HIGH COURT OF KARNATAKA
CIT, International Taxation
Bovis Lend Lease (India) (P.) Ltd.
IT Appeal Nos. 15 to 22 of 2010
IT Appeal Crob. NoS. 2 to 9 of 2011
March 16, 2012
N. Kumar, J. – These appeals and cross objections ate between the same parties and the questions involved are one and the same. Hence, they are taken up for consideration together and disposed off by this common order.
2. The assessee is a Private Limited Company carrying on the business of project and construction management. On 1.7.2001, the assessee entered into a management services agreement (herein after referred to as “MSA” for short) with M/ S Lend Lease Asia Holdings Private Limited, Singapore (herein after referred to as “LLAH”). The purpose of the agreement was to get the benefit of LLAH’s or its associates’ expertise and experience in management service, administrative services, personnel services, legal services, financial services, marketing services, business operational services, information technology services based on knowledge and expertise gained by the LLAH or its associates’ during its operations of similar business world-wide. In accordance with the terms of the MSA agreement, the LLAH was to provide services like administration, personnel, legal, finance and accounting information, marketing support, insurance matters, treasury management and information technology to the assessee. As per Article 3 of the MSA, the LLAH after providing the services shall submit a statement of service charges to the assessee and the claim has to be settled within 30 days from the time the invoice is tendered. Accordingly, the LLAH, after providing the services, has raised invoices and submitted them to the assessee. The claim has been admitted and accordingly, amounts were debited as expenditure for the relevant financial years under the head ‘Regional Overhead Charges Account’ and corresponding amounts were credited to the ‘Outstanding Expenses Account’. The debit entries have reduced the income of the assessee for the relevant assessment years. After making such credit entries, no tax at the rate in force was deducted by the assessee under Section 195 (1) of the Income Tax, 1961 (hereinafter referred to as “the Act” for short).
3. The LLAH filed applications to the assessing officer in terms of the provisions of Section 197 of the Act. Along with the said application he also furnished copies of the invoices raised by them for payment by the assessee. The assessing authority has issued certificates authorizing the payment without deduction of tax. It is not in dispute that after the issuance of the said certificate the assessee made payments as against each invoices without any deductions.
4. The Authority issued a notice under Section 201 calling upon the assessee to show cause as to why he should not be treated, as an assessee in default under Section 201(1) and also why interest should not be levied under Section 201 (1A) as the assessee has not deducted tax as required under Section 195(1) of the Act at the time of making a credit entry. On receipt of the notice, the assessee submitted its reply. In substance, the defence of the assessee was that the credit to the outstanding expanses account is not to be regarded as credit to the account of the non-resident as the income has not accrued or crystallized. No tax can be charged under Sections 4 and 5 and no tax can be deducted under Section 195 unless income accrues and that happen only when it becomes due and payable. The mere passing of the accounting entry is no evidence of any amount becoming due and payable to a non-resident. The Explanation to Section 195 (1) is not applicable as there is no intention to escape tax deduction by crediting the income to some other account. The credit of the sums payable to LLAH was made after obtaining the certificate for non-deduction of tax. The assessing authority on consideration of all the relevant material held that the intention of the assessee was to get the benefit of LLAH or its associates’ expertise and experience in management services, administrative service etc., and the intention of LLAH was to provide such services. The consideration was paid for such services. The name which the parties give to the transaction which is the source of receipt and characterization of the receipt by them are of little moment, and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances. The covenants of the contract and surrounding circumstances clearly establish the fact that the amounts in question on the payments is for consideration for the services rendered by LLAH to the assessee. Therefore, these amounts cannot be called as reimbursement of expenses. The reimbursement of actual expenditure is also subject to tax deduction under provisions of Section 195 of the Act. The use of the term ‘reimbursement’ will be determinative on the question of payments. He also further held the services which were rendered by LLAH involved training which would clearly ‘make available technical knowledge expertise, skill, know haw’ for purposes of the assessee and hence, they fall into the category of FTS (Fees for Technical Services). The LLAH has to make the technology available to the assessee within the meaning of the MOU. Therefore, the credits/payments clearly fall into the category of FTS and liable to tax and therefore, proceeded to pass an order levying tax and interest Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals).
5. After reappreciation of the entire material on record, the appellant Commissioner found no justification to interfere with the order passed by the Assessing authority and accordingly, dismissed the appeal
6. Aggrieved by the said order the assessee preferred an appeal to the Income Tax Appellate Tribunal. The Tribunal held that the assessing authority who has completed the assessment has held that no tax was required to be deducted under section 195 of the Act. Even no transfer pricing adjustment has been made though the assessee has disclosed in the enclosure attached with the return that it is making reimbursement of costs. It means that the left hand does not know what the right is doing and the revenue in the assessment proceeding has accepted that no tax was required to be deducted at source and such order became final except for the assessment year 2005-2006. The Appellate Commissioner has not invoked its revisionsl jurisdiction to interfere with the said order and therefore the Tribunal held that the lower authorities were not justified in raising the demand under Section 201 of the Act. The Tribunal also held that certificates have been issued under Section 197 (1). The assessee has acted on the basis of the certificates and did not deduct any tax under Section 197 (2) while making payment. It is not open to the authorities to treat the assessee as the assessee in default in the face of those certificates. However, the Tribunal has confirmed the findings of the lower authorities, rejecting the contention of the assessee that no tax was required to be deducted on the ground that the payments were reimbursement of the expenses. Further, it also held that LLAH has provided assistants for various services and as per the agreement, it has to provide education and training to the employees of the assessee. The word ‘make available’ only refers to the willingness of the provider of the services and does not refer to the acceptance of the receiver of the services. Therefore, LLAH is also making available the skill and expertise of the recipient. Therefore, the authorities below were justified in holding that the said consideration paid by the assessee to LLAH attracts tax liability and the assessee ought to have deducted the TDS before making such payment. As the Tribunal recorded a finding that the assessee was not required to deduct tax at source under Section 195of the Act and consequently the assessee cannot be treated as an assessee in default, it was held that no interest is leviable under Section 201 (1A). Therefore, the appeal came to be allowed.
7. The revenue has preferred these appeals challenging the findings of the Tribunal that the assessee was not required to deduct tax at source under Section 195 of the Act and consequently was not liable to pay interest under Section 201 (1A) The assessee in turn has preferred cross appeals in these appeals challenging the findings recorded by all the three authorities that the management services rendered by LLAH did not involve “make available their expertise, skill and know how” and therefore no tax is liable to be paid on the said consideration. They are also challenging the findings of the authorities that the amount paid by the assessee is not towards reimbursement of the expenses.
8. The learned Additional Solicitor General assailing the impugned order of the Tribunal contended that as is clear from Section 197 tax is required to be deducted at the time of crediting the amount in the accounts. The assessing officer had not issued the certificates under section 197 (1) and therefore the assessee was under an obligation to deduct the tax. Secondly he contended that the certificates issued by the assessing officer is not conclusive. In the regular assessment proceedings, it open to the assessing authority to hold that tax is liable to be paid, even though the certificate issued under Section 197 (1) is not cancelled. If in a regular assessment proceedings it is held that the tax is liable to be paid, the certificate issued goes to the background. Therefore, he submits that the Tribunal was not justified in holding that when once the certificate is issued and no steps are taken to cancel the said certificate, during that interregnum, the assessee is not liable to pay tax.
9. Per contra, it was contended on behalf of the assessee that the case of the assessee is that it is the consideration paid towards reimbursement of the actual expenses. There is no element of real income in respect of which tax is payable. In fact, LLAH when they approached the assessing authority for issue of a certificate under Section 197(1) they produced before the authorities, the invoices raised and it is their case also that what is received by them is reimbursement of the actual expenses incurred for the management services rendered. Accepting the said stand, the certificate is issued. Once there is a certificate under Sub-Section (2) of Section 197 no tax is liable to be deducted by the assessee. In that view of the matter, the assessee could not have been treated as an assessee in default and the impugned proceedings could not have been initiated. The Tribunal was justifying is setting aside the entire proceedings on that ground.
10. In support of his cross objections he has contended that though the consideration paid was for rendering managerial services and what is paid is the actual cost of such services and by way of reimbursement the technical know how, expertise and skill is not made available under the terms of contract and therefore, primarily there is no liability to pay tax at all and the authorities have not properly interpreted the terms of the agreement as well as the concept of ‘make available’ in the light of the terms contained in the DTAA and therefore, he submits that, the said finding also requires to be set aside.
11. The learned Additional Solicitor General supports the impugned order.
12. These appeals were admitted to consider the following substantial questions of law:
“(i) Whether the Tribunal was correct in holding that the technical services rendered under a contract between the assessee and its counter part abroad was not liable to deduction of tax at source under Section 195 of the Act, in view of the judgment of this Hon’ble Court in Jindal Thermal Power Company v. DCIT and the judgment of the Apex Court in Ishikawajma Harima Heavy Industries Limited v. Dy. CIT 286 ITR 408?
(ii) Whether the Tribunal was correct in ignoring the findings recorded by the Assessing Officer and Appellate Commissioner that the contract entered into between the assessee and its group company M/s. Lend Lease Asia Holding’s Private Limited, Singapore, was a management services agreement and the payments were for fees towards technical services and the same was deemed income under Section 9 read with Article 12 of the DTAA between India and Singapore and consequently recorded a perverse finding?
(iii) Whether the certificate issued wider Section 197 of the Act, would have any bearing as the same was issued beyond the period, without jurisdiction and without examining the facts of the terms and conditions of the contract and the provisions of the Act?”
The relevant statutory provisions, which are required to be noticed are (1) section 195 (2) and section 197 (1) and (2).
‘Section 195(2);-Where the person responsible for paying any such sum chargeable under this Act(other than…salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, [by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section(l) only on that proportion of the sum which is so chargeable.?
197(l)[Subject to rules made under sub-section(2A), on in the case of any income of any person [or sum payable to any person]income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of Sections 192, 193, 194, 194A, [194C] 194DT [194G], [194H], [194-I], [194J], [194K], [194LA] and 195, the Assessing Officer is satisfied] that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the [Assessing] Officer shall, on an application made by the assessee in this behalf give to him such certificate as may be appropriate.
(2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the [Assessing] Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.’
As is clear from Sub-Section (2) of Section 195 of the Act, if the person responsible for paying any amount chargeable under this Act to a non-resident, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the assessing officer to determine the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted under Sub-Section (l) only on that proportion of the sum which is so chargeable. However, if the assessing authority is of the view that no tax is chargeable, a certificate to that effect could be issued to the person responsible for making payment. Once a certificate is issued, the liability of the person responsible for paying under the aforesaid provision ceases and without any deduction he may make payment to the non-resident. Insofar as Section 197 is concerned it provides for a similar application being made by the recipient of the income. On such an application being made under Section 197 (1), the assessing officer can give to him such certificate as may be appropriate. If such certificates states no tax is deductible, until such certificate is cancelled by the assessing officer, the person responsible for paying the income is under “No obligation” to deduct tax while making payment. In fact the language employed is “Shall”. Therefore, it is mandatory in nature. What is the effect of such a certificate was the subject matter of interpretation.
13. The Delhi High Court in the case of Areva T& D, SA v. Asstt. DIT  200 Taxman 84/10 taxmann.com 379 dealing with the nature and effect of certificates under Section 197 has held that the said certificate is interim in nature and in fact the same could not have been anything else, but interim in character as the scope of Section 197 is limited. On a conjoint reading of Sections 195 and 197 of the Act, if any opinion is expressed at the time of the grant of certificate, it is tentative or provisional or interim in nature and the same does not debar the assessing authority from initiating proceedings under Section 147 of the Act on the ground that there has been a change of opinion.
14. In Aditya Birla Nuvo Ltd. v. Dy. CIT  200 Taxman 437/12 taxmann.com 141the Bombay High Court held as follows :-
“A certificate under Section 195 (2) creates immunity to the payer under Section 201 for non-deduction tax. The order under Section 195(2) is tentative in nature and does not have any effect beyond providing immunity under Section 201 and the immunity steps at that stage and does not preclude the assessing officer to either reexamine the chargeable of income in regular assessment proceedings or to recover the taxes from the prayer in his representative capacity. Neither words used in the statute nor by any reasonable interpretation, it can be inferred that once the certificate under Section 195 (2) is issued, the assessing officer is precluded from proceeding against the prayer in his representative capacity. Liability of an assessee under Section 195 is in his capacity as a prayer, whereas, the liability under Section 163 is as a representative assessee of the non-resident with all attendant rights and obligation as per the provisions contained in Section 161. A representative – assessee cannot escape liability on the ground that the assessee are a payer was not required to deduct tax at source as per the Certificate granted under Section 195(2) of the Act.”
However, in the facts of the said case, it was held as follows:-
“The certificate obtained by Indian Rayon by furnishing incorrect facts and by making misleading statements would not precluded the Revenue from initiating proceedings under Section 163 of the 1961 Act, because, the facts discovered subsequent to the Certificate prima facie reveal that it is AT&T USA (now NCWS) which had subscribed to the shares of the JVC and that the said shares were owned by AT&T USA and not by AT&T Mauritius. Consequently, on sales of the shares, capital gains accrued to AT&T USA (now NCWS) could be recovered form Indian Rayon as agent of NCWS. Since the proceedings under Sections 163 and 195 operate in different fields and in the present case, there is no material on record to suggest that the Certificate under Section 195(2) was issued after considering the applicability of Section 163, in our opinion, initiation of proceedings under Section 163 of the Act cannot be faulted.”
Therefore, it is clear that both the payer and the recipient of the payment can approach the Assessing Authority under the Act seeking for a certificate providing for exemption from payment of tax, i.e. exemption from deducting tax at source. Once such a certificate is issued, there is no obligation on the part of the payer to pay tax. In view of the fact that the word used is “shall”, if the recipient were to obtain such a certificate and make it available to the payer, then, the payer shall not deduct tax at source.
15. Under the aforesaid provision, there is no obligation on the part of the payer to pay tax as long as the said certificate is in force and rest cancelled. Even if tax is payable under the Act, the payer cannot be treated as an assessee in default. If in a regular assessment, an order is passed holding that the said income is liable to tax, the issue of such a certificate under the aforesaid provision would not come in the way of levying and collecting tax. However, the payer cannot be treated as an assessee in default and he cannot be proceeded with. It is because as long as the said certificate stands, the payer shall not make any payment and shall not deduct from the consideration payable to the recipient. However, the said certificate is tentative or provisional or interim in nature. It does not have any effect beyond providing immunity under Section 201 of the Act. The immunities stop at that stage. It does not preclude the Assessing Officer to either reexamine the chargeability of income in a regular assessment proceedings or to recover taxes from the payer in his representative capacity. It is only in the nature of a protection against the consequences that may follow out of non-deduction.
16. In the instant case, it is the consistent stand of both the assessee and LLAH that the consideration paid under the agreement is by way of reimbursement of actual expanses. Therefore, even when a credit entry was made in the accounts as the assessee was treating it only as a reimbursement of actual expenses, he was under no obligation to deduct tax from the said amount as the said amount did not represent income. When LLAH approached the Assessing Officer and made the aforesaid representation, a certificate under Section 197(1) came to be issued. On the face of the certificate issued under Section 1971(1) being made available to the assesses by LLAH, the assessee could not have deducted tax at source. Therefore, he cannot be treated as a defaulter under law. He is not an assessee in default as understood under Section 201 of the Act.
17. Therefore, the entire proceeding initiated on that basis is unsustainable, illegal and the Tribunal was justified in setting aside the same. In fact, the Tribunal while coming to the said conclusion has taken, note of the fact that the Assessing Authority while passing an assessment order did not find fault with the assessee in not complying with the requirement of Section 195 and consequently, did not disallow the said expenditure. In fact, the Assessing Authority accepted the case of the assessee that the said consideration represents reimbursement of the actual expenditure and granted the said benefit. The jurisdictional Commissioner did not initiate any revisional proceedings to interfere with the said order. It is in that context the Tribunal was justified in holding that the left hand does not know what the right hand is doing. Therefore, in the facts of the case, the authorities were estopped from initiating proceedings under Section 201 of the Act. Therefore, the substantial questions of law are answered in favour of the assessee and against the revenue.
18. Insofar as the subject matter of the cross appeal on merits is concerned, if the assessee was not required to deduct tax at source and could not be declared as an assessee in default, the question whether the payment was in the nature of a fee for managerial services or in the nature of reimbursement for the expenses incurred or whether Double Taxation Avoidance Agreement overrides the provisions of the Act and whether the expertise were made available for consideration could not be gone into. Therefore, the said findings, which were recorded by the authorities below, are not inquired into. It is made clear that if on the basis of such findings, if any claim is made, it is open to the assessee to urge the grounds which he has urged in this cross objection and the authority shall decide the said question afresh without in any way being influenced by the findings recorded in these proceeding or by the Tribunal, that would meet the ends of justice.
19. In the results, all the appeals and cross objections are dismissed.