Subsidiary reimburses non-resident parent company for mobilisation and demobilisation charges – if TDS not deducted on payments, provisions of Sec 40(
The facts of the case
Assessee/appellant in the instant case was a wholly owned subsidiary of Van Oord ACZ Marine Contractors BV, Netherlands [VOAMC]. It executed a dredging contract at Port Mundra for Adani Gujarat Port Ltd. in the relevant previous year and since it followed completed contract method of accounting it debited a sum of Rs.8,65,57,909/ – in the P&L a/c of relevant previous year reimbursed to VOAMC on account of mobilisation and demobilisation expenses pertaining to dredging at Mundra Port. These expenses included transportation of dredger, survey equipment and other plant and machinery from countries outside India to the site in India and re-transportation of the same on completion of the contract, including fuel cost incurred on transportation. The aforesaid services were contracted by VOAMC and were provided by various non-resident parties. Assessee applied to DCIT, International Taxation, New Delhi u/s 195(2) for Nil tax witholding certificate with respect to reimbursements to VOAMC for mobilisation and demobilisation charges which was rejected, and instead DCIT directed assessee to deduct TDS from the reimbursements on 11% of the amount treating it as profit of VOAMC as latter had received income from assessee for services rendered in india which led to accrual of income to VOAMC thus was liable to be taxed. Subsequently A.O. also held that business connection between assessee and VOAMC was established and since latter being a foreign Co. had rendered service to an Indian Co. i.e. assessee, it was liable to tax in india for reimbursements made to it by the assessee and since assessee failed to deduct TDS on such payments as per Sec.195, deduction as claimed by assessee of entire mobilisation and demobilisation charges were disallowed by A.O. u/s 40(a)(i).
Aggrieved by the order, assessee took the matter in appeal to CIT(A) who however affirmed the order of A.O. holding that there is no evidence brought to show that reimbursement did not constitute income in the hands of VOAMC and further held that the real transaction relating to the aforementioned services was between assessee and non resident service providers and not VOAMC as claimed and therefore failed to perform its duty to deduct tax at source.
Consequently assessee brought the matter in front of the Tribunal on a number of grounds which are as under :
1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the disallowance made by the Assessing Officer in respect of claim of mobilization and demobilization expenses of Rs. 8,65,57,909/ -, reimbursed by the appellant to Van Oord ACZ Marine Contractors BV, Netherlands, (VOAMC), invoking the provisions of section 40 (a) (i) of the Act.
2. That the Commissioner of Income Tax (Appeals) erred on facts and in law in not holding that the provisions of section 40 (a) (i) did not apply, since the aforesaid amount reimbursed by the appellant did not constitute income of VOAMC liable to tax in India and consequently the appellant was not required to deduct tax at source under section 195 of the Act.
2.1 Without prejudice, that the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the disallowance under section 40 (a) (i) had to be restricted to only that part of the mobilization and demobilization expenses reimbursed by the appellant which related to activity carried out in the Indian territorial waters.
3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that whether VOAMC claimed deduction of the aforesaid amount paid by that company to non-resident service providers was irrelevant for determining the appellant’s obligation to deduct tax at source from the aforesaid amount reimbursed by the appellant to VOAMC.
4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in alleging that the real transaction relating to mobilization and demobilization of dredgers was between the appellant and non-resident service providers (and not VOAMC) and that the appellant failed to discharge its obligation of deducting tax at source in respect of payment made in respect of the aforesaid transaction with the non-resident service providers.
4.1 That without prejudice, the Commission of Income Tax (Appeals) on the basis of orders dated 4.3.02 and 22.11.02, passed under section 195(2) of the Act, having observed that VOAMC had a PE in India and the appellant had made payment to VOAMC for mobilization and demobilization services, fell in error in observing that the appellant paid the aforesaid amount to the non-resident service providers and was required to deduct tax at source in respect of such payment not appreciating that there was no privity of contract between the appellant and such non-resident service providers.
5. Without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the appellant having deducted tax at source under section 195 in respect of the sum of Rs. 6,98,26,456, included in the aforesaid amount of reimbursement of Rs. 8,65,57,909, in terms of the order dated 22.11.2002 passed u/s 195 (2) by DCIT, Circle-2, International Taxation New Delhi, no
disallowance under section 40 (a) (i) of the Act could be made in respect of said amount of Rs. 6,98,26,456.
6. Further without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the aforesaid claim of reimbursement could not be disallowed invoking the provisions of section 40 (a) (i) of the Act, in view of the provisions of Article 24 of the India Netherlands Double Taxation Avoidance Agreement relating to non-discrimination.
The AR largely argued on the grounds as mentioned above whereas the DR for revenue countered the arguments largely on the basis that assessee was in India and made payments for services rendered in India regardless of mobilisation and demobilisation which were not income earning economic activity but only enabled providing of services in India. He also dwealt on other aspects on which appeal was raised including matters related to DTAA between India and Netherlands.
However, the Tribunal having heard the rival submissions, restricted itself to the basic question of allowability or disallowability of deduction of reimbursement made by assessee to VOAMC with respect to mobilisation and demobilisation charges as claimed by assessee which had been disallowed by the authorities below. For this purpose it first went into the relevant provisions i.e. 40(a)(i) and 195 which are as under. As per Sec. 40(a)(i) :
(i) Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter
Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted.”
Sec. 195 provides for deduction of tax at source in case of payments made outside India or in India to non resident or foreign Cos.
A combined reading of the two provisions bring out the proposition unambiguously that where any sum chargeable to tax is payable outside India or in India to a foreign Co., the payer is under a duty u/s 195(1) to deduct TDS failing which deduction of such sum is not allowable at the time of computation of income of the payer in terms of Sec.40(a)(i) . It is only when non-deduction of such TDS or deduction at lower rate is authorised by the A.O. u/s 195(3) in pursuance of an application u/s 195(2) that the same can be done by the assessee, otherwise it has to face the consequences as per Sec.40(a)(i) in case of non deduction of TDS.
The Tribunal largely relied on the decision of Apex Court in the case of Transmission Corporation of AP Ltd. & Another v/s. CIT (2002-TIOL-471-SC- IT) in which the apex court went into the scheme and purpose of deduction of tax at source u/s 195 and laid down that Sec. 195 merely requires deduction of tax at source on amount paid outside India or inside India to a non resident or foreign Co. and which is chargeable to tax u/s 4 of the IT Act.
The Bench further clarified that this was merely tentative and was subject to final regular assessment thus rights of parties were not adversely affected. Moreover there are adequate safeguards for the payee or recepient u/s 195(2), (3) and 197. Where a payee or recepient is of the view that the amount paid is not chargeable to tax or is to be charged at a lesser then the prescribed rate, it can apply u/s 195(2) to the A.O. for determination of the same and the payer shall deduct or not deduct such tax as the case may be as per A.O.’s determination. But where such application is rejected or no application is made, the payer is under a mandate to deduct the tax at source at the prescribed rate and failure to do that attracts Sec. 40(a)(i) which calls for disallowance of any deduction claimed by the payer unless TDS is deducted from the paid amount in order to ensure compliance with the provisions of Sec.195. The mandate of payer is restricted to simply this and he is not supposed to go any further then this and try and deduce whether such payment is income in the hands of payee/non resident which is chargeable to tax i.e. payer is not to step into the shoes of A.O. and simply deduct TDS on sums which fall within the four walls of deduction u/s 195.
Coming to the case in hand, the Tribunal held that the assessee paid a sum to VOAMC for services rendered for mobilisation and demobilisation of dredgers which was chargeable to tax and thus TDS was to be deducted by it u/s 195 but which it failed to do and thus deduction claimed by it at the time of computation of income was rightly disallowed u/s 40(a)(i) and accordingly upheld the order of CIT(A).
It held that there was no need for it to go into the nature of the sum paid or taxability of the sum in the hands of recepient i.e. VOAMC. The only issue to be seen was whether provisions of Sec.195 have been complied with or not and nothing else in terms of Sec.40(a)(i). Thus the Tribunal did not go into the merits of the case regarding nature or taxability of the sum paid by the assessee which was totally irrelevant for deciding the issue with respect to Sec. 40(a)(i). However since assessee claimed that it deducted TDS on a part of the total amount of. Rs. 86557909/- under consideration, Tribunal directed the A.O. to verify the claim and give benefit of the same to the assessee if the claim is found to be correct.
Thus when it comes to applicability or otherwise of Sec.40(a)(i) with respect to deduction claimed in case of payment made outside India or within India to a non-resident or foreign Co., the only thing to be taken into account is whether provision of Sec. 195 has been adhered to or not i.e. TDS has been deducted or not on any sum paid which is chargeable to tax u/s 4 and nothing else. The payer in all such cases is under a duty to deduct TDS failing which provision of Sec.40(a)(i) will be attracted and A.O. comes under an obligation to disallow such claims.