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?
No. A Full Bench of the Bombay High Court answered the referred question and held that s.172 and s.44B are to be read together — s.44B enacting the special provisions for computing the profits and gains of a non-resident's shipping business and s.172 enacting the scheme for the levy and recovery of tax on the ship — and that where s.172 governs, there is no warrant for applying the provisions in Chapter XVII for collection and recovery of tax and its deduction at source under s.195. The Court overruled the view in CIT v. Orient (Goa) Private Limited to the extent contrary to that, and directed the appeals to be listed before an appropriate Division Bench.
Decided by the High Court (Full Bench of three Judges: S.C. Dharmadhikari, R.D. Dhanuka and B.P. Colabawalla JJ (judgment delivered by S.C. Dharmadhikari J); reserved on 27 November 2015) on 2016-02-05, reported as Income Tax Appeal No. 989 of 2015 and connected appeals, High Court of Judicature at Bombay, pronounced 5 February 2016 (file reference ITXA989.15.doc); no law-report citation was printed on the source read. It bears on section 172, section 172(1), section 172(2), section 172(8), section 44B, section 195, section 40(a)(i), section 194C, section 260A of the Income Tax Act 1961, in TDS Defaults, Presumptive Taxation & Audit, Deductions & Disallowances and How Tax Law Is Read matters.
This is the decision a practitioner needs when the Assessing Officer's answer to Circular No. 723 is "but my assessee is a resident". That was the reasoning in Orient (Goa), where the Court had held that s.172 applies only to non-residents carrying on shipping business, that a resident Indian company therefore could not place reliance on it, and that s.195 accordingly applied with s.40(a)(i) consequences. The Full Bench was constituted on 9 October 2015 precisely because a Division Bench hearing Income Tax Appeal Nos. 989 and 991 of 2015 on 8 September 2015 could not agree with that view. Two things in the Full Bench's answer are worth carrying into practice. First, the structural point the brief for this area most needs and which is stated in the Court's own words: s.172 sits in Chapter XV, Liability in Special Cases, Profits of Non-residents, and "section 172 is referable to section 44B" — both open with a non-obstante clause, s.44B computing the profits and s.172 providing the machinery for levy and recovery on the voyage, with the sub-sections of each drawing demurrage and handling charges into the base. Second, the conclusion drawn from that: read together and harmoniously, the sub-sections of s.172 show how the tax is to be levied, computed, assessed and recovered, and there is therefore no warrant for applying Chapter XVII to the same income. The limits should be stated as squarely as the holding. The Court answered a reference; it did not dispose of the appeals, which it sent to a Division Bench. And the Revenue's counsel did not appear at the hearing, which the Court recorded and criticised — a point an opponent may raise and which you should be ready for.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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On 8 September 2015 a Division Bench hearing Income Tax Appeal Nos. 989 and 991 of 2015 found itself unable to agree with the view taken by another Division Bench in CIT v. Orient (Goa) Private Limited, reported at 325 ITR 554, and directed that the papers be placed before the Chief Justice so that a question of law might be placed before a larger Bench. The Acting Chief Justice directed the constitution of the larger Bench on 9 October 2015. The question referred was: "Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a non-resident before the provision to section 172 of the Act can be invoked ?" The lead appeal concerned V.S. Dempo & Co. Pvt. Ltd., a company engaged in mining and export of processed iron ore and in construction, for assessment year 1999-2000. Among other things the assessee had charged demurrage under the head export expenses to its profit and loss account without deducting tax, and the Assessing Officer held, in view of s.40(a)(i) read with s.195, that the demurrage was liable to be added back. The Tribunal at Panaji had held that s.40(a)(i) applies only where there is an obligation to deduct tax at source, had relied on CBDT Circular No. 723 to conclude that there was no such obligation where s.172 applies, had held that s.172 is a charging as well as a machinery provision providing for determination and collection of tax in respect of non-resident shipping companies, and had deleted the disallowance. In Orient (Goa) the Court had taken the contrary view, holding that s.172 applies only to a non-resident carrying on shipping business and that the resident assessee could not rely on it. Senior counsel Mr. Mistri appeared for some of the assessees. The advocate engaged by the Revenue informed the Registry shortly before the hearing that she would not appear and sought three weeks so that the Additional Solicitor General could be appointed; the Court rejected the request, recorded its disapproval at paragraphs 11 and 12, and asked Mr. Mistri to assist the Court on the perspective of both sides.
The reference was answered and the appeals were directed to be listed before an appropriate Division Bench. Section 172, which falls in Chapter XV of the Act under the sub-title dealing with profits of non-residents, is referable to s.44B; both provisions open with a non-obstante clause, s.44B enacting the special provisions for computing the profits and gains of the shipping business of a non-resident and s.172 being enacted for the purpose of the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident operated from India. The sub-sections of s.172, read together and harmoniously, show how the tax is to be levied, computed, assessed and recovered, and there is therefore no warrant for applying the provisions in Chapter XVII for collection and recovery of the tax and its deduction at source under s.195. To the extent contrary to that conclusion, the view taken in Orient (Goa) was overruled (para 54).
The Court traced the placement of the provisions rather than reading them in isolation. It reproduced s.172 in extenso at paragraph 29, sub-section (4A) included, and observed at paragraph 30 that the provisions are made to take care of the income of the shipping business of non-residents and for the purpose of levy and recovery of tax thereon; at paragraph 31 it located s.195 in Chapter XVII, headed Collection and Recovery — Deduction at Source; and at paragraph 34 it framed the question as being whether, s.172 containing a non-obstante clause and applying for the purpose of levy and recovery of tax on a ship belonging to or chartered by a non-resident, there is any obligation to deduct tax at source under s.195. In the concluding stretch of the judgment, immediately before paragraph 54, the Court reasoned that the income deemed to accrue under s.172 "has to be levied and recovered in terms of the sub-sections of section 172 of the Income Tax Act", that "Once section 172 falls in Chapter XV titled as Liability in Special Cases - Profits of Non-residents, then section 172 is referable to section 44B", that both provisions open with a non-obstante clause, that "These sections and particularly section 172 devise a scheme for levy and recovery of tax", and that "The sub-sections of section 172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered. Therefore, there is no warrant in applying the provisions in chapter XVII for collection and recovery of the tax and its deduction at source vide section 195." At paragraph 54 the Court added that "The difficulty is presented only when provisions are not read together and harmoniously so also without bearing in mind the setting and placement thereof in the chapters", and overruled Orient (Goa) to the extent contrary.
Once section 172 falls in Chapter XV titled as Liability in Special Cases - Profits of Non-residents, then section 172 is referable to section 44B.
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Handle my notice → Ask a CA on WhatsAppNo. A Full Bench of the Bombay High Court answered the referred question and held that s.172 and s.44B are to be read together — s.44B enacting the special provisions for computing the profits and gains of a non-resident's shipping business and s.172 enacting the scheme for the levy and recovery of tax on the ship — and that where s.172 governs, there is no warrant for applying the provisions in Chapter XVII for collection and recovery of tax and its deduction at source under s.195. The Court overruled the view in CIT v. Orient (Goa) Private Limited to the extent contrary to that, and directed the appeals to be listed before an appropriate Division Bench. This was decided by the High Court (Full Bench of three Judges: S.C. Dharmadhikari, R.D. Dhanuka and B.P. Colabawalla JJ (judgment delivered by S.C. Dharmadhikari J); reserved on 27 November 2015) and bears on section 172, section 172(1), section 172(2), section 172(8), section 44B, section 195, section 40(a)(i), section 194C, section 260A of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 989 of 2015 and connected appeals, High Court of Judicature at Bombay, pronounced 5 February 2016 (file reference ITXA989.15.doc); no law-report citation was printed on the source read. This is the decision a practitioner needs when the Assessing Officer's answer to Circular No. 723 is "but my assessee is a resident". That was the reasoning in Orient (Goa), where the Court had held that s.172 applies only to non-residents carrying on shipping business, that a resident Indian company therefore could not place reliance on it, and that s.195 accordingly applied with s.40(a)(i) consequences. The Full Bench was constituted on 9 October 2015 precisely because a Division Bench hearing Income Tax Appeal Nos. 989 and 991 of 2015 on 8 September 2015 could not agree with that view. Two things in the Full Bench's answer are worth carrying into practice. First, the structural point the brief for this area most needs and which is stated in the Court's own words: s.172 sits in Chapter XV, Liability in Special Cases, Profits of Non-residents, and "section 172 is referable to section 44B" — both open with a non-obstante clause, s.44B computing the profits and s.172 providing the machinery for levy and recovery on the voyage, with the sub-sections of each drawing demurrage and handling charges into the base. Second, the conclusion drawn from that: read together and harmoniously, the sub-sections of s.172 show how the tax is to be levied, computed, assessed and recovered, and there is therefore no warrant for applying Chapter XVII to the same income. The limits should be stated as squarely as the holding. The Court answered a reference; it did not dispose of the appeals, which it sent to a Division Bench. And the Revenue's counsel did not appear at the hearing, which the Court recorded and criticised — a point an opponent may raise and which you should be ready for. If it applies to you, the first step is this: Establish that the payment is one to which s.172 applies at all — a ship belonging to or chartered by a non-resident, carrying passengers or goods shipped at a port in India — before you rely on this line. The section is about the non-resident recipient's income, not about the payer's status.
On 8 September 2015 a Division Bench hearing Income Tax Appeal Nos. 989 and 991 of 2015 found itself unable to agree with the view taken by another Division Bench in CIT v. Orient (Goa) Private Limited, reported at 325 ITR 554, and directed that the papers be placed before the Chief Justice so that a question of law might be placed before a larger Bench. The Acting Chief Justice directed the constitution of the larger Bench on 9 October 2015. The question referred was: "Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a non-resident before the provision to section 172 of the Act can be invoked ?" The lead appeal concerned V.S. Dempo & Co. Pvt. Ltd., a company engaged in mining and export of processed iron ore and in construction, for assessment year 1999-2000. Among other things the assessee had charged demurrage under the head export expenses to its profit and loss account without deducting tax, and the Assessing Officer held, in view of s.40(a)(i) read with s.195, that the demurrage was liable to be added back. The Tribunal at Panaji had held that s.40(a)(i) applies only where there is an obligation to deduct tax at source, had relied on CBDT Circular No. 723 to conclude that there was no such obligation where s.172 applies, had held that s.172 is a charging as well as a machinery provision providing for determination and collection of tax in respect of non-resident shipping companies, and had deleted the disallowance. In Orient (Goa) the Court had taken the contrary view, holding that s.172 applies only to a non-resident carrying on shipping business and that the resident assessee could not rely on it. Senior counsel Mr. Mistri appeared for some of the assessees. The advocate engaged by the Revenue informed the Registry shortly before the hearing that she would not appear and sought three weeks so that the Additional Solicitor General could be appointed; the Court rejected the request, recorded its disapproval at paragraphs 11 and 12, and asked Mr. Mistri to assist the Court on the perspective of both sides. The matter was decided on 2016-02-05 by the High Court (Full Bench of three Judges: S.C. Dharmadhikari, R.D. Dhanuka and B.P. Colabawalla JJ (judgment delivered by S.C. Dharmadhikari J); reserved on 27 November 2015). On those facts the High Court held as follows. The reference was answered and the appeals were directed to be listed before an appropriate Division Bench. Section 172, which falls in Chapter XV of the Act under the sub-title dealing with profits of non-residents, is referable to s.44B; both provisions open with a non-obstante clause, s.44B enacting the special provisions for computing the profits and gains of the shipping business of a non-resident and s.172 being enacted for the purpose of the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident operated from India. The sub-sections of s.172, read together and harmoniously, show how the tax is to be levied, computed, assessed and recovered, and there is therefore no warrant for applying the provisions in Chapter XVII for collection and recovery of the tax and its deduction at source under s.195. To the extent contrary to that conclusion, the view taken in Orient (Goa) was overruled (para 54).
The Court traced the placement of the provisions rather than reading them in isolation. It reproduced s.172 in extenso at paragraph 29, sub-section (4A) included, and observed at paragraph 30 that the provisions are made to take care of the income of the shipping business of non-residents and for the purpose of levy and recovery of tax thereon; at paragraph 31 it located s.195 in Chapter XVII, headed Collection and Recovery — Deduction at Source; and at paragraph 34 it framed the question as being whether, s.172 containing a non-obstante clause and applying for the purpose of levy and recovery of tax on a ship belonging to or chartered by a non-resident, there is any obligation to deduct tax at source under s.195. In the concluding stretch of the judgment, immediately before paragraph 54, the Court reasoned that the income deemed to accrue under s.172 "has to be levied and recovered in terms of the sub-sections of section 172 of the Income Tax Act", that "Once section 172 falls in Chapter XV titled as Liability in Special Cases - Profits of Non-residents, then section 172 is referable to section 44B", that both provisions open with a non-obstante clause, that "These sections and particularly section 172 devise a scheme for levy and recovery of tax", and that "The sub-sections of section 172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered. Therefore, there is no warrant in applying the provisions in chapter XVII for collection and recovery of the tax and its deduction at source vide section 195." At paragraph 54 the Court added that "The difficulty is presented only when provisions are not read together and harmoniously so also without bearing in mind the setting and placement thereof in the chapters", and overruled Orient (Goa) to the extent contrary. In the words reproduced by the source cited on this page: "Once section 172 falls in Chapter XV titled as Liability in Special Cases - Profits of Non-residents, then section 172 is referable to section 44B." The decision followed or applied CIT v. Orient (Goa) Private Limited, 325 ITR 554 (Bombay) — overruled to the extent contrary to the Full Bench's conclusion.
It was decided by the High Court on 2016-02-05 and is reported as Income Tax Appeal No. 989 of 2015 and connected appeals, High Court of Judicature at Bombay, pronounced 5 February 2016 (file reference ITXA989.15.doc); no law-report citation was printed on the source read. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 172, section 172(1), section 172(2), section 172(8), section 44B, section 195, section 40(a)(i), section 194C, section 260A, 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 reference was answered and the appeals were directed to be listed before an appropriate Division Bench. Section 172, which falls in Chapter XV of the Act under the sub-title dealing with profits of non-residents, is referable to s.44B; both provisions open with a non-obstante clause, s.44B enacting the special provisions for computing the profits and gains of the shipping business of a non-resident and s.172 being enacted for the purpose of the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident operated from India. The sub-sections of s.172, read together and harmoniously, show how the tax is to be levied, computed, assessed and recovered, and there is therefore no warrant for applying the provisions in Chapter XVII for collection and recovery of the tax and its deduction at source under s.195. To the extent contrary to that conclusion, the view taken in Orient (Goa) was overruled (para 54). It arises in TDS Defaults, Presumptive Taxation & Audit, Deductions & Disallowances and How Tax Law Is Read matters, on section 172, section 172(1), section 172(2), section 172(8), section 44B, section 195, section 40(a)(i), section 194C, section 260A of the Income Tax Act 1961, and was decided by Full Bench of three Judges: S.C. Dharmadhikari, R.D. Dhanuka and B.P. Colabawalla JJ (judgment delivered by S.C. Dharmadhikari J); reserved on 27 November 2015. 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. Then take the point that the payer's residence is irrelevant. That is precisely the question the Full Bench answered, and Orient (Goa) is overruled to the extent it held otherwise. Pair the judgment with CBDT Circular No. 723 dated 19 September 1995, which says in terms that ss.194C and 195 are not applicable where s.172 applies and that a shipping agent steps into the shoes of his non-resident principal. Where demurrage is the payment in question, point to s.172(8), which brings demurrage charge, handling charge and amounts of a similar nature into the s.172(2) base — the income is taxed, just not through deduction at source. Cite the judgment for what it decided. It is an answer to a reference, delivered by a Full Bench of three Judges; the appeals themselves were sent back to a Division Bench, so do not describe it as having allowed or dismissed any appeal. If you are on the Revenue side, note that the hearing proceeded without appearance for the Revenue and that senior counsel for some of the assessees was asked to assist on both perspectives; that is on the face of the judgment at paragraphs 11 and 12.
Validity check could not be completed. Validity check could not be completed. I ran no search for any appeal against this Full Bench judgment or for later High Court or Supreme Court treatment of it, and I make no claim that none exists. What I can report is that the Supreme Court order of 5 September 2016 in Civil Appeal No. 4797/2008 between the same parties, which a title search surfaces, is a different case on s.50 and s.54E and is not an appeal from this judgment. Two features of the decision a reader should weigh for himself: it answers a reference and does not dispose of the appeals, and the Revenue was not represented at the hearing. 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.
A WARNING ABOUT RETRIEVAL OF THIS JUDGMENT, because it bears directly on how it should be cited. The judgment runs to seventy-nine pages and fifty-four numbered paragraphs, ending with the disposal at paragraph 54. Neither the plain document page nor a full-text fetch reaches the end: both stop part-way through paragraph 42/43, inside a long quotation from the Goa Division Bench's judgment in Orient (Goa). Worse, a fetch of the same document with the print parameter returned a fabricated tail — thirty tidy numbered paragraphs 43 to 72, including a supposed paragraph 72 reading "Accordingly, the appeals are allowed and the orders of the Tribunal are restored". That is not what the Court did, and the document has no paragraph 72. The true disposal, which I reproduced verbatim on two separate fragment fetches, is at paragraph 54 and reads: "To the extent contrary to above, we overrule the view in Orient Goa's case (supra). The question referred is answered accordingly. Since the question above is referred to us, having answered it, let the Appeals be now listed for hearing before appropriate Division Bench." Everything in this entry that is attributed to the Court comes either from the paragraphs 1 to 42 I read in full or from fragment fetches that I ran twice and that returned identical words. A SECOND STRUCTURAL WARNING: several passages inside this judgment carry their own paragraph numbers — the referring Division Bench's order is reproduced with its paragraphs 8 to 12, and the Orient (Goa) judgment with its paragraphs 8 to 12 — so a citation to "paragraph 11" of this judgment may in fact be a citation to a quoted order. I have cited only paragraph 54 and, for the s.44B passage, the unnumbered stretch immediately preceding it; I did not see a paragraph number printed against that stretch and I therefore do not assign one. DATE DISCREPANCIES ON THE FACE OF THE JUDGMENT: paragraph 3 records the Panaji Tribunal order under appeal as dated 11 December 2005 while paragraph 5 records it as 11 December 2006, and paragraph 5 records the CIT(Appeals) order variously as dated 2 August 2008, 2 August 2004 and 12 March 2002. I have not resolved these and none of them affects the point of law. The Supreme Court order at https://indiankanoon.org/doc/112096619/ in Civil Appeal No. 4797/2008, CIT Panaji v. V.S. Dempo Company Ltd., decided 5 September 2016, is a DIFFERENT case between the same parties, concerning s.50 and s.54E; I read it to confirm it is not an appeal from this judgment, and it is not. 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 reference was answered and the appeals were directed to be listed before an appropriate Division Bench. Section 172, which falls in Chapter XV of the Act under the sub-title dealing with profits of non-residents, is referable to s.44B; both provisions open with a non-obstante clause, s.44B enacting the special provisions for computing the profits and gains of the shipping business of a non-resident and s.172 being enacted for the purpose of the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident operated from India. The sub-sections of s.172, read together and harmoniously, show how the tax is to be levied, computed, assessed and recovered, and there is therefore no warrant for applying the provisions in Chapter XVII for collection and recovery of the tax and its deduction at source under s.195. To the extent contrary to that conclusion, the view taken in Orient (Goa) was overruled (para 54).
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