Cipro Pharmaceuticals, Hyderabad V. ACIT, Circle-6(1), Hyderabad

ITA 1537/HYD/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91745 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 11-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 07-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANJALA SAHU
• Assessee Lawyers: S RAMA RAO
• Keywords: Question of law
• Section: 194C

Judgement Text

ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER & SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1537/HYD/2014 (ASSESSMENT YEAR: 2006-07) M/S. CIPRO PHARMACEUTIC ALS PLOT NO.10-C, FILM NAGAR, ROAD NO.8, JUBILEE HILLS, HYDERABAD 500033 PAN-AAEFC 4363 Q VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 6(1) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI S. RAMA RAO FOR REVENUE : SMT. ANJALA SAHU DATE OF HEARING : 11.06.2015 DATE OF PRONOUNCEMENT : 17 .06.2015 O R D E R PER SMT. ASHA VIJAYARAGHAVAN, J.M. THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST TH E ORDER OF THE CIT (A)-IV, HYDERABAD, DATED 18.07.2014 RELATIN G TO A.Y 2006-07. 2. BRIEF FACTS ARE THAT THE ASSESSEE IS A PARTNERSH IP FIRM CARRYING ON BUSINESS IN MANUFACTURE OF FORMULATIONS AND TRADING IN BULK DRUGS. THE ASSESSEE SUPPLIES MATERIAL TO TH E FOREIGN MARKETS. THE TRANSPORTATION IS EITHER THROUGH AIR O R SEA. IN SO FAR AS AIR LITING IS CONCERNED, THE GOODS ARE TRANSPORT ED THROUGH GBR FREIGHT FORWARDERS PRIVATE LTD AND IN SO FAR AS SHI PMENTS ARE CONCERNED, THEY ARE THROUGH BALAJI SHIPPING SERVICE S. ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 2 OF 8 3. ASSESSEE HAD DEDUCTED TAX AT SOURCE ON A SUM OF RS.20,250 IN THE CASE OF GBR FREIGHT FORWARDERS PRI VATE 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 THEMS ELVES BUT GOT THE WORK DONE ON BEHALF OF THE ASSESSEE. THE AS SESSEE SUBMITTED THAT IN CASE OF GBR, THE PAYMENT CONSISTE D OF FIRSTLY, REIMBURSEMENT OF EXPENSES INCURRED ON THE ASSESSEE S BEHALF AND SECONDLY, SERVICE CHARGES AND TDS HAD BEEN DEDU CTED ON THE SERVICE CHARGES PAID. THE APPELLANT SUBMITTED T HAT IN CASE OF BSS, THERE WAS NO SERVICE CHARGE COMPONENT AND THER EFORE, 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 UND ERTOOK THE WORK THEMSELVES OR GOT IT DONE THROUGH OTHER APPROP RIATE MEANS. THE ASSESSING OFFICER RELIED ON SEC.194C(1) WHICH R EQUIRES THAT TAX IS TO BE DEDUCTED ON 'ANY SUM' PAID FOR CARRYIN G OUT 'ANY WORK' AND HELD THAT THE TAX SHOULD HAVE BEEN DEDUCT ED ON THE GROSS AMOUNT PAID BY THE APPELLANT. THE ASSESSING O FFICER ALSO NOTED THAT IT WAS NEITHER POSSIBLE NOR PERMISSIBLE FOR AN ASSESSEE TO DETERMINE WHAT PART OF THE PAYMENT BY IT CONSTIT UTED THE INCOME OF THE CONTRACTOR. 5. THE ASSESSING OFFICER ALSO OBSERVED THAT MERELY BECAUSE BSS HAD NOT SPECIFIED THE SERVICE CHARGE COMPONENT IN I TS BILLS, IT DID NOT MEAN THAT THEY HAD NOT TAKEN ANY PROFIT PORTION OF THE ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 3 OF 8 AMOUNT CHARGED TO THE APPELLANT. THE ASSESSING OFFI CER 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. TH E ASSESSING OFFICER RELIED ON THE DECISION IN THE CASE OF ASSOC IATED CEMENT CO.LTD VS. CIT [1993] 201 ITR 441 (SC) FOR THE VIEW THAT ON EXPRESS LANGUAGE OF THE SECTION, IT IS IMPOSSIBLE T O HOLD THAT THE DEDUCTION OF TAX HAS TO BE CONFINED TO THE INCOME C OMPONENT OF THE CONTRACTOR, THAT THERE IS NOTHING IN THE LANGUA GE OF THE SECTION WHICH PERMITS EXCLUSION OF AN AMOUNT PAID T O 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 W ITH THE INTENTION OF ENACTING AN IMPRACTICAL AND UNWORKABLE PROVISION WHICH CASTS IMPOSSIBLE BURDENS ON THE PAYER. 6. THE ASSESSING OFFICER, THEREFORE, DISALLOWED A S UM OF RS.24,76,442 U/S 40(A)(IA). 7. AGGRIEVED, ASSESSEE PREFERRRED APPEAL BEFORE T HE CIT (A). BEFORE THE CIT (A) THE AR SUBMITTED THAT REIMBURSEM ENT OF EXPENSES DID NOT REPRESENT A REVENUE PAYMENT NOR DI D IT REPRESENT INCOME IN THE HANDS OF THE RECIPIENT, THA T REIMBURSEMENT DID NOT MEAN CONSIDERATION FOR SERVIC ES RENDERED AND THAT REIMBURSEMENT MEANT EXPENSES INCURRED ON B EHALF OF ANOTHER PERSON WERE RECOVERED. THE AR FURTHER SUBMI TTED AND RELIED ON THE FOLLOWING DECISIONS FOR THE VIEW THAT REIMBURSABLE ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 4 OF 8 EXPENSE WERE SEPARATE FROM FEES, THAT WHAT CONSTITU TES FEE SHALL BE THE CONSIDERATION FOR THE SERVICES RENDERED BY T HE RECIPIENTS BUT NOT THE AMOUNT OF REIMBURSEMENT AND THAT EXPENS ES INCURRED BY THE RECIPIENTS ON BEHALF OF THE ASSESSE E 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 (BO M) IV. DDIT(INTERNATIONAL TAXATION)-I VS. LOUIS BERGER INTERNATIONAL INC (ITA NO. 242/HYD/10 AND 243/HYD/1 0) 8. THE AR POINTED OUT THAT GBR INCLUDED SERVICE CHA RGES AND THAT TAX HAD BEEN DEDUCTED ON THE SERVICE CHARGES B UT NOT ON THE AMOUNTS REIMBURSED. THE AR SUBMITTED THAT BSS ON TH E OTHER HAND DID NOT RECEIVE ANY SERVICE CHARGES, THAT IT G OT COMMISSION FROM THE TRANSPORTERS, THAT THE ENTIRE AMOUNT PAID TO BSS WAS FOR REIMBURSEMENT OF SHIPMENT CHARGES AND THAT THER EFORE, 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 F REIGHT CHARGES. IT IS THE APPELLANTS CLAIM THAT THE FREIG HT CHARGES, REFERRED TO IN THESE BILLS WAS MERELY REIMBURSEMENT OF EXPENSES INCURRED BY THESE TWO PARTIES AND THEREFORE, THE APPELLANT WAS NOT OBLIGE D TO DEDUCT TAX ON THE PAYMENT MADE TOWARDS SUCH REIMBURSEMENT. THERE IS NOTHING IN THESE BILLS TO S HOW THAT THE FREIGHT CHARGES WERE MERELY BEING REIMBURS ED TO THE TWO PARTIES . ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 5 OF 8 10. THE CIT (A) FURTHER POINTED OUT THAT CBDT CIRCU LAR NO.715, DATED 8.8.1995, (215 ITR (ST) 12) STATES AS FOLLOWS : 'QUESTION 30 : WHETHER THE DEDUCTION OF TAX AT SOUR CE UNDER SECTION 194C AND 194J HAS TO BE MADE OUT OF T HE GROSS AMOUNT OF THE BILL INCLUDING REIMBURSEMENTS O R EXCLUDING REIMBURSEMENT FOR ACTUAL EXPENSES? ANSWER: SECTIONS 194C AND 194J REFER TO ANY SUM PAI D. 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 T HE SEC.194C, ALONG WITH THE CLARIFICATION AS PER THE CBDT CIRCUL AR, SHOWS THAT THE APPELLANT WAS OBLIGED TO DEDUCT TAX ON THE ENTI RE PAYMENT MADE TO THE TWO SHIPPING AGENTS AND RELIED ON THE F OLLOWING 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 DECI SION 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 B ILL 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 CLAIME D FOR REIMBURSEMENT. FURTHER, THERE IS NOTHING IN THE BILLS THEMSELVES TO SUGGEST THAT THE CLAIM WAS BY WAY OF REIMBURSEMENT. ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 6 OF 8 15. I, THEREFORE, UPHOLD THE DISALLOWANCE OF THE SU M OF RS.24,76,442 U/S 40(A)(IA). IN THE RESULT, THE APPE AL IS DISMISSED. 14. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. BEF ORE US THE LD COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT (A). THE LD COUNSEL FOR THE ASSESSEE ALSO P LACED RELIANCE ON THE DECISION IN THE CASE OF CIT VS. S.K. TEKRIWA L (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 FALLIN G 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 SECTI ON 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 INVOKE D AND THAT IF THERE WAS ANY SHORTFALL DUE TO ANY DIFFEREN CE OF OPINION AS TO THE TAXABILITY OF ANY ITEM OR THE NAT URE OF PAYMENTS FALLING UNDER VARIOUS TAX DEDUCTION AT SOU RCE 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 TRIBUNA L. 15. THE LD COUNSEL SUBMITTED THAT THOUGH THIS ARGUM ENT FOR SHORT DEDUCTION OF TAX WAS NOT RAISED BEFORE THE CI T (A), THIS CLAIM OF THE ASSESSEE MAY BE CONSIDERED IN THE PRES ENT CASE BEFORE THE BENCH. IT WAS ALSO SUBMITTED BY THE LD C OUNSEL THAT ALL AMOUNTS WERE PAID BEFORE THE END OF THE RELEVAN T ACCOUNTING ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 7 OF 8 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 HEL D 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) UP HELD THE FINDING OF THE ITAT THAT FOR DISALLOWING EXPENSES F ROM BUSINESS AND PROFESSION ON THE GROUND THAT TDS HAS NOT BEEN DEDUCTED, THE AMOUNT SHOULD BE PAYABLE AND NOT WHIC H HAS BEEN PAID BY THE END OF THE YEAR. A COPY OF THE DEC ISION OF THE HON'BLE HIGH COURT WAS ALSO SUBMITTED BY THE ASSESS EE AND THE ITAT FOLLOWED THE RATIO OF THE SPECIAL BENCH DE CISION 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 I N 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 CO URT, IT BINDS SMALLER AND COORDINATE ITA NOS.676 OF 09 AND 411 OF 2010 USHODAYA ENTERPRISES LTD HYDERABAD BENCH OF THE TRI BUNAL. THE ASSESSEE PRAY THAT IN THE LIGHT OF THE DECISION OF THE JURISDICTIONAL HIGH COURT, ITAT MAY DIRECT THE DISA LLOWANCE U/S 40(A)(IA) MAY NOT BE MADE IN SO FAR AS THE ASSE SSEE HAS ALREADY MADE PAYMENTS BEFORE THE END OF THE RELEVAN T ACCOUNTING YEAR, OUT OF THE AMOUNTS DISALLOWED WHIC H HAVE BEEN UPHELD BY THE CIT (A). 8. WE HAVE HEARD BOTH THE PARTIES. WE DIRECT THAT T HE AO MAY FOLLOW THE DECISION OF THE SPECIAL BENCH IN THE CAS E 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 NO T BE MADE BY THE AO FOR THE AMOUNTS/PAYMENTS WHICH HAVE ALREADY BEEN PAID BEFORE THE END OF THE RELEVANT AC COUNTING YEAR, OUT OF THE AMOUNTS DISALLOWED WHICH HAVE BEEN UPHELD BY THE CIT (A). THIS GROUND IS PARTLY ALLOWED FOR S TATISTICAL PURPOSES. 16. WE HEARD BOTH PARTIES. WE ARE OF THE OPINION TH AT AS FAR AS GBR FREIGHT FORWARDERS (P) LTD IS CONCERNED, ASSESS EE HAS MADE ITA NO.1537 OF 2014 CIPRO PHARMACEUTICALS HYDERABAD PAGE 8 OF 8 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 SHI PPING SERVICES, THE AMOUNTS PAID ARE ONLY TOWARDS REIMBUR SEMENT 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 USH ODAYA ENTERPRISES IN ITA NO.676/HYD/2009 & 411/HYD/2010 D ATED 7.1.2015. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH JUNE, 2015. S D/ - S D/ - ( B. RAMAKOTAIAH ) ( ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 17 TH JUNE, 2015. VNODAN/SPS COPY TO: 1. SHRI S. RAMA RAO, ADVOCATE, FLAT NO.102, SHRIYAS EL EGANCE, 3-6-643, STREET NO.9, HIMAYATNAGAR, HYDERABAD 50002 9 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