Shipping charges using non-resident shipping are not liable to TDS u/s 172(8) as supplemented by CBDT Circular No. 723/1995

ITAT Amritsar, in a recent judgment has held that shipping charges (Inland haulage charges, Terminal handling charges, Bunker adjustment factor, Cost adjustment factor, etc) using non-resident shipping are not liable to TDS u/s 172(8) as supplemented by CBDT Circular No. 723/1995

Case Details:
ITA No.257(Asr)/2014 Assessment year:2006-07
PMS International (P) Ltd vs. Income Tax Officer (TDS)-II
Date of Order/Judgment: 22/03/2016

Brief Facts of the Case:
The assessee company in the course of exports, had made payments to several companies towards shipping expenses, i.e., Inland haulage charges, Terminal handling charges, Bunker adjustment factor, Cost adjustment factor, etc. to the  shipping agents of non-resident ship-owners. The Assessing Officer (AO) noted that the auditors of the assessee had stated that the assessee had not deducted tax at source for such payments as required under section 194C.

The assessee contended that according to section 172(8) of the Income Tax Act, 1961 which was supplemented by CBDT Circular No. 723 dated 19.09.1995 which provided that where payments were made to shipping agents of nonresident ship-owners or charterers for carriage of passengers, etc., shipped at a port in India, since the agent acts on behalf of the nonresident ship-owner or charterer, he steps into the shoes of the principal and, accordingly, the provisions of section 172 shall apply and those of sections 194C and 195 will not apply. Thus, the amounts paid by the assessee company towards these shipping expenses, were not liable for any deduction of tax at source.

However the AO held that since the amounts paid were found to represent charges paid other than ocean freight and were not paid under the provisions of section 172(8) and the Circular relied by the assessee that the amounts of shipping charges do not constitute freight amount, but represented other charges which had been paid to the clearing and forwarding agents for their services to clear the goods at the custom port; and that by clearing the goods at the custom port, the clearing and forwarding agents cannot be considered to be the agents of the nonresident ship-owners or charters and they will not step into the shoes of the principal as stated in said Circular No.723. As such, the AO held the assessee to be in default.  CIT(A) also confirmed the action of the Assessing Officer.

Excerpts from ITAT Judgment:

……. it is clear that in case of shipping of goods at a port in India , seven and a half percent of the carriage charges shall be deemed to be income accruing in India on account of such carriage; that unless and until the tax assessable u/s 172 is paid or arranged for and the Collector of Customs is satisfied to that effect, the ship shall not be granted port clearance; that the carriage charges, as and envisaged by section 172(2) shall be included in the amount of demurrage charge or handling charge or any other amount of similar nature.

Further, in ‘ITO vs. Freight Systems (India ) Pvt. Ltd.’, 6 SOT 473 (Del.), it has been held that payment of ocean freight and Inland haulage charges cannot be subjected to TDS by virtue of the provisions of section 172 of the Act, which position is clarified by CBDT Circular No.723 dated 19.09.1995. This decision, though cited by the assessee before the ld. CIT(A), it does not find even a mention, much less adjudication, by the ld. CIT(A), in the operative portion of the order. Before us also, no decision contrary to ‘Freight Systems (India) Pvt. Ltd.’ (supra) has been cited on behalf of the Department. Thus, in view of the clear provisions of section 172(8) of the Act, as supplemented by CBDT Circular No.723 dated 19.09.1995, both of which have been duly considered in ‘Freight Systems (India ) Pvt. Ltd.’ (supra). The grievance of the assessee by way of Ground no. 2 is found to be justified and is accepted as such. Accordingly, the demand of Rs.7,189/- u/s 201(1) and Rs.4,314/- u/s 201(1A) of the Act for non-deduction of TDS on payment of shipping expenses of Rs.3,52,434/- is cancelled.

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