We pay ocean freight and demurrage to a foreign shipping line, usually through its Indian agent, and we do not deduct tax. The Assessing Officer is disallowing the whole payment under section 40(a)(i). Is there anything from the Board on this?
Yes, and it is directly in point. Circular No. 723 dated 19 September 1995 states that s.172 is a self-contained code for the levy and recovery of tax, ship-wise and journey-wise, that its provisions apply notwithstanding anything contained in other provisions of the Act, and that "Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable." Paragraph 5 extends that to payments routed through agents: since the agent acts on behalf of the non-resident owner or charterer, he steps into the shoes of the principal, and accordingly s.172 applies and ss.194C and 195 do not.
Decided by the CBDT Circulars & Instructions (Not applicable — Central Board of Direct Taxes circular) on 1995-09-19, reported as Circular No. 723, dated 19-9-1995; cited in the source judgments as [1995] 215 ITR (St.) 116 and as (1995) 128 CTR (St) 61; cross-referred in the footnotes to s.172 on the departmental pages. It bears on section 172, section 172(1), section 194C, section 195, section 40(a)(i) of the Income Tax Act 1961, in TDS Defaults, Presumptive Taxation & Audit and Deductions & Disallowances matters.
This circular is the single most-cited administrative instrument in freight-related disallowance disputes, and it is worth knowing exactly what each of its five paragraphs does. Paragraph 2 describes s.172 as "a self-contained code for the levy and recovery of the tax, ship-wise, and journey-wise" requiring a return within a maximum of thirty days from the date of departure — the source of the "complete code" language that runs through the case law. Paragraph 3 is the operative exclusion of ss.194C and 195. Paragraph 4 makes an entirely separate and often overlooked point: s.194C applies only to payments to a "resident", so there is no overlap between the two sections in the first place. Paragraph 5 is the one that decides most real cases, because in practice the Indian exporter pays an agent in India and not the foreign line, and the Board says the agent steps into the shoes of the principal. Two limits should be stated with the same firmness. The circular presupposes that s.172 in fact applies to the payment — a ship belonging to or chartered by a non-resident carrying goods shipped at a port in India — and it does not touch payments for services that are not that. And the circular says nothing about composite invoices. Where a single bill mixes ocean freight with terminal handling, documentation and similar service components, whether the non-freight elements are covered has been litigated both ways and I have not established a settled position; treat the split as a question of fact on the particular contract and do not assume the circular carries the service components.
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The circular, as reproduced identically in two judgments read this pass, reads under the heading "Section 172. Shipping Business of Non-Residents — Tax deduction at source from payment made to foreign shipping companies": "1. Representations have been received regarding the scope of sections 172, 194C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents. 2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journey-wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship. 3. The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172. 4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (l) of sub-section (1) to any 'resident' (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any 'resident'. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections. 5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply."
The Board's clarification is that s.172 is a self-contained code operating ship-wise and journey-wise and applies notwithstanding the other provisions of the Act; that in consequence ss.194C and 195 relating to deduction of tax at source are not applicable to the payments to which s.172 applies; that s.194C in any event applies only to payments made to a resident, so that there is no overlap between it and s.172; and that where the payment is made to a shipping agent of a non-resident owner or charterer, the agent steps into the shoes of the principal so that s.172 applies and ss.194C and 195 do not.
Not applicable in the judicial sense. The Board's stated route is the non-obstante clause in s.172(1) and the confinement of s.194C to payments made to residents.
The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable.
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Handle my notice → Ask a CA on WhatsAppYes, and it is directly in point. Circular No. 723 dated 19 September 1995 states that s.172 is a self-contained code for the levy and recovery of tax, ship-wise and journey-wise, that its provisions apply notwithstanding anything contained in other provisions of the Act, and that "Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable." Paragraph 5 extends that to payments routed through agents: since the agent acts on behalf of the non-resident owner or charterer, he steps into the shoes of the principal, and accordingly s.172 applies and ss.194C and 195 do not. This was decided by the CBDT Circulars & Instructions (Not applicable — Central Board of Direct Taxes circular) and bears on section 172, section 172(1), section 194C, section 195, section 40(a)(i) of the Income Tax Act 1961. It is reported as Circular No. 723, dated 19-9-1995; cited in the source judgments as [1995] 215 ITR (St.) 116 and as (1995) 128 CTR (St) 61; cross-referred in the footnotes to s.172 on the departmental pages. This circular is the single most-cited administrative instrument in freight-related disallowance disputes, and it is worth knowing exactly what each of its five paragraphs does. Paragraph 2 describes s.172 as "a self-contained code for the levy and recovery of the tax, ship-wise, and journey-wise" requiring a return within a maximum of thirty days from the date of departure — the source of the "complete code" language that runs through the case law. Paragraph 3 is the operative exclusion of ss.194C and 195. Paragraph 4 makes an entirely separate and often overlooked point: s.194C applies only to payments to a "resident", so there is no overlap between the two sections in the first place. Paragraph 5 is the one that decides most real cases, because in practice the Indian exporter pays an agent in India and not the foreign line, and the Board says the agent steps into the shoes of the principal. Two limits should be stated with the same firmness. The circular presupposes that s.172 in fact applies to the payment — a ship belonging to or chartered by a non-resident carrying goods shipped at a port in India — and it does not touch payments for services that are not that. And the circular says nothing about composite invoices. Where a single bill mixes ocean freight with terminal handling, documentation and similar service components, whether the non-freight elements are covered has been litigated both ways and I have not established a settled position; treat the split as a question of fact on the particular contract and do not assume the circular carries the service components. If it applies to you, the first step is this: Establish first that s.172 applies to the payment on its own terms. The circular is an application of s.172, not an independent exemption.
The circular, as reproduced identically in two judgments read this pass, reads under the heading "Section 172. Shipping Business of Non-Residents — Tax deduction at source from payment made to foreign shipping companies": "1. Representations have been received regarding the scope of sections 172, 194C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents. 2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journey-wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship. 3. The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172. 4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (l) of sub-section (1) to any 'resident' (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any 'resident'. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections. 5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply." The matter was decided on 1995-09-19 by the CBDT Circulars & Instructions (Not applicable — Central Board of Direct Taxes circular). On those facts the CBDT Circulars & Instructions held as follows. The Board's clarification is that s.172 is a self-contained code operating ship-wise and journey-wise and applies notwithstanding the other provisions of the Act; that in consequence ss.194C and 195 relating to deduction of tax at source are not applicable to the payments to which s.172 applies; that s.194C in any event applies only to payments made to a resident, so that there is no overlap between it and s.172; and that where the payment is made to a shipping agent of a non-resident owner or charterer, the agent steps into the shoes of the principal so that s.172 applies and ss.194C and 195 do not.
Not applicable in the judicial sense. The Board's stated route is the non-obstante clause in s.172(1) and the confinement of s.194C to payments made to residents. In the words reproduced by the source cited on this page: "The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable."
It was decided by the CBDT Circulars & Instructions on 1995-09-19 and is reported as Circular No. 723, dated 19-9-1995; cited in the source judgments as [1995] 215 ITR (St.) 116 and as (1995) 128 CTR (St) 61; cross-referred in the footnotes to s.172 on the departmental pages. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 172, section 172(1), section 194C, section 195, section 40(a)(i), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Board's clarification is that s.172 is a self-contained code operating ship-wise and journey-wise and applies notwithstanding the other provisions of the Act; that in consequence ss.194C and 195 relating to deduction of tax at source are not applicable to the payments to which s.172 applies; that s.194C in any event applies only to payments made to a resident, so that there is no overlap between it and s.172; and that where the payment is made to a shipping agent of a non-resident owner or charterer, the agent steps into the shoes of the principal so that s.172 applies and ss.194C and 195 do not. It arises in TDS Defaults, Presumptive Taxation & Audit and Deductions & Disallowances matters, on section 172, section 172(1), section 194C, section 195, section 40(a)(i) of the Income Tax Act 1961, and was decided by Not applicable — Central Board of Direct Taxes circular. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where you paid an agent rather than the line, rely on paragraph 5 by name — the agent steps into the shoes of the principal — and put on record the documents showing the agency and that the freight was remitted to the non-resident principal. Treat a composite invoice as a live question rather than a settled one. Identify the freight and demurrage element paid over to the non-resident line, which is what the circular addresses, and be ready to argue the terminal handling and documentation components on the terms of the contract; do not assume either that they are covered or that they are not. If the officer answers that your client is a resident and so cannot invoke s.172, take the Bombay High Court Full Bench answer in CIT v. V.S. Dempo & Co. Pvt. Ltd. of 5 February 2016 — the payer's status is not the test. Keep paragraph 4 in reserve. Section 194C by its own terms applies to payments made to a resident, so a payment to a non-resident line was never within it, quite apart from s.172.
Still good law. The circular was applied by the Gujarat High Court on 3 January 2023 and by the Mumbai Tribunal on 30 March 2023, both of which set it out in full, and it is cross-referred on the departmental footnote list to s.172 as printed on the Year 2010 edition of that page. Its number and date have not been withdrawn or replaced so far as those sources show. That is not a completed validity check: I did not search for any later circular superseding it, and the related Circular No. 730 dated 14 December 1995 was withdrawn by Circular No. 9/2001, so the Board has revisited this area at least once. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
I could NOT retrieve this circular from a departmental URL. https://incometaxindia.gov.in/communications/circular/910110000000000723.htm returned a 404 and I had no web-search budget left with which to find the correct departmental path; a later pass should start there. What I did instead was to read the circular reproduced verbatim inside two independent judgments and compare the two reproductions word for word: the Gujarat High Court in Principal Commissioner of Income Tax-1 v. M/s Bajaj Herbals Pvt. Ltd., R/Tax Appeal No. 278 of 2020, decided 3 January 2023, which sets it out at its paragraph 5.8; and the Mumbai Bench of the Tribunal in Tigers Worldwide Logistics Pvt. Ltd. v. DCIT, ITA Nos. 3286 and 3287/MUM/2022, order of 30 March 2023. The two reproductions agree word for word in paragraphs 1 to 4. In paragraph 5 they differ in one particular that is plainly a transcription slip in one of them: the Gujarat High Court prints "payments are made to shipping agents of non-resident ship-owners or charterers" and "the agent acts on behalf of the non-resident ship-owner or charterer", while the Tribunal prints "shipping agents of non-resident ship or ship-owners charterers" and "the agent acts on behalf of the non-resident owner or charterer". I have quoted only from paragraph 3, which is identical in both. Both reproductions carry a leading number "913." above the heading; that is a commercial digest's paragraph number appearing in the text the courts copied, not part of the circular, and the circular's own identifier is given at the foot of both reproductions as "Circular: No. 723, dated 19-9-1995". The circular's number and date are independently confirmed by the footnote lists printed on the departmental s.172 pages, which cross-refer to "Circular No. 723, dated 19-9-1995". A citation of this circular as reported at [1995] 215 ITR (St.) 116 appears in the Orient (Goa) question of law reproduced in the Dempo Full Bench judgment, and at (1995) 128 CTR (St) 61 in the referring order reproduced in the same judgment. 'decided_on' is the date of the circular. 'bench' and 'favours' are inapplicable in the ordinary sense; the circular is a departmental clarification favourable to payers. A third judicial reproduction, in ITO Ward 3(1)(4), Rajkot v. Avadh Agri Exports (ITA No. 816/RJT/2025, ITAT Rajkot, 1 April 2026), was compared against the two above and agrees word for word in paragraphs 2, 3 and 4. Its text of paragraph 4 prints the clause range as "clauses (a) to (1)" — i.e. clause (l) — where the Gujarat High Court's reproduction prints an empty bracket; the range in the text above is given as (a) to (l) on the strength of that third reproduction, and the empty bracket is recorded here as a reproduction artefact rather than silently corrected. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Board's clarification is that s.172 is a self-contained code operating ship-wise and journey-wise and applies notwithstanding the other provisions of the Act; that in consequence ss.194C and 195 relating to deduction of tax at source are not applicable to the payments to which s.172 applies; that s.194C in any event applies only to payments made to a resident, so that there is no overlap between it and s.172; and that where the payment is made to a shipping agent of a non-resident owner or charterer, the agent steps into the shoes of the principal so that s.172 applies and ss.194C and 195 do not.
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