasons, Mr. Vaidya submits that thefirst two substantial questions of law as framed in all these appeals maybe answered in favour of the Assessees. 7.Mr. Vaidya submits that there are errors apparent on theface of record of the impugned orders made by the ITAT. He pointsout that in this case “Jet Air Freighters” were the C & F agents and notcarriers as incorrectly held by the ITAT. Besides, the ITAT noted onlyone of the five bills on record and therefore incorrectly concluded thatthe freight charges were only 1,25,272/- and the payment of₹₹2,05,660/- had no nexus with the reimbursement of freight charges.He pointed out that in addition to this one bill, there were four otherbills and the amounts therein totalled upto 2,05,660/-.₹ 7 TXA47-15&Ors. 8.For all the aforesaid reasons, Mr. Vaidya submits that thefirst two substantial questions of law as framed in all these appeals maybe answered in favour of the Assessees. 9.Ms. Linhares, learned counsel for the Revenue stresses uponthe Circular No.715 and submits that such Circular is quite clear andbinding upon the Authorities under the IT Act. She submits that theview taken by the ITAT is entirely consistent with what is set out inCircular No.715. In particular, she makes reference to answers toQuestion Nos.7 and 30 in Circular No.715 and submits that since theview taken by the ITAT is entirely consistent with the answers inCircular No.715, there is no case made out to interfere with theimpugned orders or to answer the substantial questions of law as raisedin favour of the Assessees and against the Revenue, in all these appeals.She therefore submits that all these appeals may be dismissed. 10.The rival contentions now fall for our determination. 11.In order to appreciate the rival contentions, reference isnecessary to the provisions in Section 4 and Section 190 of the IT Actwhich explain the basis of charge of income tax and the TDS regimerespectively. 12.Section 4(1) provides that where any Central Act enacts 8 TXA47-15&Ors. that income tax shall be charged for any assessment year at any rate orrates, the income tax at that rate or those rates shall be charged for thatyear in accordance with, and subject to the provisions ( includingprovisions for the levy of additional income tax) of, this Act in respectof the total income of the previous year of every person. Proviso toSection 4(1) provides that where by virtue of any provision of IT Act,the income tax is to be charged in respect of the income of a periodother than the previous year, the income tax shall be chargedaccordingly. 13.Sub section (2) of Section 4 of the IT Act provides that inrespect of income chargeable under sub-section (1) of Section 4, theincome tax shall be deducted at source or paid in advance, where it is sodeductible or payable under any provision of the IT Act. 14.Therefore, what is important is that the income tax is a taxpayable in respect of “total income” of the previous year of every person.Further, such income tax shall have to be deducted at source or paid inadvance, where it is so deductible or payable under any of the provisionof the IT Act. From this, it follows that unless the paid amount has any“income element” in it, there will arise no liability to pay any incometax upon such amount. Further, in such a situation, there will also ariseno liability of any deduction of tax at source upon such amount. 9 TXA47-15&Ors. 14.Therefore, what is important is that the income tax is a taxpayable in respect of “total income” of the previous year of every person.Further, such income tax shall have to be deducted at source or paid inadvance, where it is so deductible or payable under any of the provisionof the IT Act. From this, it follows that unless the paid amount has any“income element” in it, there will arise no liability to pay any incometax upon such amount. Further, in such a situation, there will also ariseno liability of any deduction of tax at source upon such amount. 9 TXA47-15&Ors. 15.Section 190 of the IT Act is to be found in Chapter XVIIof the IT Act concerning the collection and recovery of tax. Sub section(1) of Section 190 of the IT Act provides that notwithstanding that theregular assessment in respect of any income is to be made in a laterassessment year, the tax on such income shall be payable by deductionor collection at source or by advance payment, or by payment undersub-section (1A) of Section 192, as the case may be, in accordance withthe provisions of this Chapter. Sub section (2) of Section 190 of IT Actprovides that nothing in this Section shall prejudice the charge of tax onsuch income under the provisions of sub-section (1) of Section 4.Section 190 of IT Act states the general rule where provisions ofChapter XVII apply. Section 194(C) of the IT Act which is a part ofChapter XVII specifically concerns payments to be made to contractorswhich would include C&F agents. 16.Again, the liability to deduct or collect income tax at sourceis upon “such income” as referred to in Section 190(1) of the IT Act.The expression “such income” would ordinarily relate to any amountwhich has an “income element” in it and not otherwise. This is becausethe regime of TDS was enacted for the purpose of easy collection ofincome tax or to prevent the tax evasion. From bare reading of text ofSection 190 and other provisions to be found in Chapter XVII, it dealswith “collection and recovery of tax”. It is clear that the TDS regime isnothing but an alternate mode of recovery or collection of income tax. 10 TXA47-15&Ors. 17. In all these appeals, there is no dispute or in any case, there is overwhelming material on record which establishes the followingposition :- (i) The C & F agents have raised two separate sets of bills :- (a) first towards the services rendered by the C & F agents; and(b) second towards the reimbursement of freight charges paid to the carriers. (ii)These are not cases where any composite bills were raised by the C & F agents without indicating the service charge components and reimbursement components separately; (iii)There are ample evidences in the form of ledgerentries, bills, payment vouchers etc., placed on record toestablish that separate sets of bills were invariably madetowards the service charge components and reimbursementcomponents by the Assessees to the C & F agents; (iv) The Assessees have invariably deducted tax at source when it comes to payment towards the first set of bills i.e. towards the services rendered by the C & F agents without any demur; (v)Even in cases where composite bills were issued or where there was any ambiguity about payment towards reimbursement components, the Assessees have deducted tax at source; (vi)It is only in cases where separate bills were raised by the C & F agents towards reimbursement and the freight charges, backed by proper evidence that the Assessees have not deducted any tax at source before making payments towards such reimbursement. 11 TXA47-15&Ors. (iv) The Assessees have invariably deducted tax at source when it comes to payment towards the first set of bills i.e. towards the services rendered by the C & F agents without any demur; (v)Even in cases where composite bills were issued or where there was any ambiguity about payment towards reimbursement components, the Assessees have deducted tax at source; (vi)It is only in cases where separate bills were raised by the C & F agents towards reimbursement and the freight charges, backed by proper evidence that the Assessees have not deducted any tax at source before making payments towards such reimbursement. 11 TXA47-15&Ors. 18.Thus, the Assessees only contend that in clear cases whereseparate bills have been raised by the C & F agents towards thereimbursement of freight charges, they are not liable to deduct tax atsource upon payment towards such reimbursement components, since,such payment has no income element embedded in it. According to us,the Assessees' contention deserves to be upheld in the facts andcircumstances of the present case. There are decided cases whichsupport the contention of the Assessees and reference can be usefullymade to some such cases. 19. In Krupp Udhe GMBH (supra), the Division Bench ofthis Court speaking through Dr. D. Y. Chandrachud, as His Lordshipthen was, held that the question as to whether the reimbursement ofexpenses will form a part of the taxable income is not res integra in sofar as this Court is concerned. Reference was then made to the decisionin Siemens Aktiongesellschaff (supra), wherein another Division Benchof this Court agreed with the view taken by the Calcutta High Court inCIT Vs Dunlop Rubber Co. Ltd. (142 ITR 493) and Delhi HighCourt in CIT Vs Industrial Engineering Projects (P) Ltd., (202 ITR1014 ) that the amounts by way of reimbursement expenses do notconstitute income as such and liable to any income tax. 20.In Transmission Corporation of A. P. Ltd. Vs CIT (239ITR 587) the Hon'ble Supreme Court held that when the Assessee 12 TXA47-15&Ors. makes the payment to non-residents, the Assessee is under theobligation to deduct tax at source under Section 195. However, theobligation is limited only to appropriate proportion of incomechargeable under the IT Act. 21..The decision in Transmission Corporation of A. P. Ltd(supra) was considered by the Hon'ble Supreme Court in GE IndiaTechnology Centre (P) Ltd. Vs CIT (327 ITR 456), in which, it washeld that the provisions for deduction of TAS which are to be found inChapter XVII dealing with collection of taxes and the chargingprovisions of the IT Act form one single integral, inseparable code andtherefore, the provisions relating to TDS apply only to those sumswhich are chargeable to tax under the IT Act. 22.Based upon legal position as explained in the aforesaiddecisions of the Hon'ble Supreme Court and our High Court, theAssessees' contention that there was no liability to deduct tax at sourceupon payments made towards reimbursement of amounts to the C & Fagents, will have to be accepted. 23.The ITAT, in its impugned order dated 16/01/2015,indeed appears to have misread the bills issued by Jet Air Freighters andproceeded to incorrectly style “Jet Air Freighters” as “carriers” and notas the C & F agents. These very bills as well as other material on record 13 TXA47-15&Ors. very clearly establishes that Jet Air Freighters were indeed the C & Fagents and it is “Jet Airways” which was the carrier in these cases. Thereasoning of the ITAT is therefore vitiated by this apparent error. 23.The ITAT, in its impugned order dated 16/01/2015,indeed appears to have misread the bills issued by Jet Air Freighters andproceeded to incorrectly style “Jet Air Freighters” as “carriers” and notas the C & F agents. These very bills as well as other material on record 13 TXA47-15&Ors. very clearly establishes that Jet Air Freighters were indeed the C & Fagents and it is “Jet Airways” which was the carrier in these cases. Thereasoning of the ITAT is therefore vitiated by this apparent error. 24.Similarly, the ITAT once again erred in observing that thebills towards reimbursement was only in an amount of 1,25,272/- and₹since the Assessees had paid by cheque an amount of 2,05,660/-, this₹payment has no nexus with reimbursement of freight charges of theC & F agents. The record clearly bears out that in all there were fivebills raised by the C & F agents towards reimbursement of freightcharges and the break up of the same reads as follows :- 25.The bill amounts total upto 2,05,660/-, which is the₹precise amount paid by the Assessees by consolidated cheque No.46101dated 16/05/2008. The nexus, is thus clearly established. There isapparent error in the reasoning of the ITAT on this count as well. 26.Finally, we come to CBDT Circular No.715 and theanswers to Question Nos.7 and 30 to be found therein. The questionsand answers do not seem to clearly suggest that even in cases where 14 TXA47-15&Ors. separate bills are raised towards reimbursement components, thepayments against such separate bills carry liability of TDS. In any case,it is well settled that the CBDT Circular has to be read and construed inconsonance with the provisions of the IT Act. If there is any ambiguity,such ambiguity has to be resolved by accepting the position consistentwith the provisions of the IT Act. If there is conflict, then, it is obviousthat the provisions of the IT Act will have to prevail. 27.The Karnataka High Court in Kalyani Steels Ltd. (supra)has referred to Circular No.715 but not read or construed it in themanner which the ITAT has, in the present case. There the Assessee hadmade payment to a company named HSL towards reimbursement ofsome travel expenses of deputed personnel. The High Court held thatthere was no income element embedded in such payment towardsreimbursement and therefore, any insistence upon deduction of tax atsource on these payments might run counter to the intent of CircularNo.715. 28.Similarly, the Gujarat High Court in Consumer Marketing(India) (P) Ltd., (supra), the facts and circumstances which bear closeresistance to the facts and circumstances of the present case, held thatthere will arise no liability to deduct tax at source where C & F agentsraises separate bills towards reimbursement of transportationcomponents alongwith supporting bill invoices, receipts etc. This wasafter considering the impact of Circular No.715. 15 TXA47-15&Ors. 29.In fact, the Gujarat High Court, referred to a previousdecision of ITAT in Om Satya Exim (P) Ltd. Vs ITO rendered on13.05.2011 in ITA No.1335/Ahd/2010 and observed therein theTribunal held after considering Circular No.715, taken a view thatwhen no composite bills were issued but separate bills were issuedtowards reimbursement of transportation charges, the Circular No.715was not applicable. On this basis, the High Court held that there wasnothing in Circular No.715 which required the deduction of tax atsource in respect of payment made to C & F agents towards thereimbursement of transportation charges, when separate bills were raisedfor reimbursement claims. 30.Since, no decision of the jurisdictional High Court or theHon'ble Supreme Court was pointed out, the ITAT in the present case,should have construed the Circular No.715 in consonance with itsconstruction by the coordinate Bench and in any case the High Courtsof Karnataka and Gujarat. 30.Since, no decision of the jurisdictional High Court or theHon'ble Supreme Court was pointed out, the ITAT in the present case,should have construed the Circular No.715 in consonance with itsconstruction by the coordinate Bench and in any case the High Courtsof Karnataka and Gujarat. 31.For all the aforesaid reasons, we allow these appeals andanswer the first two substantial questions of law, which were commonto all these appeals, in favour of the Assessees and against the Revenue. For all the aforesaid reasons, we allow these appeals and 32.In view of the above, there is no necessity to consider thethird substantial question of law framed in Tax Appeal Nos.47 and 49 16 TXA47-15&Ors. of 2015 and Tax Appeal No.9 of 2016. 33.The impugned orders will now have to be modifiedaccordingly. 34.These appeals are allowed in the aforesaid terms. Thereshall however be no order as to costs. Dama Seshadri Naidu, J M. S. Sonak, J at*