Expenditure of demurrage charges cannot be allowed in the absence of tax being deducted at source: Bombay High Court

Payments made to a non-resident company by way of demurrage charges cannot be permitted in the absence of tax being deducted at source. A division bench of Justice MS Sanklecha and GS Kulkarni, while adjudicating the matter in The Commissioner of Income Tax v. Dempo & Co. Pvt. Ltd; [INCOME TAX APPEAL NO. 989 OF 2015], dealt with the issue of demurrage charges while paying income tax.

The respondent-assessee had claimed expenditure of Rs.1.8 crores being the demurrage claim paid to a non-¬resident shipping company.     The   Assessing   Officer   disallowed   part   of   the   above expenditure for failure to deduct tax at source under Section 195 of the Income Tax Act. In appeal, the respondent-assessee contended that there was no obligation to deduct tax at source as the amount paid to non-resident shipping company which was engaged in operation of ships and therefore governed by Section 172 of the Act.  It was pointed out that Section 172 of the Act provides for levy and collection of taxes   in   respect   of   any   income   of   ship   engaged   in   carriage   of goods/passengers/livestock from a port in India.  Reliance was also placed upon the Circular issued by   CBDT   which   interalia   provides   that   Section   172   is   a   self-contained code for levy and recovery of taxes ship wise and journey wise   in   case   of   ships   owned   or   chartered   by   non-residents. Therefore, the requirement of deducting tax at source would not be applicable   in   such   a   case   thus   the   consequent   disallowance   of expenditure under Section 40(a)(i) of the Act was not warranted. However, the   CIT(A) did   not   accept   the   contention   of   the respondent-assessee and held Section 44B of the Act would apply as it relates to computation of profits and gains and from shipping business.

The Court upon considering the aforesaid facts held that; “the respondent-assessee placed reliance upon Section 172 of the Act in respect of payments made by it to a non-resident shipping company by way of demurrage charges.  The tax which is deducted at source by the assessee company is on behalf of the recipient of the charges. The issue before the Court was whether demurrage charges which are   paid   by   the   respondent-assessee   to   a   non-resident   company would be allowed as an expenditure in the absence of deduction of tax at source. Section 172 of the Act is applicable only in   respect   of   non-resident   carrying   on   shipping   business   while is   admittedly   a   resident   and therefore   Section   172   of   the   Act   cannot   be   applied. Thus, the expenditure of demurrage charges cannot be allowed in the absence of tax being deducted at source.  It is a settled position under the law of precedents that, it is not open to us (Division Bench) to take a view contrary to the view taken by another Division Bench of this Court.   In case, we are unable to agree with the view of the earlier Division Bench and it does not fall within the exclusionary categories of binding precedent by being contrary to and/or in conflict with a decision of the Apex Court or rendered per-incuriam.  In such a case it is best that the issue is resolved at the hands of a Larger Bench of this Court. Certainty of law is an important ingredient of Rule of Law.”

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