Expenditure of demurrage charges cannot be allowed in the absence of tax being deducted at source: Bombay High Court
Payments made to a non-resident company by way of demurrage charges cannot be permitted in the absence of tax being deducted at source. A division bench of Justice MS Sanklecha and GS Kulkarni, while adjudicating the matter in The Commissioner of Income Tax v. Dempo &amp; Co. Pvt. Ltd; [INCOME TAX APPEAL NO. 989 OF 2015], dealt with the issue of demurrage charges while paying income tax. The respondent-assessee had claimed expenditure of Rs.1.8 crores being the demurrage claim paid to a non-¬resident shipping company.     The   Assessing   Officer   disallowed   part   of   the   above expenditure for failure to deduct tax at source under Section 195 of the Income Tax Act. In appeal, the respondent-assessee contended that there was no obligation to deduct tax at source as the amount paid to non-resident shipping company which was engaged in operation of ships and therefore governed by Section 172 of the Act.  It was pointed out that Section 172 of the Act provides for levy and collection of taxes   in   respect   of   any   income   of   ship   engaged   in   carriage   of goods/passengers/livestock from a port in India.  Reliance was also placed upon the Circular issued by   CBDT   which   interalia   provides   that   Section   172   is   a   self-contained code for levy and recovery of taxes ship wise and journey wise   in   case   of   ships   owned   or   chartered   by   non-residents. Therefore, the requirement of deducting tax at source would not be applicable   in   such   a   case   thus   the   consequent   disallowance   of expenditure under Section 40(a)(i) of the Act was not warranted. However, the   CIT(A) did   not   accept   the   contention   of   the respondent-assessee and held Section 44B of the Act would apply as it relates to computation of profits and gains and from shipping business.
 on 16 09 2015 on 22 03 902.ITXA.989.15.odt IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO. 989 OF 2015(Original Tax Appeal No. 507 Goa Bench)WITHINCOME TAX APPEAL NO. 991 OF 2015(Original Tax Appeal No. 607 Goa Bench)The Commissioner of Income Tax..AppellantVs.V.S. Dempo and Company Pvt. Ltd...Respondent....Ms. Asha Desai Advocate for Appellant.Mr. Mihir Naniwadekar Advocate for Respondent.....CORAM : M.S. SANKLECHA &G.S. KULKARNI JJ.DATED : 8 SEPTEMBER 2015ORAL ORDERis to the common order dated 11December 2006 passed by the Income Tax Appellate Tribunalallowing the appeals filed by the respondent­assessee.The Assessment Years involved are A.Y. 1999­00 and 2000­01.2.Both these appeals were admitted on 12 October 2007 on thefollowing substantial questions of law:S.S.DESHPANDE 1 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odt(I)Whether in facts and circumstances of the case theITAT has erred in applying the provision of Section 172in holding that section 40(a)(i) is not applicable particularly when section 172 concerned with levy andrecovery of tax in a case of any ship as against section195 r w 40(a)of the IT Act refers to non­residentAssessee as in the present case ofExplanation to section 80HHC is right in law ofexplanation to section 80HHC is right in law of Explanationto section 80HHC is right in law of Explanation to Section80HHC is right in law S.S.DESHPANDE 3 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odtRegarding Question No.1:3.The respondent­assessee had claimed expenditure of Rs.1.8crores being the demurrage claim paid to a non­resident shippingcompany. The Assessing Officer disallowed part of the aboveexpenditure for failure to deduct tax at source under Section 195 ofthe Act.4.In appeal the respondent­assessee contended that there wasno obligation to deduct tax at source as the amount paid to non­resident shipping company which was engaged in operation of shipsand therefore governed by Section 172 of the Act. It was pointedout that Section 172 of the Act provides for levy and collection oftaxes in respect of any income of ship engaged in carriage ofgoods passengers livestock from a port in India. Reliance was alsoplaced upon the Circular No. 723 dated 19 September 1995 issuedby CBDT which interalia provides that Section 172 is a selfcontained code for levy and recovery of taxes ship wise and journeywise in case of ships owned or chartered by non­residents.Therefore the requirement of deducting tax at source would not beS.S.DESHPANDE 4 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odtapplicable in such a case thus the consequent disallowance ofexpenditure under Section 40(a)(i) of the Act was not warranted.However the CIT(A) did not accept the contention of therespondent­assessee and held Section 44B of the Act would apply asit relates to computation of profits and gains and from shippingbusiness. In the above view the appeal of the respondent­assesseewas dismissed.5.On further appeal the Tribunal by the impugned orderallowed respondent s appeal by following its decision in DCIT Vs.Orient(P) Ltd. rendered on 2 December 2004. Theimpugned order holds that Section 40(a)(i) of the Act would applyonly when there is an obligation to deduct tax at source. Reliancewas placed upon the Circular No. 723 issued by CBDT to support it splea that there was no obligation to deduct tax at source in respectof payment made towards demurrage charges in cases whereSection 172 of the Act applies. It was not disputed by the revenuethat in this case Section 172 of the Act applies. The impugned orderspecifically holds that Section 172 of the Act is a charging as well asS.S.DESHPANDE 5 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odta machinery provision in respect of non­resident shippingcompanies. It provides for determination and collection of tax.Thus Chapter XVII of the Act in respect of deducting tax at sourcewould not apply in such cases. Consequently the disallowance ofexpenditure on account of Section 40(a)(i) of the Act was deleted.6.In appeal before us Ms. Desai the learned Counsel for therevenue invites our attention to the decision of this Court in CIT Vs.OrientLtd. 325 ITR 554 by which this Court reversed thedecision of the Tribunal in OrientLtd. rendered on 2December 2004. In the above view she submits that the appeal beallowed.7.On the other hand Mr. Mihir Naniwadekar learned Counselfor the respondent­assessee submits that the decision of this Courtin OrientLtd.may require reconsideration.8.The substantial question interalia which arose forconsideration of this Court in OrientLtd.was asunder:S.S.DESHPANDE 6 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odt“(B)Whether on the facts and in the circumstances ofthe case the assessee was entitled to claim deduction ofthe demurrage charges of Rs.1 08 53 980 ­ paid toforeign company without deducting tax on it under s.40(a)(i) of the IT Act in view of the Circular No. 723 dt.19Th September 1995128 CTR6] issued bythe CBDT ”9.The above question arose for consideration by this Court onthe following facts:(a)M s OrientLtd.had for A.Y. 1997­98declared an income of Rs.2.10 crores. It had paid an amount ofRs.1.08 crores as demurrage charges to a non­resident shippingcompany viz. M s Mitsui & Co. Ltd. However as the assessee hadnot deducted tax at source on the demurrage charges paid theAssessing Officer disallowed the expenditure of demurrage chargesin view of Section 40(a)(i) of the Act.(b)In appeal the CIT(A) held that demurrage charges had beenpaid by assessee. However in the hands of recipient M s Mitsui &Co. Ltd. It was in the nature of profits of a non­resident fromS.S.DESHPANDE 7 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odtoccasional shipping business. Placing reliance upon the CBDTCircular No. 723 and Section 172 of the Act the CIT(A) allowed theappeal.(c)The revenue s appeal to the Tribunal was dismissed.10.This Court held that Section 172 of the Act is applicable onlyin respect of non­resident carrying on shipping business whileassessee i.e. OrientLtd. is admittedly a resident andtherefore Section 172 of the Act cannot be applied. Thus theexpenditure of demurrage charges cannot be allowed in the absenceof tax being deducted at source. The relevant observations of thisCourt is found in paragraph 8 are as under:“8.Sec. 172 of the Act 1961 is carefully considered byus. Chapter XV titles as "Liability in special cases". We haveno concern with sections starting from s. 159 till s. 171from this Chapter XV. Sec. 172 comes under sub­title "H.­Profits of non­residents from occasional shipping business".Title of s. 172 is "Shipping business of non­residents". Forbringing a case under Chapter XV­H of the Act 1961 onehas to establish a case of profits of non­residents fromoccasional shipping business. "Non­resident" is defined u s.2(30) as a person who is not a "resident" and for thepurpose of ss. 92 93 and 168 includes a person who is notS.S.DESHPANDE 8 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odtordinarily resident within the meaning of cl.of s. 6.The respondent assessee is a company incorporated underthe provisions of Indian Companies Act 1956 is fairly anadmitted position. The assessee cannot be said to be non­resident. We have also taken notice of s. 6 i.e. "residence inIndia". In short respondent assessee cannot be said to benon­resident. The present appeal pertains to the respondentassessee. In our view in the facts of the present case therespondent assessee cannot lay fingers on s. 172 since weare not dealing with profits of non­residents. The otheraspect is that such profits of non­residents should be fromoccasional shipping business. It is not the case that therespondent assessee has earned some profit from occasionalshipping and is a non­resident. In our view s. 172 does nothave application in relation to the respondent assessee andin the facts and circumstances of the present case. Thecompany from Japan viz. Mitsui & Co. Ltd. Japan recipient of demurrage amount is not before us. In otherwords we are not examining the tax liability of the foreigncompany i.e. Mitsui & Co. Ltd. Japan. …....... Provisionsof s. 172 are to apply notwithstanding anything containedin the other provisions of the Act. Therefore in such cases the provisions of ss. 194C and 195 relating to TDS are notapplicable. The recovery of tax is to be regulated for voyageundertaken from any port in India by a ship under theprovisions of s. 172. In this view these observations of thelearned Vice President of Tribunal have no concern withthe factual aspect that it is a case of occasional shipping pleaded or raised by assessee. There is no dispute aboutinterpretation of s. 172 or s. 195. Crucial point is as tohow s. 172 applies to the facts of the present case whereinthe respondent assessee is an Indian company incorporated under the provisions of Indian CompaniesAct 1956. In our view the learned Vice President of theTribunal has recorded a perverse observation finding inpara 3 regarding application of ss. 44B and 172 of the Act1961..”S.S.DESHPANDE 9 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odt11.We are unable to agree with the above view of this Court inOrientLtd.of the Act. Although theCourt was concerned with the issue in an appeal concerning aresident company. The introduction of section 172 of the Act by theassessee was to determine whether in view thereof was there anyobligation to deduct tax at source by the payer­assessee. Section172 of the Act has to be examined through the prism of the non­resident shipping company in respect of it s income. It is in theabove view that Section 172 of the Act and Circular No. 723 issuedby the CBDT was relied upon by the respondent­assessee to pointout that as Section 172 of the Act provides a complete code itself forS.S.DESHPANDE 10 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odtlevy recovery of tax ship wise and journey wise. Thus there is nooccasion to deduct tax under Chapter XVII of the Act.12.It is a settled position under the law of precedents that it isnot open to usto take a view contrary to the viewtaken by another Division Bench of this Court. In case we areunable to agree with the view of the earlier Division Bench and itdoes not fall within the exclusionary categories of binding precedentby being contrary to and or in conflict with a decision of the ApexCourt or rendered per­incurrim. In such a case it is best that theissue is resolved at the hands of a Larger Bench of this Court.Certainty of law is an important ingredient of Rule of Law.13.As we do not agree with the view taken by this Court in Orient(Goa)Ltd.and it does not fall with the exclusionsmentioned in Paragraph 12 above we direct the Registry to placepapers and proceedings of the present two appeals before theHon ble The Chief Justice to obtain suitable directions to place thefollowing question of law for the opinion of the Larger Bench of thisCourt as under:­S.S.DESHPANDE 11 13 on 16 09 2015 on 22 03 902.ITXA.989.15.odtWhether while dealing with the allowability of expenditureunder Section 40(a)(i) of the Act the status of a person making theexpenditure has to be a non­resident before the provision to Section172 of the Act can be invoked 14.It is made clear that all the substantial questions of law wouldbe considered after the receipt of the view of the Full Bench of thisCourt.[G.S. KULKARNI J][M.S. SANKLECHA J.]S.S.DESHPANDE 12 13 on 16 09 2015 on 22 03 