ITAT of Chennai Removes Disallowance on Freight Charges Paid to Korean AE

The disallowance of ocean freight charges paid to Korean-associated enterprises (AE) would have been deleted by the Chennai Bench of the Income Tax Appellate Tribunal (ITAT).

According to Article 8 of the DTAA (Double Taxation Avoidance Agreements) of India-Korea, the ship’s rentals would be counted in the profit type from the ships or aircraft operated in the international traffic which the company carries of the contracting state. The sum is solely taxable in contracting states, not in India.

The taxpayer/petitioner company is engaged in the business of designing, building, installing, and maintaining engineering plants, with a specialization in thermal and coal power plants. The taxpayer company yields engineering services to its related companies, Doosan Heavy Industries & Construction Co. Ltd.

The taxpayer performs the business of execution of turnkey projects for steam generating equipment, supply of spares, and furnishing the relevant related services. In turn, the taxpayer paid ocean freight charges to its AE, M/s.Doosan Corporation Korea, but no TDS was deducted. The DRP rendered the Assessing Officer (AO) to disallow such ocean freight charges which the taxpayer paid to AE by inserting the provisions of Section 40(a)(I).

The Ocean Freight charges are paid via taxpayer to M/s. Doosan Corporation Korea towards the non-deduction of TDS by inserting the provisions of Section 40(a)(i) would have been disallowed by AO.

Read also: Calcutta HC Rejects Tax Demand Order As Ocean Freight Out from GST Ambit

The assessee maintained that ocean freight rates would not be covered within the scope of fees towards the technical services, royalty, or beneath the India-Korea DTAA.

The taxpayer mentioned that the ocean freight services are counted as the business furnished under Article 7 of the DTAA. As M/s. Doosan Corporation Korea does not secure any business activity in India, it does not subject to tax in India.

The taxpayer would not be responsible to deduct TDS and, hence, there is no disallowance by invoking the provisions of Section 40(a)(i) of the Income Tax Act, the tribunal held.