Case Note & Summary
The case involves three tax appeals filed by India Furniture Products Limited against the Commissioner of Income Tax, Goa, concerning the assessment year 2009-10. The appellant, a public limited company engaged in business, filed its return of income declaring nil income and claimed an expenditure of ₹17,14,806 as LC charges and commission paid to its bankers in India. The Assessing Officer, under Section 143(3) of the Income Tax Act, 1961, disallowed this expenditure on the ground that the appellant had failed to deduct tax at source under Section 195(1) of the Act, as the payments were allegedly made to non-resident suppliers. The appellant appealed to the Commissioner of Income Tax (Appeals), who allowed the appeal and deleted the addition, holding that the LC charges were paid to Indian banks and not to non-residents, and therefore no TDS was required. The Revenue then appealed to the Income Tax Appellate Tribunal (ITAT), which reversed the CIT(A)'s order and restored the Assessing Officer's disallowance. Aggrieved, the appellant filed these tax appeals before the High Court. The High Court admitted the appeals on the substantial question of law: whether the ITAT failed to realize that since the appellant paid LC charges/commission to its own nationalized banks in India, it could not be construed as payment to a non-resident supplier under Section 195(1), and consequently, the appellant was not liable to deduct TDS. The High Court, after hearing both sides, held that the LC charges were paid to Indian banks, not to non-resident suppliers, and therefore no TDS was required under Section 195(1). The court further held that the disallowance under Section 40(a)(i) for failure to deduct TDS was not justified. Consequently, the High Court allowed the appeals, set aside the ITAT's order, and restored the CIT(A)'s order deleting the addition. The substantial question of law was answered in favor of the appellant.
Headnote
A) Income Tax - TDS - Section 195(1) - LC Charges - The issue was whether LC charges paid by the assessee to its Indian bankers for opening letters of credit for import of goods are payments to a non-resident, attracting TDS under Section 195(1). The court held that such payments are made to Indian banks, not to non-resident suppliers, and therefore no TDS is required. The disallowance under Section 40(a)(i) was deleted. (Paras 4-8)
B) Income Tax - Disallowance - Section 40(a)(i) - Failure to Deduct TDS - The court held that since the LC charges were paid to Indian banks, there was no obligation to deduct TDS under Section 195(1), and consequently, the disallowance under Section 40(a)(i) was not justified. The CIT(A) had correctly deleted the addition. (Paras 6-8)
Issue of Consideration
Whether LC charges/commission paid by the appellant to its Indian bankers for opening letters of credit can be considered as payment to a non-resident supplier, thereby attracting TDS under Section 195(1) of the Income Tax Act, 1961, and consequently disallowance under Section 40(a)(i) for failure to deduct TDS.
Final Decision
The High Court allowed the tax appeals, set aside the ITAT's order, and restored the CIT(A)'s order deleting the addition of ₹17,14,806. The substantial question of law was answered in favor of the appellant.
Law Points
- TDS under Section 195(1) applies only to payments made to non-residents
- LC charges paid to Indian banks are not subject to TDS
- Section 40(a)(i) disallowance cannot be made for failure to deduct TDS on payments to residents
Case Details
2020 LawText (BOM) (11) 50
Tax Appeal No. 45 of 2015, Tax Appeal No. 46 of 2015, Tax Appeal No. 51 of 2015
M. S. Sonak, Dama Seshadri Naidu
Mr. Chetan Kumar Gouda, Mr. Menino Pereira for the Appellants; Ms. Amira Razaq for the Respondent
India Furniture Products Limited
The Commissioner of Income Tax, Goa
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Nature of Litigation
Tax appeal against the order of the Income Tax Appellate Tribunal (ITAT) reversing the CIT(A)'s order and restoring the Assessing Officer's disallowance of LC charges for failure to deduct TDS.
Remedy Sought
The appellant sought to set aside the ITAT's order and restore the CIT(A)'s order deleting the addition of ₹17,14,806 as LC charges.
Filing Reason
The appellant challenged the ITAT's order that held the appellant liable to deduct TDS on LC charges paid to Indian banks, treating them as payments to non-resident suppliers.
Previous Decisions
The Assessing Officer disallowed the expenditure of ₹17,14,806 under Section 143(3) for failure to deduct TDS. The CIT(A) allowed the appeal and deleted the addition. The ITAT reversed the CIT(A)'s order and restored the Assessing Officer's disallowance.
Issues
Whether LC charges/commission paid by the appellant to its Indian bankers for opening letters of credit can be considered as payment to a non-resident supplier, thereby attracting TDS under Section 195(1) of the Income Tax Act, 1961.
Whether the disallowance under Section 40(a)(i) for failure to deduct TDS on such payments is justified.
Submissions/Arguments
The appellant argued that the LC charges were paid to Indian nationalized banks, not to non-resident suppliers, and therefore no TDS was required under Section 195(1).
The respondent argued that the LC charges were in the nature of payments to non-resident suppliers and thus attracted TDS provisions.
Ratio Decidendi
Payments made by an assessee to Indian banks for LC charges/commission for opening letters of credit are not payments to non-residents and therefore do not attract TDS under Section 195(1) of the Income Tax Act, 1961. Consequently, no disallowance under Section 40(a)(i) can be made for failure to deduct TDS on such payments.
Judgment Excerpts
The learned counsel state that these appeals may be disposed of by a common judgment and order since, the issues involved in all these appeals are virtually identical and also the substantial questions of law as framed, are identical.
The assessee filed return of income for the Assessment Year 2009-10 returning nil income claiming inter alia expenditure of ` 17,14,806/- as LC Charges and commission paid to the assessee's bankers in India in Indian currency.
The assessment officer made order dated 13.12.2011 under Section 143(3) of the Income Tax Act, 1961 (IT Act) disallowing expenditure of ` 17,14,806/- pertaining to LC Charges and commission paid to the assessee's bankers and added the same to the income of the appellants inter alia on the ground that the appellants had failed to deduct tax at source on this expenditure.
Procedural History
The Assessing Officer disallowed the expenditure of ₹17,14,806 under Section 143(3) for failure to deduct TDS. The CIT(A) allowed the appeal and deleted the addition. The ITAT reversed the CIT(A)'s order and restored the Assessing Officer's disallowance. The appellant then filed these tax appeals before the High Court, which were admitted on 05.10.2015 on the substantial question of law. The High Court heard the appeals and pronounced judgment on 02.11.2020, allowing the appeals and restoring the CIT(A)'s order.
Acts & Sections
- Income Tax Act, 1961: Section 195(1), Section 40(a)(i), Section 143(3)
