2012 (2) TMI 137 - AT - Income Tax

Tribunal rejects Revenue appeal on foreign shipping payments, emphasizes taxability consideration.

The Tribunal dismissed the Revenue's appeal, confirming that the disallowance under section 40(a)(ia) was unwarranted as the payments to foreign shipping ... Tax deduction at source under section 195 - Disallowance under section 40(a)(i) - Taxability of income of foreign shipping companies in India - Applicability of CBDT Circular No.723 regarding ships and section 172 - Reference application under section 195(2)Tax deduction at source under section 195 - Disallowance under section 40(a)(i) - Reference application under section 195(2) - Whether provisions of section 195 and consequent disallowance under section 40(a)(i) apply to payments made to agents of foreign shipping companies where those payments are not taxable in India and no application under section 195(2) was made - HELD THAT: - The Tribunal noted that the assessee claimed the payments to agents of foreign shipping companies were not taxable in India and that the Assessing Officer did not dispute that claim. Reliance placed by the AO on a High Court decision holding section 195 applicable even where payments were not taxable was held to be overtaken by the Supreme Court decision in G. E. India Technology Centre (P) Ltd., which limits the operation of section 195 to cases where there is no doubt that the payment is chargeable to tax; section 195(2) is confined to situations where taxability is not in doubt but the taxable portion is uncertain. As the record contained no material to controvert the assessee's claim of non-taxability and the AO himself had not disputed it, there was no basis to invoke section 195 or to sustain a disallowance under section 40(a)(i). [Paras 4]Section 195 is not attracted and section 40(a)(i) cannot be invoked where payments are not chargeable to tax in India; the addition was rightly deleted.Applicability of CBDT Circular No.723 regarding ships and section 172 - Taxability of income of foreign shipping companies in India - Whether levy and recovery of tax relating to ships belonging to or chartered by a non-resident (and related payments) are governed by section 172 and excluded from the operation of section 195 and section 194C by CBDT Circular No.723 - HELD THAT: - The Tribunal accepted the assessee's submission and the view of the Commissioner (Appeals) that CBDT Circular No.723 clarifies the special scheme for levy and recovery of tax in respect of ships of non-residents under section 172, and that in such cases provisions like section 194C and section 195 do not apply. Given the claim that the payments were not chargeable to tax in India and the Circular's clarification, the Tribunal held that section 195/40(a)(i) were not applicable to the payments in question. [Paras 4]Payments connected with ships of non-residents fall under the special regime described in CBDT Circular No.723 and are not subject to section 195/section 40(a)(i) in the circumstances shown; deletion of the addition is sustained.Final Conclusion: The order of the Commissioner (Appeals) deleting the disallowance under section 40(a)(i) is upheld and the Revenue's appeal is dismissed. Issues:Dispute over disallowance of payments to foreign shipping companies under section 40(a)(i) of the Income Tax Act for Assessment Year 2007-08.Detailed Analysis:1. Background and AO's Decision:The AO disallowed payments made to foreign shipping companies totaling to `.5,33,26,726/- under section 40(a)(i) as taxes were not deducted. The AO referred to section 195(2) and a High Court judgment stating that tax deduction under section 195 is necessary, even if the income is not taxable in India.2. Arguments Before CIT(A):The assessee contended that section 40(a)(i) did not apply as the payments were not taxable in India. The assessee relied on Circular No. 723 of CBDT and section 172 to support their claim. The CIT(A) agreed with the assessee and directed the AO to delete the addition.3. Tribunal's Analysis and Decision:The Tribunal reviewed the contentions and found that the payments to foreign shipping companies were not taxable in India. The Tribunal noted that the AO did not dispute this claim and relied on an outdated High Court judgment. The Tribunal cited a Supreme Court judgment stating that section 195 applies only when there is no doubt about taxability in India. Since the payments were not taxable, section 40(a)(ia) did not apply, as per Circular No. 723 of CBDT. The Tribunal upheld the CIT(A)'s decision to delete the addition.4. Conclusion:The Tribunal dismissed the Revenue's appeal, confirming that the disallowance under section 40(a)(ia) was unwarranted as the payments to foreign shipping companies were not taxable in India. The Tribunal emphasized the importance of considering taxability before invoking tax deduction provisions under section 195. The judgment highlighted the significance of Circulars issued by CBDT in interpreting tax laws accurately.