- Normally, Custom House Agents (CHA) or Clearing & Forwarding (C&F) Agents operate on a contractual basis and so the tax is deductible u/s 194C of the Income Tax Act-1961.
- Section 194C (1) provides that any person responsible for paying any sum to any resident contractor, for carrying out any work in pursuance of a contract, shall deduct tax at source at a specified percentage.
- Custom House Agents (CHA) or Clearing & Forwarding (C&F) Agents make payments on behalf of the importers and exporters towards statutory levies, for example, port dues, customs duties, etc., and other reimbursable expenses like Container charges, ICD Charges, stamp charges, and processing other statutory charges. The important question arises about the amount on which tax is to be deducted? There is a great confusion which leads to a dispute between the tax authorities and the tax payers as to whether tax is to be deducted on reimbursement of actual expenses incurred by the CHA and C&F.
- Arguments for deduction of tax at source on the entire amount:
a] Clarification by Circular No. 715, dt. 8-8-1995:
Circular No. 715, dt. 8-8-1995 has clarified that sections 194C and 194-J refer to any sum paid. So, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
b] Supreme Court decision in the case of Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435:
The Department often relies on the Supreme Court decision in the case of Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435 (SC) wherein in was held that section 194C does not permit exclusion of amount of reimbursement of actual expenditure incurred by the payee for getting the work completed.
- Arguments for non-deduction of tax at source on the Reimbursement of Expenses:
a] Sub-section (2) of section (4) reads as under:
“(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the Act.”
One can interpret that if the income is not chargeable to tax in the recipient’s hands under section 4(1), then, the provision for deduction of tax at source under sub-section (2) of section 4 will not be applicable.
b] Supreme Court decision in the case of Transmission Corporation of AP Ltd. v. CIT (1999) 239 ITR 587:
It was held that since the deduction of tax at source must be in relation to an income or trading receipt only, the actual cost reimbursements and other statutory charges do not come within the purview of section 194C.
c] The Central Excise Department, in their Trade Notice No. 5 of 1997, Dt. 12-6-1997 also clarified that the payment towards statutory levies and various other reimbursable expenses incurred by Custom House Agent on behalf of the client, are not to be included for computing the service tax.
d] In case of Rajiv Cumber v. Bharat Sanchar Nigam Ltd. (2002) 128 STC 494 (SC):
It was held that the contractee had to examine the facts for making deductions from the total bills submitted by the contractor. Therefore, the contractor cannot make deduction mechanically.
We are of a considered opinion that if a consolidated bill is raised for charges as well as of expenses, then the entire amount should be subject to TDS. However, if a separate bill is given for charges and expense then the reimbursement of expenditure should not be subject to deduction of tax at source