[Opinion] Tribunal Allows Full TDS Credit to Agent Acting for Foreign Principal

Meenakshi Subramaniam – [2025] 179 taxmann.com 297 (Article)

One taxpayer was declared the most popular speaker at a conference, when he likened TDS to the door of the house which is taken away by the income tax authorities, by saying that it would be returned next year.

TDS tangles ensnare intelligent tax brains, too. However, in a recent interesting case (Eastern Shipping (P.) Ltd. v. Income Tax Officer [2025] 178 taxmann.com 590 (Mum.-Trib), the assessee secured full TDS credit in extraordinary circumstances.

[2025] 178 taxmann.com 590 (Mumbai-Trib.)

Eastern Shipping (P.) Ltd.
v
Income-tax Officer

The assessee had been acting as an agent for SITC Container Lines Company Limited, who is a resident of Hong Kong, As such, its scope of work included cargo booking, container monitoring, liasioning with importers, lading, handling of cargo at the terminal and carrying out the necessary work with exporters and government authorities for statutory approvals, issue of bill of documentation, etc. For this purpose, it raised invoices for importers/exporters/ freight forwarders for ocean freight, terminal handling charges, documentation charges, etc. A part of this amount received from the importer/exporter/ freight forwarder was retained by the assessee and the balance part transferred to the account of its principal.

However, it is of essence for its business viability that bifurcation of such amount between what belongs to it and such amount which has to be transferred to the principal cannot be shared with the importer/exporter/ freight forwarder. Otherwise, the customers would push it for a better deal.

The assessee filed its return of income and claimed credit for TDS as per Form 26AS. However, the appellant’s claim for tax deducted at source (‘TDS”) of Rs. 95,799/- was not granted credit by the Deputy Director of Income Tax, CPC, Bengaluru (“the Assessing Officer”) while processing its return of income vide Intimation passed under section 143(1) of the Income tax Act, 1961, dated 09.01.2024.

The Assessing Officer allowed TDS credit to the extent of receipts offered to tax by the assessee in its return of income and disallowed the balance TDS credit.

Out of the total amount of revenue of Rs. 1,41,86,672/- as per Form 26AS, an amount of Rs. 89,91,331/- was appellant’s agency fees which is as per the financial statements while Rs. 52,49,276/- was receipts on behalf of Foreign Principal’s account. Tax was deducted at source at an applicable rate and was claimed by the appellant being an agent of Foreign Principal.

The appellant submitted that since TDS has been deducted on invoices raised on behalf of the Foreign Principals under the PAN of the appellant and the same appears in Form 26AS of the appellant, credit thereof ought to be granted to the appellant. By denying such credit to the appellant, the credit of such TDS has not been given to anyone which can never be the intention of the legislature as the said TDS would not remain available to anyone.

On appeal, the Commissioner (Appeals) dismissed the plea of the assessee by relying upon section 199 read with rule 37BA(2).

The appellant raised the following grounds in appeal:

The appellant submitted that the CIT (A) failed to appreciate that Rule 37BA will apply for grant of credit to a person different from the payee only when the requisite procedure (viz. filing of declaration by the deductee and reporting by the deductor in the name of the other person) has been complied with and not when such procedure has not been complied with, in which case the payee ought to continue to get the credit for TDS based on entry in Form 26AS.

The Learned CIT (A) failed to appreciate that while the total receipts as per Form 26AS is Rs. 1,41,86,672/-, out of above, a sum of Rs. 89,91,331/- was reflecting in Profit & Loss Account as Sale of Services – Operational & Commission and the balance amount of Rs. 51,95,341/- consists of receipts earned on behalf of Foreign Principal on which tax was deducted at source. Said amount is credited to the profit and loss account and by way of an accounting (journal) entry is transferred to Balance Sheet and hence entire credit of TDS as claimed ought to be granted to the appellant.

The CIT (A) erred in not appreciating the business model of the appellant and the established trade practice in the shipping industry in which it operates wherein the customers deduct taxes on any amounts paid/credited by them to the appellant. However, the appellant in turn owes certain amount to its foreign principals and accordingly such reimbursements effected by it cannot form part of its total income being credited to profit and loss account and thereafter transferred by way of an accounting (journal) entry to balance sheet as ‘receivables’ or ‘payables’.

The only issue raised in this appeal for consideration is with regard to grant of credit for TDS of the entire amount as appearing in form 26AS, whereas the revenue authorities allowed to the extent of Rs. 1,74,861/-. Therefore the short grant of Rs. 95,799/- is on account of the fact appearing in form 26AS relates to receipts equivalent to Rs.1,41,86,672/- while the receipts offered to tax by assessee in return stood at Rs. 91,65,381/-, the credit has been proportionately allowed as per intimation order dated 09.01.2024 issued u/s 143(1) of the Act.

The present appeal has been filed by the revenue challenging the impugned order dt. 26.02.2025 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC) for the assessment year 2023-24.

1. Judgement

The Tribunal, first of all, observed that the assessee has been filing its return of income, declaring such gross receipts as its income which it is entitled to receive. The amount received and transferred to its principal is reflected as a balance sheet item in its audited financial statement. This position has been accepted by its Auditor without any qualification in the audit report. The amount of income as reflected in the return of income stands accepted without any adjustment.

Whereas as per Section 199(1) a deduction of tax at source made in accordance with the provisions of Chapter XVII and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whom inter alia the deduction was made. As per the assessee in the present case, since the deduction of TDS has been made from the payment made to the assessee, it is entitled to get credit in respect of the same.

The Tribunal said that it had gone through Section 199(3) of the Act which enables the CBDT to make such rules for the purposes of giving such credit including the rules for grant of such credit to a person other than that referred to in sub section (1) and sub section (2) thereof. Pursuant thereto, rule 37BA has been notified by the CBDT.

In the considered view of Tribunal, according to sub-rule (1) thereof, such credit for TDS has to be allowed to the person to whom payment has been made or credit has been given on the basis of information relating to deduction of tax furnished by the deductor to the Income-tax authority. As in the present case, such information is contained in Form 26AS which is also according to the said rule, thus the assessee should be allowed credit in respect of the entire amount of TDS as reflected in such Form.

Although Sub-rule (2) of Rule 37BA enables the recepient of income to file declaration with the deductor to the effect that such TDS may be reflected in the name of the other person. But this enabling provision is not mandatory. However, if the necessary requirement in the Rule is fulfilled, then, the deductor has to reflect the TDS in the name of the other person in which event the said person would get credit in respect of such TDS.

Otherwise, TDS credit has to be allowed to the person from whose payments such TDS has been deducted. As in the present case on account of business expediency, the assessee could not have divulged this information with the importers/exporters/ freight forwarders.

In this regard reliance is being placed upon the decision in the case of CIT v. Relcom[2015] 62 taxmann.com 190/234 Taxman 693 (SC) wherein it was held as under:

The High Court was concerned with the case where work had been performed by the assessee’s sister company being Relcom Engineering Private Limited and invoices and in Form 26AS, assessee’s PAN was reflected by the deductor. The CIT (A), ITAT and the High Court have upheld the claim of TDS credit in the hands of the assessee though the income was reflected in the hands of its sister concern.

In the case of Arvind Murjani Brands(P.) Ltd. v. ITO [2012] 21 taxmann.com 131/137 ITD 173 (Mum.), wherein it was held as under:

The property was let out by the Landlords for the benefit of a Franchisee. The lease agreement was entered into with Arvind Brands Limited. The assessee would receive the rent amount from the Franchisee who would pay such amount after deduction of tax at source. It, in turn would pay such amount to Arvind Brands Ltd. who will thereafter pay the same amount to the landlord. In this case, the rental income was entirely passed on by the assessee to Arvind Brands Ltd. and hence was not reflected as income by it. However, the Tribunal has found it to be entitled to grant of tax credit in respect of the TDS deducted by the Franchisee.

In the case of ACIT v. Mile Stone Real Estate Fund [IT Appeal No. 1144 (Mum.) of 2018, dated 22.09.2020], wherein it was held as under:

This was a case where the assessee was a venture capital trust who had received contributions from the investors and made investments in venture capital undertakings. Based on section 10(23FB) and section 115U of the Act, the assessee acted as a pass through and the income which it generated from venture capital undertakings had to be assessed in the hands of the investors. Therefore, the assessee did not reflect any income to tax but claimed refund of the TDS deducted by the venture capital undertakings.

The Tribunal upheld the assesse’s claim, relying upon the provisions of section 199 and rule 37BA (2).

In the case of ACIT v. Digi JPR Networks (P.) Ltd. [IT Appeal No. 6070 (Mum) of 2014, dated 04.08.2015], wherein it was held as under:

The parent company of the assessee deducted tax at source on the payment which it made to the assessee for onward payment to the broadcasters or the channel companies. The assessee reflected such amounts in the Balance sheet and did not route the same thorough its Profit & loss account. However, its claim for TDS has been upheld by the CIT(A) as well as the Tribunal.

Lastly, in IVRCL-KBL (JV) v. Asstt. CIT [2016] 67 taxmann.com 224/386 ITR 564/239 Taxman 152/386 ITR 564 (Andhra Pradesh), wherein it was held as under:

The assessee was a joint venture who was awarded certain contracts by the Irrigation Department of the Government of Andhra Pradesh. Later these contracts were given by the assessee on sub-contract to one of its constituents on a back to back basis without any margin. Hence, it returned its income as nil but claimed credit in respect of the TDS deducted by the Government on the invoices raised by it which has been allowed by the Court.

Although during the course of hearing, Ld. DR has inter alia urged that the cases as relied upon by the assessee were those where the other person was a resident of India, while in the present case, the other person being the shipping line was a non-resident of India. Although these arguments have been raised for the first time and expressed concern over whether the payments made by assessee to non-resident shipping line have been subjected to TDS and they have filed their return of income in India. In this regard Ld. AR submitted that the other person being a resident or a non-resident of India would not make any difference to the principles as accepted by the High Court and the Tribunal referred to above. In any event of the matter, the assessee has also ensured that the foreign shipping line has deposited due taxes on the payment made by it to the non-resident shipping line. It also understands that, the said non-resident shipping line is complying with the obligations under the Act including filing of its return of income in India. A copy of the acknowledgement for filing of return of income by the foreign shipping line for A.Y 2023-24 has also been annexed for the purpose of reference. Moreover it is not the case of the Revenue that the assessee has not offered the correct income to tax as well as there is no qualification by its Auditor in the audit report.

Therefore considering the totality of the facts and circumstances as discussed by me above, the Tribunal allowed the balance tax credit in respect to TDS of Rs. 95,799/-. Accordingly grounds raised by the assessee stands allowed.

2. A Thumping Judgement

One person said to another:

“The income tax department says we should file taxes with a smile. That’s okay. But, it’s really difficult to wait for TDS credit, with a smile.”

Not only was the Eastern Shipping case full of exciting twists and turns, but also the judgement was equally thrilling. It showed that the assessee must be given entire TDS credit, as far as possible.

Click Here To Read The Full Article