No TDS U/s 194C on freight to C&F charges .

Overview on the case ( Zephyr Biomedicals Vs JCIT (High Court of Bombay at Goa)) – No TDS U/s 194C on reimbursement of freight charges to C&F Agents.

The issue is whether the payments to C&F agents that are entirely recovered for freight charges which have no element of gain are liable in compliance with Section 194C of the Income-tax Act to deduct TDS?

The basic questions of law that have been arising in this appeals are as below:-

(1) Whether on the facts and in the situations of the case, Court was right in law in holding that the Appellant is liable to deduct TDS u/s 194C of Income-tax Act 1961 on the payments made to Clearing and forwarding agents which is outright reimbursement of freight charges having no element of profit?

(2) Whether on the facts and in the situations of the case, Court was right in law in upholding the disallowance u/s 40(a)(ia) of Income-tax Act 1961 when said section cannot be applied in the instant case?

Below are the overviews of the High Court Order/judgment on the above Case:

• Section 194C under Income-Tax Act, 1961
• Tax deduction at source
• Contractors/sub-contractors, access to (Reimbursement)
• Assessment Years 2009-10 & 2010-11
• Assessee-company paid a certain amount to its Clearing and forwarding agents a certain amount.
• reimbursement of freight charges paid to carriers by the Clearing and forwarding agents
• actual Clearing and forwarding agents agent service charges
• On both these payments, the Clearing and forwarding agents raised separate bills.
• Assessee deducted TDS on payment for bills raised for services offered by C&F agents
• Assessing Officer disallowed a sum paid u/s 40(a)(ia) to reimburse freight charges on which TDS was not deducted
• The issue before the court as to whether since there was no income factor contained in the payment for the reimbursement of freight charges to Clearing and forwarding agents, the assessee was not liable to deduct tax at source on the same source
• The court found it as yes, so the case was concluded in favor of the assessee.

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Following material on record which found and establishes the below situation: –

(i) The Clearing and forwarding agents have raised 2 separate bills:

(a) 1st towards the services rendered by the Clearing and forwarding agents; and

(b) 2nd towards reimbursement of freight charges paid to the carriers.

(ii) These are not cases where any composite bills were raised by the Clearing and forwarding agents without indicating the reimbursement components & service charge components separately.

(iii) There are ample evidence in the form of bills, payment vouchers, ledger entries, etc., placed on record to settled that separate bills were invariably made towards the reimbursement components & service charge components by the Assessees to the Clearing and forwarding 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 Clearing and forwarding 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 TDS deducted;

(vi) It is only in cases where separate bills were raised by the Clearing and forwarding agents towards freight charges and reimbursement backed by proper evidence that the Assessees have not TDS deducted before making payments towards such reimbursement.

However, they also agree that this question will be required to be answered only if the substantial question of law (2) above is answered in favour of the Revenue and against the Assessee.

This means that only if we hold that the disallowance under Section 40(a)(ia) of the IT Act was valid in the facts and circumstances of the if a violation of TDS provision in the present case,

Conclusion

• In the present case circumstances, the High Court states that, in the reimbursement of freight charges incurred by carriers and the actual service charge of the Clearing and forwarding agents, the Clearing and forwarding agents had raised separate bills.
• The Assessees’ payments for reimbursement therefore never had an element of income therein.
• Thus, the Assessees say only that if the Clearing and forwarding agents raise separate bills to pay the freight costs, they are not liable to deduct tax at source on payment of the reimbursement components, as such reimbursement has no income element.
• In our view, in the facts and circumstances of the case at issue, the Assessees’ contention should be maintained. There are determined cases supporting the Assessees’ claim and reference to certain such cases can be made usefully.