During last year’s audit season, we uncovered a compliance gap that nearly cost one of our importer clients a massive ₹5.4 Lakhs in additional tax.

The culprit? Shipping Line Charges.

If you are an importer, you deal with shipping agencies and freight forwarders daily. But are your accountants deducting TDS correctly? Here is how a simple oversight almost became a very expensive penalty, and how we managed to save the client at the last minute.

📉 The ₹18.21 Lakh Disallowance Trap

Under Section 194C of the Income Tax Act, 1961 (which is now seamlessly transitioning into Section 393(1) [Table: S.No. 6(i)] and 393(4) [Table: S.No. 8] of the Income Tax Act 2025), any payment made to a contractor for “carrying out any work”—including transportation and freight—attracts TDS.

During the audit, we noticed the client had paid a substantial amount in shipping line charges to various agencies without deducting a single rupee of TDS.

Under the law, failing to deduct TDS on a domestic contractor payment gives the tax department the right to disallow the expense entirely.

Here is the exact math of the damage they were facing:

• Shipping Charges Disallowed: ₹18.21 Lakhs

• Artificial Increase in Taxable Income: ₹18.21 Lakhs

• Additional Tax Liability: ₹5.4 Lakhs

Because someone in the accounts team assumed shipping charges were exempt, the business was staring at a completely avoidable cash outflow.

The “Save”: The Exemption Certificate

Before letting the client absorb the ₹5.4 Lakh hit, we dug into the specific shipping lines they were using.

Here is the industry secret that many junior accountants miss: Usually, all large, international shipping lines operate with a TDS Exemption Certificate. Because their shipping income is often taxed under different presumptive tax rules (like Section 172 for non-residents), the tax department grants them a formal “Nil” or “Lower” deduction certificate.

We immediately contacted the shipping agencies, procured their official TDS exemption certificates for that specific financial year, and applied them to the client’s file.

The Result? Because the shipping lines possessed valid exemption certificates, our client was legally not liable to deduct TDS on those specific transactions. The ₹18.21 Lakh disallowance was completely reversed, and the ₹5.4 Lakh tax liability was wiped out.

🎯 The Lesson for Importers

If you are paying shipping line charges, you cannot just assume TDS doesn’t apply. You must enforce one of two rules in your accounts department:

1. Deduct the TDS before releasing payment.

2. Collect the Exemption Certificate from the shipping agency before you clear their invoice.

Do not wait for your tax audit to find out you are missing documentation.

At CFO Emeritus, we ensure our clients have ironclad vendor compliance so they never pay a rupee more in tax than they legally owe.

📩 Are your import logistics fully compliant? Let us review your freight ledgers before the assessing officer does. Write to us at office@cfoemeritus.com