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.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
The circular 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.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
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 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 Bench of the Tribunal on 30 March 2023, both of which set it out in full, and the footnote list to s.172 in the departmental consolidation of the Act cross-refers to it by number and date. Its number and date have not been withdrawn or replaced so far as any of that shows. That is not a completed validity check, and the qualification is worth stating plainly. No search has been made for a later circular superseding this one, and the Board has revisited this area at least once: the related Circular No. 730 dated 14 December 1995 was withdrawn by Circular No. 9/2001 dated 9 July 2001 as no longer legally tenable. A reader putting Circular No. 723 at the head of a reply should satisfy himself that it still stands. Two further points go to the circular's reach rather than to its currency. A circular of this kind binds the Department and not the assessee, so it can be used against an officer who disregards it but cannot be used to cut down a statutory right; and it is an application of s.172, not an independent exemption, so it does nothing at all unless s.172 applies to the payment on its own terms - a ship belonging to or chartered by a non-resident, carrying passengers, livestock, mail or goods shipped at a port in India. For a year governed by the Income-tax Act 2025 the successors of ss.172, 194C, 195 and 40(a)(i) should be identified and the Board's position under that Act checked before the circular is relied on; that correspondence has not been established here. 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.
ON WHERE THE TEXT ON THIS PAGE COMES FROM. The departmental text of this circular has not been established. What is set out above is its text as reproduced verbatim inside two independent judgments, compared 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". Only paragraph 3, which is identical in both, is quoted on this page. 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)" - that is, 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. TWO THINGS IN THE REPRODUCTIONS THAT ARE NOT THE CIRCULAR. Both carry a leading number "913." above the heading; that is a commercial digest's paragraph number that travelled into the text the courts copied, and it is not part of the circular. The circular's own identifier appears at the foot of both reproductions as "Circular: No. 723, dated 19-9-1995", and the footnote list to s.172 in the departmental consolidation cross-refers to it in the same terms. ON THE CITATIONS. The circular is cited as reported at [1995] 215 ITR (St.) 116 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 itself. 'bench' and 'favours' are inapplicable in the ordinary sense; this is a departmental clarification, and it is favourable to payers. 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.
TaxSphere, “CBDT Circular No. 723 dated 19 September 1995 — where section 172 applies, sections 194C and 195 do not, and the shipping agent steps into the shoes of his non-resident principal”, https://taxnotice.vittsphere.com/caselaw/case/cbdt-circular-723-1995-no-tds-under-194c-or-195-on-payments-to-foreign-shipping-companies-or-their-agents/ (validity last checked 2026-09-09)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
We are an Indian exporter. We paid demurrage to a foreign shipping company without deducting tax and the Assessing Officer has disallowed the whole payment under section 40(a)(i), saying section 172 is for non-residents and we are a resident. Does the payer have to be a non-resident before section 172 can be invoked?
A foreign ship loaded our cargo at an Indian port and the Assessing Officer is demanding tax from the master before port clearance. What is the levy, what return has to be filed, is there any time limit on the officer, and can the owner ask instead to be assessed on his year's income?
We paid tax on each voyage under section 172(4) and then elected under section 172(7) for a regular assessment, which came out much lower and produced a refund. The Department has refunded the tax but refused interest, saying what we paid was not advance tax. Is that right?
The Tribunal disallowed my education cess. Does s.40(a)(ii) actually cover cess?
