Question And Answer
Subject: What is the TDS Obligation When Reimbursing Expenses To C & F Agent?
Category:  Income Tax
Asked by: Neeraj Sharma
Answered by:
Tags: , ,
Date: September 14, 2018
Query asked by Neeraj Sharma

We are an assessee engaged in imports and exports.

In order to clear the goods from the ports we may payments to Clearing and Forwarding (C & F) agents.

Generally, speaking, the payments to the C&F agents comprises of reimbursement of various expenses incurred by them on our behalf.

(a) Reimbursement of freight paid to shipping companies or airlines.

(b) Reimbursement of freight on local transportation.

(c) Reimbursement of import or export clearing expenses like payments to Port Trust, Airport Authorities of India, miscellaneous charges, etc.

(d) Reimbursement of bonded warehousing charges.

(e) Reimbursement of Customs duties and Octroi.

(f) Reimbursement for Crane and Machinery charges to Port Trust. etc.

(g) Agency service charges.

(h) Service tax.

Recently, the Income-tax Department issued a notice asking if we were deducting TDS under section 194C of the Income-tax Act, 1961 when making payments to the C&F agents.

Please advice of our obligations for TDS under section 194C of the Income-tax Act, 1961.

Answer given by

The CBDT has taken the view that payments towards C & F services charges or Agency Service Charges is liable for deduction of TDS under section 194C of the Income-tax Act.

This is clear from the answer to Question No. 7 of Circular No. 715 dated August 8, 1995:

“The clearing and forwarding agents act as independent contractors. Any payment made to them would be liable for TDS. They would also be liable to deduct tax at source while making payments to a carrier of goods”.

Explanation III to section 194C inserted by the Finance Ac t, 1995 with effect from July 01, 1995 reads as under:

“Explanation III – For the purposes to this section, the expression ‘work’ shall also include-

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(c) carriage of goods and passengers by way mode of transport other than by railway;

(d) catering”.

In Birla Cement Works vs. CBDT [248 ITR 216], the Supreme Court has held that the word ‘work’ in section 194C has to be understood in a limited sense and would extend only to the service contracts specifically included in the section by way of Explanation III.

In East India Hotels Ltd. vs. CBDT [179 Taxman 17], the Bombay High Court has followed the judgement of the Supreme Court in Birla Cement Works vs. CBDT [248 ITR 216].

In ACIT vs. St. Mary’s Rubbers Private Ltd, the ITAT Cochin held that amounts paid by way of reimbursement of expenses do not constitute income in the hands of the recipient. Consequently, the payer was held to be under no obligation to deduct TDS u/s 194C and no disallowance of the expenditure can be made u/s 40(a)(ia). CBDT Circular No.715 dated 08.08.1995 was distinguished.

A similar view has been taken by the ITAT Kolkata in AT & S India Pvt. Limited vs. DCIT. It was held that reimbursement of expenditure under cost-sharing agreement does not constitute “income” and there is no obligation to deduct TDS u/s 195.

The ITAT noted that a perusal of the decision of the Supreme Court in Tejaji Farasram Kharawalla Limited (1967) 67 ITR 95 (SC) clearly shows that Supreme Court has categorically held that the reimbursement of the actual expenses would not be taxable in the hands of the person receiving the reimbursements.

In DCIT vs. Ernst & Young Pvt. Ltd, the ITAT Kolkata held that reimbursement of share of costs towards administrative and management support services in connection with technology updates etc is not taxable.

A similar view has been taken by the Mumbai Tribunal in ACIT vs. P.P. Overseas vide ITA No. 733/Mum/2010 dated February 18, 2011.

The ITAT has held that:

“The contract between the assessee and C & F Agent is a service contract which has not been specifically included in Explanation III below section 194C. In this view of the matter, the provisions of section 194C are not applicable to the payments to the C & F agents. If that is so, there was no obligation on the part of the assessee to deduct tax from the payments made to C & F agents”.

Reference can also be made to ITO vs. Dr. Willamer Schwable India (P) Ltd. [3 SOT 71 (Del.)] where the Tribunal has held that reimbursement of actual expenses where no profit element is involved, is not liable for the TDS.

Similarly, it has been held by the Delhi High Court in Handicrafts & Handloom Export Corpn. of India vs. ITO [140 ITR 532]; that the amounts received by an assessee from its holding company to enable it to recoup losses incurred by it or by way of reimbursement or recoupment of its research expenditure is not liable to tax as per CIT vs. Dunlop Rubber Co. Ltd. [142 ITR 493 (Cal.)].

Consequently, there is no obligation to deduct TDS under section 194C of the Income-tax Act, 1961 when making payments to the C&F agents by way of reimbursement of expenses.

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4 thoughts on “What is the TDS Obligation When Reimbursing Expenses To C & F Agent?

  1. The CBDT view is clearly wrong. It should have the good grace to withdraw the circular and issue a fresh circular. Otherwise the AO will be bound by the circular and will make the addition despite the clear law on the subject. This will create avoidable harassment for taxpayers.

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