National Aviation Co. of India Vs. Dy. Commissioner of Income Tax ITAT Mumbai)- When the assessee is prevented from deducting tax u/s 195, the question of his not performing the obligation under law does not arise and thus he cannot be held a defaulter. The assessee cannot be held to be an assessee in default in terms of section 201 and 201(1A) of the Act. This is a case of impossibility of performance and the assessee is released from the obligation and hence the assessee is not an assessee in default.
INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH “L”, MUMBAI
Before Shri R.V. Easwar, Hon’ble President and Shri J. Sudhakar Reddy, Accountant Member
I.T.A. No. 6698/Mum/2002.
Assessment Year: 2001- 02.
|National Aviation Co. of India (Formerly known as Air India) Air India Building, Nariman Point, Mumbai -400 021.
|Dy. Commissioner of Income-tax, TDS, Circle-I, Mumbai|
Appellant by : Shri Arvind Sonde and Shri Jitendra Sanghvi.
Respondent by : Shri Narender Singh.
Date of Judgment: 3rd Nov, 2010.
O R D E R
Per J. Sudhakar Reddy, A.M.
This is an appeal filed by the assessee directed against the order of the CIT(Appeals)-XXXI, Mumbai dated 30th Sept., 2002 for the assessment year 2001-02.
2. The first appellate authority had dismissed the appeal filed by the assessee, against the order u/s 201 and 201(1A) of the Income-tax Act, 1961 dated 14-02-2001 passed by the DCIT (TDS), Circle-I, Mumbai.
3. The facts of the case are brought out in the order of the CIT(Appeals) which are extracted below for ready reference :
“2.1 the Air India has taken in December, 1995, three aircrafts on Wetlease from M/s Caribjet Inc. in accordance with Wetlease Agreement dated 22nd October, 1995. Because of certain non-compliance/defect, etc. Air India terminated the Wetlease on 4th September 1996. According to Caribjet the termination of the Wetlease Agreement was not correct and demanded on 7th January, 1997 reference of the dispute to arbitration in accordance with the lease agreement.
2.2 The agreement provides for arbitration to be governed by the English laws and accordingly, London Court of International Arbitration was agreed as the venue as the venue for arbitration. An Arbitral Tribunal after hearing at length oral as well as written submissions of both the parties ruled in the Award dated 19-1-1999 that Air India has wrongfully terminated Wetlease Agreement with Caribjet.
2.3 Air India filed an appeal in London Commercial Court against the said award. After hearing the appeal, court rejected Air India’s application for leave to appeal as the judge was not satisfied that the Tribunal was “obviously wrong” in its conclusion on the liabilities. Thereafter, Arbitral Tribunal heard the matter of determination of quantum in June 1999. The Arbitral Tribunal determined that Caribjet will receive a total amount of US$ 24.6 millon (termination cost US $ 2.2 million and termination losses US $ 22.4 million) and after setting up the amounts payable to Air India the Tribunal has awarded damage to Caribjet of US $ 23.6million (approximately Rs.102.6 crore). Soon after this award, M/s Caribjet moved the court in England on December 6, 1999 to enforce the award on Air India as a decree of the English Court since the Wetlease Agreement was governed by the English Law and the arbitration was conducted under the Uncitral Rules in England. The Air India put forth the evidence/argument that it was unable to release the money under the award until and unless the Government formalities including in RBI approval to remit the money and the clearance from the I.T. authorities in the form of NOC is obtained.
2.4 An application was made to RBI on December 16, 1999 for their approval for payment of the US $ 23.6 million to M/s Caribjet. The RBI vide their letter December 21, 1999 gave their approval subject to an NOC from the I.T. Department under the Income Tax Act, 1961. An application was, therefore, made to the Dy.CIT, Spl. Range-1 on December 21, 1999 for issuance of NOC for remittance of the award amount. After making an enquiry, on December 30, 1999, AO passed an order u/s 195(2) asking him to remit the whole amount into the Govt. Treasury as the TDS liability is more than the amount of the Award. The details of the working of the TDS is as below :
|The lease rent paid earlier||
|The damage awarded by the|
(required to be deducted)
2.5 The Court of Appeal in London heard Air India’s application on January 14 and 20 of 2000 wherein Air India submitted that “in view of sec.195(2) order passed by the DCIT of Income tax Department in India the Air India should be permitted to deduct such tax from the Award amount. However, M/s Caribjet argued that Article 11.1 of the Agreement did not survive the reputation of the Wet Lease Agreement by Air India and therefore Air India cannot deduct any amount of tax from the Award on quantum.”
2.6 Pending stay Air India was directed by the court of appeal in London to remit a sum of US $ 21.6 million (US $ 23.6 million minus US $ 2 million set apart for cost and other court orders) in the Escrow Account maintained in the names of the Solicitors of both the parties. The Court aso referred the tax dispute as a fresh dispute to the same Tribunal which determined the quantum damages. In view of the above fact, after obtaining approval from the RBI an Escrow Account was opened and US $ 21.6 million was remitted on 14-2-2000 with approval of the RBI. The second reference to the Arbitral Court was informed to the I.T. Department simultaneously for their representation before the court, if any. After hearing Air India’s representative and the Caribjet and the I.T. authoribities, the Tribunal, in a majority decision (two out of the three arbitrators) on May 22, 2000, agreed with the view of M/s Caribjet that clause 11.1 did not survive the repudiation of the Wetlease by Air India and the said clause was inapplicable to award on quantum damage and, therefore, Air India cannot deduct the amount, directed by the tax authorities, from the amount awarded by the Tribunal. The copy of this award was communicated to the Income Tax Department vide their letter No. HQ/9-59/1458 dated May 24th, 25th , 2000.
2.7 Even after the unfavorable award was published, the Air India applied to the commercial court in England for leave to appeal against the Tribunal’s award. After hearing Air India, court did not grant permission to appeal on the ground that the majority was not “obviously wrong”. The Court also granted M/s Caribjet’s motion for an order instructing the bank holding Escorow Account to hold the money solely for the benefit of M/s Caribjet. Consequent upon this decision by the court, the amount in the Escrow Account was held by M/s Caribjet as the sole beneficiary and the entire quantum amount stood remitted to M/s Caribjet by a court order.”
4. As already stated, on an application made by the assessee the AO passed an order u/s 195(2) of the I.T. Act on 30-12-1999, wherein it was determined that the assessee should deduct tax at source of US$ 3,55,61,006, with appropriate applicable grossing up. However, as the amount payable by Air India to M/s Caribjeb was only US $ 2,36,43,851, Air India was directed to deduct the same and pay into the Government Treasury. An appeal was filed by Air India against this order passed u/s 195(2). The CIT(Appeals) held that under section 248 of the Act, the appeal is maintainable only if the amount has been deducted and paid in accordance with section 200 and the appeal is filed on time. As in this case no tax was deducted and paid to the Government Treasury, the appeal was held to be invalid and non-maintainable. The assessee carried the matter further in appeal. The L-Bench of the Tribunal in ITA No.5428/Mum/2002 for the assessment year 2000-01 upheld the findings of the CIT(Appeals).
5. In the impugned order u/s 201 and 201(1A) of the Income-tax Act, 1961, the AO at page 9 observed that, the pith and substance of the assessee’s arguments is that, it tried its level best to convince the Tribunal/English Court, that it is under the statutory obligation under the Indian Income Tax Act, 1961, to deduct taxes from the quantum award payable to M/s Caribjet. However, the Court held that M/s Air India has no right to deduct taxes. The AO held that M/s Air India, on their own had submitted an application for determination of tax liability out of the remittances to M/s Caribjet and have obtained an order u/s 195(2) which, as per the AO has been accepted. He held as follows :
“Having filed an application and accepted the order, the plea that they were prevented by English Court from deducting the amount, would not enable M/s Air Indi to take the plea of English decisions being as reasonable cause.
It is sufficient for me to conclude that M/s Caribjet earned sufficient profits due to transactions with Air India and such profits are taxable in India. If Air India has to pay compensation / damages due to its conduct to third parties, this in itself will not absolve it from its responsibility of deducting the due taxes or payment thereof as required by law.
The liability of Air India is clear and unambiguous. They have to pay taxes and recover the same from M/s Caribjet through appropriate means. Sovereign dues not be waived, on the plea that the same has been paid to the third parties. Therefore, the plea of Air India that it has paid all the amounts to M/s Caribjet, would not absolve it from the determined tax liability. In view of the above, I hold that Air India is to be treated as an assessee in default and all the consequences of paying the tax, interest u/s 201(1A) and levy of penalty u/s 221 will follow.”
Thereafter the AO raised a total demand of Rs.101,16,74,416/-. Aggrieved, the assessee carried the matter in appeal.
6. The first appellate authority after considering the arguments of the assessee held that he need not adjudicate ground Nos. 1 to 7 raised by the assessee, which are on the issue of chargeability to tax of the sum paid to M/S Caribjet, for the reason that the order passed u/s 192(2) of the Act has become final. He relied on the decision of the Hyderbad Bench of the Tribunal in the case of Cherminor Drugs Ltd. vs. ITO 70 TTJ 936. At para 3.2 page 6 of his order, he held as follows :
“In the present case though the appellant has moved application u/s 195(2), but he failed to file a complete appeal in time. Therefore, the issue which should have been decided in the appeal against the order u/s 195 cannot be raised and decided in this appeal. Otherwise it will make the section 195(2) and 248 redundant which is not the intention of the Statute as observed by the ITAT Hyderabad (supra). Accordingly, these grounds i.e. Grounds No.1 to 7 are not adjudicated and dismissed.”
On the other grounds he held the issues against the assessee and dismissed the appeal.
The learned counsel for the assessee, Mr. Arvind Sonde, narrated the facts of the case. He submitted that the first appellate authority has appropriately summarized the facts. He submitted that though no assessment year is mentioned to the order u/s 201. As the order was dated 14th Feb., 2001 the assessee has mentioned the year as assessment year 2001-02. Further, to support this, he submitted that the amounts were withdrawn by Caribjet from the Escrow account on 19-07-2000 and thus the assessment year would be 2001-02 only. Thereafter he took this Bench through the order of the CIT(Appeals). The learned counsel challenged the order passed u/s 201 as confirmed by the first appellate authority, by raising the following propositions of law.
8. The first proposition was that the assessee was not the assessee in default, in view of the specific wording to section 201 as it existed prior to the amendment vide Finance Act, 2008 w.r.e.f. 01-06-2002. He vehemently contended that prior to the amendment “failure to deduct at source” does not permit treating an assessee, as an assessee in default. He referred to section 200 and pointed out that it refers to only those persons who had deducted tax. He said persons “who has deducted” means, present and continues and persons who “failed to deduct” are not covered by these wordings in the statute. In support of his argument he referred to section 198, where the words used are “actually deducted” and to section 205 where the words used is “deductible” and argued that, the legislature has consciously used different words in each section. Thus he submits that as the assessee has never deducted any tax, he cannot be held to be an assessee in default, in view of the specific wording in section 201 read with section 200(1).
9. The second proposition raised by the learned counsel is that section 195(1) applies only to any sum chargeable to tax, under the provisions of this Act. He argued that a failure can be only with respect to an obligation and an obligation u/s 195 arises only if the amount in question is income. Mr. Arvind Sonde submits that the payment made under an arbitral award is a judgment debt and hence not income and hence there is no failure in the obligation to deduct tax at source. For this proposition he relied on the following case laws:
2. Mahendra Singh Dhantwal vs. Hindustan Motors Ltd. 152 ITR 68
3. Saroj Kumar Maheshwari vs. Hindusthan Motors Ltd. and another 154 ITR 363 (Cal.).
4. S.S. Miranda Ltd. vs. Shyam Bahadur Singh 154 ITR 849 (Cal.)
5. Islamic Investment Co. vs. Union of India and another 265 ITR 254 (Bom.). He also relied on some other case laws which we would be discussing in this order.
10. He further submitted that an arbitration award given by a foreign Tribunal takes the form of a judgement debt under the Indian Law, as it is a deemed decree. For this proposition he relied on the following case law: AIR 2001 (SC) 2293 M/s Fuerst Day Lawsons Lt. vs. Jindel Export Ltd. AIR 1999 (SC) 3923 Thyssen Stahlunion GMBH vs. Steel Authority of India Ltd. He also relied on certain other case laws which we would be dealing in this order. He vehemently contended that an award by a Foreign Tribunal is nothing but a judgement debt and hence not income and hence the assessee is not required to deduct tax at source. Secondly he submitted that, from a judgment debt, only those items specified under Civil Procedure Code can be deducted and as Tax withholding is not an item mentioned in the Civil Procedure Code, the same cannot be deducted. He also relied on certain other case laws which we would be dealing in this order.
11. The third proposition argued by Mr. Sonde is that proceedings u/s 201 treating the assessee as an assessee in default, as well as u/s 163, treating the assessee as a representative assessee, cannot be parallely pursued by the Revenue. He submitted that the Revenue has to choose one of the paths.
12. He pointed out that the order u/s 201 was passed on 14-02-2001 and the order u/s 163 was passed on 6-3-2003. He vehemently contends that the assessments cannot be made on duel capacity and if the assessee is treated as an agent then he cannot be called upon to deduct tax at source. He relied on the judgment of the Hon’ble Calcutta High Court in the case of Bunge & Co. 79 ITR 93. He brought to our notice that the language of section 195 had undergone a change and the wording “unless he is himself is liable to pay any income-tax” was omitted with effect from 1-6-1987 by the Finance Act, 1987. Nevertheless he argued that in the case of Bunge & Co. 79 ITR 93, the Hon’ble Court did not rest its decision only on these words of section 195 and submitted that the case law is still relevant. He further relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Primier Tyres Ltd. 134 ITR 17 (Bom.). He contended that the omission of the words from 1-6-1987, was only to facilitate the accelerated recovery of tax. He pointed out that in this case of the assessee it has not accepted that it is an agent of the non resident.. He contended that the Revenue has to choose whether to proceed with section 201 or section 163.
13. The last proposition was that section 195A does not apply to the assessee. He pointed out that the CIT(Appeals) has come to a conclusion that the present case falls within the words “other arrangement”, occurring in that section as in his opinion the agreement is no more valid. He submitted that this is a judgment debt and in such a situation it cannot be said that there is an arrangement with any party or person. He contends that this is an obligation under law and hence it does not fall under the term “arrangement’ in sec. 195A, as a legal obligation cannot be a arrangement.
14. The learned DR, Mr. Narendra Singh, on the other hand, vehemently contradicted the arguments of the learned counsel for the assessee and submitted that the first appellate authority was right in holding that, he need not decide ground No. 1 to 7 raised by the assessee. He pointed out that under section 248, an appeal against an order u/s 195 can be valid, only if tax is paid thereon and as in this case the tax has not been paid, the appeal against the order passed u/s 195 was dismissed by the first appellate authority. He pointed out that the Tribunal has confirmed that order of the first appellate authority. He contended that the first appellate authority has rightly not decided these issues, as otherwise the appeal provided for u/s 248 against orders passed u/s 195(2) becomes superfluous. He submitted that there is a purpose in the legislature providing for right of appeal against an order u/s 195 and the issues arising therein, i.e. as to whether the amount in question is chargeable under the Act, should be decided in that appeal only and not in the appeal on hand. Alternatively he contended that, if the Tribunal feels that the CIT(Appeals) should have decided these issues, then the matter may be set aside to the file of the CIT(Appeals).
15. The learned DR contended that the assessee in this case has not only violated the orders of the Income-tax authorities but has also violated the orders of The Reserve Bank of India. He submitted that the RBI clearance clearly mentioned that the remittance is subject to income-tax clearance. He strongly contended that no where in the award, it has been decided as to whether the amount in question is taxable or not. He submitted that Senior Income-tax Officials have accompanied the assessee to U.K., during the arbitration proceedings, only in an advisory capacity and that they had no other role. Thus it cannot be said that the Income-tax department is involved in the arbitration.
16. Addressing the argument that the assessee cannot be treated as the assessee in default, for the reason that it did not deduct tax at source, he relied on the decision of the Special Bench of the Tribunal in the case of Mahendra and Mahendra 313 ITR (AT)263 and submitted that this issue is covered against the assessee in this decision. On the proposition that an “AWARD” is not an income, he submitted that nowhere in the various decisions cited by the assessee, a proposition has been laid down by any of the Courts that the award is not income. The proposition laid down was that, deduction of tax at source is not permissible in case of a judgment debt in view of the provisions of the Civil Procedure Code. Mr. Narendra Singh submitted that all foreign awards cannot become a decree of a Indian Court and thus are not judgment debts and that for that a method has been provided u/s 48 of the Arbitration Act. He pointed out that in this case the “award” has not come before any Indian Court. He vehemently contended that, if the assessee’s contention that the award given by a foreign Tribunal automatically becomes a judgment debt is accepted, then all foreign awards, given by even small tribunals or arbitrators in foreign countries including Banana Republics would be claimed as judgment debts and this would lead to to a very undesirable situation for the Country.. On the issue whether there can be simultaneous proceedings u/s 163 of the Act as well as u/s 201 of the Act, he submitted that the duty cast upon the assessee to deduct tax at source, is entirely different from the duty cast on the assessee to be an agent of the foreign principal and to file a return of income in that capacity. He submitted that these are two different things and when assessment is made u/s 163, the assessee would get credit of the TDS made u/s 195. He submitted that under section 163, the AO only assesses the income of the foreign principal and in that assessment many issues would come up and the assessee would be free to agitate the same. On grossing up, the learned DR has submitted that the assessee has paid net of taxes to M/s Caribjet and hence grossing up is required.
17. The learned counsel for the assessee in his rejoinder, agreed that the first proposition canvassed by him i.e. if the assessee did not deduct tax at source, it cannot be held as an assessee in default, is covered against him by the decision of the Special Bench of the Tribunal in the case of Mahendra & Mahendra (supra). Nevertheless he argued that the Special Bench decision on the issue is wrong ,as it did not consider certain arguments. On the issue of violation of RBI orders, he submitted that this argument is not relevant. He submitted that the English Courts are not concerned with taxability of the income but was only concerned as to whether tax could be deducted at source from the arbitration award. On the issue of the tribunal examining the issue as to whether the amount paid is chargeable to tax or not, he submitted that the issue is covered by the decision of the Hon’ble Supreme Court in the case of of M/S GE India Technical Center vs. CIT and that the learned CIT(Appeals) was wrong in not adjudicating the matter.
18. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.
19. Though the assessee has raised different grounds of appeal, Mr. Arvind Sonde, learned counsel for the assessee, based his arguments only on four propositions which we will be dealing in seriatim.
20. We take up the first proposition canvassed by the learned counsel. The learned counsel argued that the assessee cannot be treated as an assessee in default, for the reason that he failed to deduct tax. The contention is that prior to the amendment to the Finance Act, 2008 with effect from 1-6-2002, failure to deduct tax is not covered. All these arguments were considered by the H-Bench of the Tribunal (Special Bench) in the case of Mahendra & Mahendra in ITA Nos. 2606, 2007, 2613 & 2614 Mum/2000 (supra) wherein at page 17 under subheading IV “Whether section 201 applies in case of non deduction of tax at source?”, it is held as follows :
“13.5 On going through the above Notes on Clauses and Memorandum Explaining the Provisions of the Finance Bill, 2008, it is clearly borne out that s. 201(1), even prior to the amendment was applicable not only to the person who is required to deduct tax at source but also not deducting the same. It has further been made clear in the memorandum that the interpretation, as similar to the one suggested by the learned Authorised Representative in the present case “is contrary to the intent of the legislature” and the amendment was made “to clarify” that a person who is required to deduct any sum in accordance with the provisions of the Act does not deduct or after so deducting fails to pay, the whole or any part of the tax, he shall be deemed to be an assessee in default under s. 201(1). It is thus obvious from the amendment to s. 201(1) by the Finance Act, 2008 that the intention of the legislature from the very beginning was not only to restrict the operation of this sub-section to the person who has deducted tax at source but also who fails to deduct the tax at source in accordance with the provisions of the Act.
13.6. Be that as it may we have noted above that the assessment year under consideration is 1998-99 and at the relevant time there was no reference to any such person ‘ referred to in s. 200 ’ . It was only later on that these words were incorporated in the section which are not material for our consideration. Now we have to consider the meaning of “if any such person” as employed in s. 201 at the relevant time. The learned Authorised Representative has suggested that any such person should be considered as the one who is referred to in s. 200 meaning thereby the person deducting tax at source but not depositing with the Government, We observe that ordinarily the word “such” in the later part of section refers to the thing or person indicated in the earlier part of the same section. For example s. 2(1A) defines “agricultural income” to mean (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Then cl. (b) states that any income derived from such land by agriculture etc. ….. The reference to ‘ such land ’ in cl. (b) is to the land which is used for agricultural purposes as is stated in cl. (a). Thus the word ‘ such ’ in the latter part of the section refers to a thing or person as stated in the former part of the section. We are concerned with s. 201(1) in which the words “such person” have been used in the opening part of the section. Under these circumstances the words “such person” cannot have any reference to the person used in the earlier part of the section. Under these circumstances the words “such person” have to be interpreted by considering the language of section as a whole.
13.7. Before proceeding further it would be relevant to note the relevant portion of s. 201(1) as applicable at the relevant time, which runs as under:
“If any such person and in the cases referred to in s. 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax”. A cursory look at the section manifests that ‘ any such person ’ referred to in the “opening part of the section has connection with” the latter part of the section who “does not deduct or after deducting fails to pay the tax as required by or under this Act”. In order to appreciate the meaning of ‘ such person ’ in the context of s. 201(1) it is relevant to briefly note down the scheme of Chapter XVII, in which this section falls. Under ss. 192 to 195 a duty has been cast upon any person responsible for paying or crediting any income under the respective sections to make a deduction of tax at source at the prescribed rates. Again similar duty has been placed under ss. 196A to 196D on the person responsible for making payment. Sec. 197 deals with certificate for deduction at lower rate. Sec. 198 states that the tax deducted is income received. Sec. 199 stipulates the year in which the credit for tax deducted shall be given. Then s. 200 provides that any person deducting tax in accordance with the ‘ foregoing provisions of this chapter ’ (that is the ss. 192 to 196D) shall pay the sum so deducted to the credit of the Central Government within the prescribed time. So the person referred to in s. 200 is the person responsible for deducting the tax at source. The duty of the person who is deducting tax at source under s. 200 is confined to the making of the payment of the sum so deducted to the credit of the Central Government. By no stretch of imagination ‘ such person ’ referred to in s. 201 can be construed as only the person who has deducted the tax at source within the meaning of s. 200. It clearly refers to the person responsible for deducting the tax at source notwithstanding whether he has failed to deduct tax at source or after deducting failed to deposit the same with the Central Government. When the scheme of Chapter XVII is considered in entirety the only logical conclusion that can follow is that the “such person” referred to in s. 201(1) is the person responsible for deducting tax at source. When we further view the latter part of sub-s. (1) of s. 201, it becomes abundantly clear that it also refers to the person who does not deduct tax at source because of the employment of the expression “does not deduct or after deducting fails to pay tax as required by or under this Act”. In our considered opinion the interpretation suggested by the learned Authorised Representative for restricting “any such person” to only the person deducting tax at source and thereafter failing to pay the tax with the Central Government and allowing the person not deducting tax at source to go scot free, is completely against the spirit of the section. If we read it in the way in which the learned Authorised Representative wants, then the latter part of sub-s. (1) of s. 201 will also necessitate modification as the words “does not deduct” would require obliteration. By harmoniously considering the scheme of this chapter in which s. 201 falls, the only conclusion which follows is that ‘ any such person ’ as used in this section cannot be construed as only the person deducting and failing to deposit the tax with the Government but also encompasses within its ambit the person failing to deduct the tax at source. Our view is fortified by the judgment of the Hon ’ ble Kerala High Court in the case of Traco Cables Co. Ltd. vs. CIT (1987) 62 CTR (Ker) 174 : (1987) 166 ITR 278 (Ker) in which it has been held that “ss. 195, 200 and 201 deal with a liability which is at no time ambulatory but which is attracted immediately upon the happening of an event, namely, payment and failure to deduct under s. 195 or failure to credit the sum deducted as required by s. 200.” In the light of the foregoing discussion we hold that the view canvassed by the learned Authorised Representative on this aspect of the matter, is sans merit.”
In view of the above finding of the Special Bench of the Tribunal, we dismiss this contention of the assessee. The submissions of the assessee against the findings of the special bench are novel arguments and these in our humble opinion do not change the binding nature of the decision and that these aspects were considered and decided against the assessee.
21. Coming to the second proposition, the learned counsel argued that section 195(1) applies to any sum chargeable to tax under the provisions of the Act and that there is no obligation to deduct tax at source if the sum payable is not chargeable to tax under the provisions of the Act. He submitted that the payment made under an arbitration award is a judgment debt and not income.
22. On the first issue as to whether section 195(1) arises only if the payment is chargeable to tax in the hands of the recipient, we find that the issue is now covered by the judgment of the Hon’ble Supreme Court in the case of GE India Technical Center vs. CIT, wherein the Hon’ble Court reversed the decision of the Karnataka High Court in the case of CIT vs. Samsung Electronics 302 ITR 209. The Hon’ble Supreme Court held that a person paid interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax. It emphasis the fact that section 195(1) uses the word “Payer” and not the word “Assessee”. The payer is not the assessee. It held that the payer become the assessee in default only when he fails to fulfill the statutory obligation u/s 195(1). If the payment does not contain the element of income, the payer cannot be made liable and he cannot be declared to be an assessee in default. The first appellate authority’s decision not to adjudicate the issue as to whether the payment is chargeable to tax or not, in a proceeding u/s 201, is erroneous, in view of the above decision of the Hon’ble Supreme Court. The issue goes into the root of the matter and one cannot be prevented from arguing this legal ground. Even otherwise the appeal u/s 248 was dismissed on a technical ground of non payment of tax. The assessee cannot be shut out from taking a legal plea that the payment is not chargeable to tax under the provisions of the Act, in a proceeding, wherein the Revenue declares the assessee, to be an assessee in default, as otherwise the decision of the A.O. on the issue will become final and cannot be appealed unless the tax is paid. This issue can be challenged even in a proceeding u/s163 r.w.s.143(3) and also in other such proceedings. Thus we are unable to agree with the submissions of Mr. Narendra Singh on this issue. It is open for the assessee to contend that the Quantum damages are not income under the act and also to rely on the applicable DTAA if any. As the first appellate has not decided this issue as to whether the payment is chargeable to tax in the hands of the non-resident, the issue should in the normal course, go back to the file of the first appellate authority for fresh adjudication. The first appellate authority should consider the nature of damages awarded to M/s Caribjet by the Arbitrators and come to a conclusion as to whether such termination losses and damages are chargeable to tax under the Indian Income-tax Act, 1961. We in this order would be considering the other aspects of this case and if necessary would send this issue back to the file of the Ld C.I.T.(A).
23. As we have heard both the parties at length on the other propositions, wherein they have cited a number of case laws, we consider the same and give our findings as under.
24. In the case of All India Reported Ltd. vs. Ramchandra D. Datar (supra) the Hon’ble Court was considering the case of an employee, who obtained compensation for wrongful termination of employment, arrears of salary and interest and the Court had passed a decree. The Court held that under the scheme of the Civil Procedure Code, the decree had to be executed as it stood subject to the deduction or adjustment as were permissible under the Civil Procedure Code. It further held that there was no tax liability to which the respondent was assessed to pay, in respect of the amount of the decree. As between the company and the respondent the amount did not represent salary : it represented a judgment debt, and for payment of income-tax thereon no provision was made in the decree. Before paying that debt, the appellant company could not claim to deduct at source the tax payable by the respondent.
25. In this decision, the Hon’ble Court at page 449 has clearly stated that it is not concerned to decide in this appeal, whether in the hands of the respondent, the amount due to him under the decree, when paid, will be liable to tax. It clearly stated that this question does not fall to be determined in this appeal. Thus this decision does not support the claim of the assessee that in case of an arbitration award, the Award cannot be treated as income of the recipients. This case law applies only to judgment debts and in the case on hand we have to examine whether the Award is a judgment debt.
26. The second limb of the proposition relied upon is that, an arbitration award is a judgment debt and no deductions are permissible there-from, other than what is specified in the Civil Procedure Code. On a consideration of this argument and the case laws, we find that the award in question has not been confirmed by any Indian Court and it cannot be said that Civil Procedure Code applies to this award. When Civil Procedure Code does not apply, the decision in the case of All India Reporter vs. Ramchandra D. Datar and other judgments, in our humble opinion, do not come to the rescue of the assessee. We now discuss the other case laws relied by the assessee.
27. The learned counsel further relied on the decision of the Hon’ble Calcutta High court in the case of Saroj Kumar Mahashwari vs. Hindusthan Motors Ltd. & others reported in 154 ITR 363. In this case, the Hon’ble Calcutta High court followed the judgment of the Hon’ble Supreme Court in the case of All India Reporter vs. Ramchandra D. Datar. For the reasons given by us, while holding that the decision in the case of All India Reporter (supra) does not come to the rescue of the assessee, we have to necessarily hold that this decision in the case of Saroj Kumar Maheshwari also does not come to the rescue of the assessee. In this case of Saroj Kumar Maheshwari it is held that the compensation payable for wrongful termination of employment as merged with the decree of a Court and the claim assumed the character of the judgment debt. In the case on hand the award has not merged with the decree of any Court as contemplated in the Civil Procedure Code, for being termed as a judgmental debt.
28. The learned counsel also relied on the decision of the Hon’ble Supreme Court in the case of Mahendra and Mahendra vs. Hindusthan Motors Ltd. 152 ITR 68. In this case the Hon’ble Court at page 70 held as follows :
“The second reason is that the Court desired that Rs.22,000/- lumpsum be paid to the appellant which means that if there raises any liability to pay tax, the same shall be borne by the company. That was the intendment of the order of this court. Therefore, it must be held that the respondent company was not justified in deducting Rs.2,145/- from the compensation amount or Rs.20,000/- awarded by this court to the appellant.”
In this case the Tribunal had awarded back wages and the Hon’ble Supreme Court restored this judgment. The intendment of the order was that, the tax liability would be borne by the Company. In the case on hand, it cannot be said that the intendment of the arbitrators, was that if there arises any liability to pay tax, the same shall be borne by the assessee. In the absence of such intendment, this case does not come to the rescue of the assessee. Moreover the compensation awarded, was restored by the Hon’ble Court and it had become a judgment debt. No such circumstance exists in this case.
29. The learned counsel further relied on the decision of the Calcutta Bench of the Tribunal in the case of S.S. Miranda Ltd. vs. Shyam Bahadur Singh 154 ITR 849. Here also the employee had obtained a decree for arrears in salary etc. and it was held that the amount was payable as judgment debt and not as a salary. In the case on hand the award passed by the London arbitrators is not a decree of a Court so as to be considered as a judgment debt.
30. The learned counsel relied on the judgment of the jurisdictional High Court in the case of Madhusudan Shrikrishna vs. M/s Emkay Exports and others Execution Application No. 187 of 2005 in a Summary Suit No. 3835 of 2003, order dated 18th January, 2010 (unreported decision). In this judgment the Hon’ble Court was considering a query from the defendants regarding deduction of tax at source on the interest component of the decree. The plaintiff’s counsel in this case contended that the said law had crystallized by a decree of the Court and the defendants are not liable to deduct tax at source. Both the parties in this case relied on the judgment of the jurisdictional High court in the case of Islamic Investment Co. vs. Union of India and Others 265 ITR 254. At this stage we point out that the assessee has also placed reliance on this decision of the jurisdictional High court. The Hon’ble Judge after considering the submissions held that once a decree is passed, it is judgment and order of the Court which culminates into a final decree which when passed, has to be discharged only on payments of the amounts due under the said decree. The judgment debtor, therefore, cannot deduct tax at source, since it is an order in direction of the Court and, as such, would not be liable for penal consequences of non deduction of tax at source. Tax if payable, can be decided by the Income-tax Officer after the amount is paid to the decree holder. This decision applies to a case where there is a decree passed by the Court and the assessee is a judgment debtor. In the case on hand, there is no decree passed by the Court and it is only an award by a foreign Tribunal.
31. In the case of Islamic Investment Co. vs. Union of India, FCI had to pay a decretal amount to the petitioner who was a non resident decree holder. The Hon’ble Court considered the decision of the Hon’ble Supreme Court in the case of All India Reporter vs. Ramchandra Dattar and at page 257, plasitum G, made an important observation that, both in the case of All India Reporter as well as in the present case of Islamic Investment Co. the defendants did not apply to the Court in the suit for making a provision in the decree for payment of incometax dues. Thereafter it applied the judgment of the Supreme Court in the case of All India Reporter (supra) and held as follows :
“However, as observed by the Supreme Court, when such amount becomes part of the judgment debt, it losses its original character and assumes the character of judgment debt. Once such an amount assumes the character of a judgment-debt, the decree passed by the civil court must be executed subject only to the deductions and adjustments permissible under the Code of Civil Procedure. Learned counsel for the Food Corporation of India has not been in a position to point out any provision under the Income-tax Act or under section 195 in particular or under the Code of Civil Procedure where the amount of the interest payable under a decree is deductible from the decretal amount on the ground that it is an interest component on which tax is liable to be deducted at source.”
As in the earlier cases this judgment would also not apply as an arbitration award cannot be treated as a judgment debt as no decree has been passed by a Court under the Civil Procedure Code.
32. In the case of V.K. Diwan & Co. vs. D.D.A., in Execution Petition No. 195/2005 Judgment dated 17th Feb., 2010 (unreported decision) relied upon by the assessee, the Hon’ble Delhi High Court was deciding the case where the plaintiff was a decree holder and the defendant was a judgment debtor. In the case of Unic Enterprises vs. D.D.A. in Appeal No. CS(OS) 1227A/1992 and IA No. 5903/2005 judgment dated 20-01-2006 (unreported judgment), the Hon’ble Court was considering a case where there was an arbitration award and that award merged in a decree when it was made a rule of the court. In such a situation the defendant became a judgment debtor and the plaintiff was a decree holder. In the case on hand, the award has not been made a rule of any Court in India. Both these cases are not Awards of a foreign tribunals. We would deal with the issue further in our order.
33 The learned counsel further relied on the decision of the Hon’ble Supreme Court in the case of M/s Fuerst Day Lawson Ltd. reported in AIR 2001 (SC) 2293 for the proposition that a foreign award can be called a judgment debt under the Indian Law. We have perused this judgment.
34. In this case the Hon’ble Court was considering the question where the situation was that the arbitration proceeding commenced prior to the coming into force of the Arbitration and Conciliation Act (26 of 1996) and the arbitration award had been delivered after the commencement of this Act. The Hon’ble Court followed the judgment of the Hon’ble Supreme Court in the case of Thyseen Stahlunion GMBH vs. Steel authority of India Ltd. 1999 AIR SCW 4016 and at para 29 held as follows :
“29. Prior to the enforcement of the Act, the Law of Arbitration in this country was substantially contained in three enactments namely (1) The Arbitration Act, 1940, (2) The Arbitration (Protocol and Convention) Act, 1937 and (3) The Foreign Awards (Recognition and Enforcement) Act, 1961. A party holding a foreign award was required to take recourse to these enactments. Preamble of the Act makes it abundantly clear that it aims at to consolidate and amend Indian laws relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. The object of the Act is to minimize supervisory role of Court and to give speedy justice. In this view, the stage of approaching Court for making award a rule of Court as required in Arbitration Act, 1940 is dispensed with in the present Act. If the argument of the respondent is accepted, one of the objects of the Act will be frustrated and defeated. Under the old Act, after making award and prior to execution, there was a procedure for filing and making an award a rule of Court i.e. a decree. Since the object of the Act is to provide speedy and alternative solution of the dispute, the same procedure cannot be insisted under the new Act when it is advisedly eliminated. If separate proceedings are to be taken, one for deciding the enforceability of a foreign award and the order thereafter for execution, it would only contribute to protracting the litigation and adding to the sufferings of a litigating in terms of money, time and energy. Avoiding such difficulties is one of the objects of the Act as can be gathered from the scheme of the Act and particularly looking to the provisions contained in Sections 46 to 49 in relation to enforcement of foreign award. (In para 40 of SCC): (Para 49 of AIR; CLC) of the Thyssen (1999 (9) SCC 334 : 1999 AIR SCW 4016: AIR 1999 SC 3923 : 2000 CLC 139) judgment already extracted above, it is stated that as a matter of fact, there is not much difference between the provisions of the 1961 Act and the Act in the matter of enforcement of foreign award. The only difference as found is that while under the Foreign Award Act a decree follows, under the new Act the foreign award is already stamped as the decree. Thus, in our view, a party holding foreign award can apply for enforcement of it but the Court before taking further effective steps for the execution of the award has to proceed in accordance with Sections 47 to 49. in one proceeding there may be different stages. In the first stage the Court may have to decide about the enforceability of the award having regard to the requirement of the said provisions. Once the Court decides that foreign award is enforceable, it can proceed to take further effective steps for execution of the same. There arises no question of making foreign award as a rule of court/decree again. If the object and purpose can be served in the same proceedings, in our view, there is no need to take two separate proceedings resulting in multiplicity of litigation. It is also clear from objectives contained in para 4 of the Statement of Objects and Reasons, Section 47 to 49 and Scheme of the Act that every final arbitral award is to be enforced as if it were a decree of the Court. The submission that the execution petition could not be permitted to convert as an application under Section 47 is technical and is of no consequence in the view we have taken. In our opinion, for enforcement of foreign award there is no need to take separate proceedings, one for deciding the enforceability of the award to make rule of the Court or decree and the other to take up execution thereafter. In one proceeding, as already stated above, the Court enforcing a foreign award can deal with the entire matter. Even otherwise, this procedure does not prejudice a party in the light of what is stated (in para 40 of SCC) : (Para 49 of AIR CLC) of the Thyssen judgment.”
From the perusal of the above, it is clear that the Hon’ble Court has held that, there need not be, two proceedings i.e. the first to examine the enforce ability of the award and secondly for execution of the award. The Court has to first decide that the foreign award is enforceable. Execution of the award has to proceed as per section 47 to 49 of the Arbitration and Conciliation Act, 1996. In the case on hand, the Court in India have not been approached for deciding the enforce ability of the award. The observation that under the Foreign Award Act a decree follow and whereas, under the New Act “the foreign award is already stamped as a decree” does not in our humble opinion, lead to a conclusion that the “Award” automatically becomes a decree of the Civil Court under the Civil Procedure Code. The object of the Act is no doubt to enforce every final arbitral award, as if it was a decree of the Court.. The Arbitral award is deemed a decree only if the court decides it is enforceable. Thus in our humble opinion, we are not able to accept the proposition of the learned counsel for the assessee that in the case of an arbitral Award, it is a deemed decree and hence a judgmental debt. We further discuss the issue in the fallowing paragraphs.
35. The second decision relied by the assessee is in the case of Thyseen Stahlunion GMBH vs. Steel authority of India Ltd. AIR 1999 SC 3923. In this case the Hon’ble Court laid down that section 85(2)(a) of the new Arbitration and Conciliation Act, 1996 saves the operation of the old Act. The Court further held that foreign awards given after the date of the commencement of the new Act, 1996, can be enforced under the new Act. It further held that the fact that the arbitration proceedings had commenced in U.K. prior to the commencement of the new Act, cannot save the operation of the Foreign Awards Act, 1961. At para 48 and 49 it observed as follows :
“48. Foreign Awards Act gives the party right to enforce the foreign award under that Act. But before that right is exercised Foreign Awards Act has been repealed. It cannot , therefore, be said that any right had accrued to the party for him to claim to enforce the foreign award under the Foreign Awards Act. After the repeal of the Foreign Awards Act a foreign award can now be enforced under the new Act on the basis of the provisions contained in Part II of the new Act depending whether it is a New York Convention Award or Geneva Convention Award. It is irrespective of the fact when the arbitral proceedings commenced in a foreign jurisdiction. Since no right has accrued S. 6 of the General Clauses Act would not apply.
49. In the very nature of the provisions of Foreign Awards Act it is not possible to agree to the submissions that S. 85(2)(a) of the new Act would keep that Act alive for the purpose of enforcement of a foreign award given after the date of commencement of the new Act though arbitral proceedings in foreign land had commenced prior to that. It is correct that S. 85(2)(a) uses the words “the said enactments” which would include all the three Acts, i.e. the old Act, Foreign Awards Act and the Arbitration (Protocol) and Convention) Act, 1937. Foreign Awards Act and even the 1937 Act contain provisions only for the enforcement of the foreign award and not for the arbitral proceedings . Arbitral proceedings and enforcement of the award are two separate stages in the whole process of arbitration. When the Foreign Awards Act does not contain any provision for arbitral proceedings it is difficult to agree to the argument that in spite of what the applicability of the Foreign Award Act is saved by virtue of S. 85(2)(a). As a matter of fact if we examine the provisions of Foreign Awards Act and the new Act there is not much difference for the enforcement of the foreign award. Under the Foreign Awards Act when the Court is satisfied that the foreign award is enforceable under that Act the Court shall order the award to be filed and shall proceed to pronounce judgment accordingly and upon the judgment so pronounced a decree shall follow. Sections 7 and 8 of the Foreign Awards Act respectively prescribe the conditions for enforcement of a foreign award and the evidence to be produced by the party applying for its enforcement. Definition of foreign award is same in both the enactments. Sections 48 and 47 of the new Act correspond to Ss. 7 and 8 respectively of the Foreign Awards Act. While S. 49 of the new Act states that where the Court is satisfied that the foreign award is enforceable under this Chapter (Chapter I, Part II, relating to New York Convention Awards) the award is deemed to be decree of that Court. The only difference, therefore, appears to be that while under the Foreign Awards Act a decree follows, under the new Act foreign award is already stamped as the decree. Thus if provisions of the Foreign Awards Act and the new Act relating to enforcement of the foreign award are juxtaposed there would appear to be hardly any difference.”
A perusal of this does not lead us to the conclusion that the award by a foreign Tribunal can be considered to be a decree of the Indian Court, unless the Court is satisfied that the foreign award is enforceable. It is clear from this case that the award is deemed to be a decree of the Court, only in a circumstance where the Court is satisfied that the foreign award is enforceable under Chapter I, Part II, relating to New York Convention Awards. No such action has been taken in this case. The fact as to whether this foreign award falls within the definition of a foreign award under the Arbitration and Conciliation Act, 1996 has not been examined by any authority. Section 48 and 49 of the Arbitration and Conciliation Act, 1996 read as follows :
“48. Conditions for enforcement of foreign awards.-(1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to he Court proof that-
(a) the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of subjected it or, failing any indication thereon, under the law of the country where the award was made; or
(b) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or
(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
(e) the award has not yet become binding on the parties; or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
(2) Enforcement of an arbitral award may also be refused if the Court finds that 30 (a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
(b) the enforcement of the award would be contrary to the public policy of India.
Explanation-Without prejudice to the generality of clause (b), of this section, it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.
(3) If an application for the setting aside or suspension of the award has been made to a competent authority referred to in clause (e) of sub-section (1) the Court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security.
49. Enforcement of foreign awards.- Where the Court is satisfied that the foreign award is enforceable under this Chapter, the award shall be deemed to be a decree of that Court.”
From a perusal of the above it is very clear that only when a Court is satisfied that a foreign award is enforceable on this chapter, the award should be deemed to be a decree of the Court. The learned DR pointed out that under section 48(2) enforcement of the award may be refused by the Court if it is against the public policy of India and when it is refused, it cannot become a deemed decree. Refusing to pay income-tax and refusing to fallow the law of withholding of tax, as per the Ld D.R, is against public policy of India. Had this award traveled to an Indian Court, there was a possibility of the Court refusing to enforce the arbitral award. In such a situation it cannot be a deemed decree.
36. To sum up, we hold that none of the case laws cited before us, lay down the proposition that judgmental debt is not income and that it cannot be taxed as income of the assessee. All the case laws state that, when an amount is a judgment debt, no other deduction then, what is permissible under the Civil Procedure Code, can be done and in such a situation no tax can be deductible at source as required under the Income-tax Act. Secondly, an award in an arbitration proceedings, does not automatically become a judgment debt. A foreign award cannot be held as a judgment debt unless the procedure prescribed under the Arbitration and Conciliation Act, 1996 is followed and the Court holds that it is satisfied that the foreign award is enforceable under the said chapter of the Arbitration and Conciliation Act, 1996. In fact the Hon’ble Bombay High Court in the case of Toepfer International Asia P. Ltd. vs. Thapar Ispat Limited AIR 1999 Bom. 417 held as follows :
“[C] Arbitration and Conciliation Act, 1996 – Section 49 – Foreign Award – Enforcement of – High Court has no jurisdiction to enforce – Power of High Court only to declare that the Foreign Award is enforceable – On declaration it becomes a decree of the Court – Execution thereof only under the provisions of the Civil Procedure Code. That a prayer for enforcement of the award by the High Court cannot be granted under the provisions of the Arbitration and Conciliation Act, 1996. Section 49 of the Act merely empowers the Court to declare that the Foreign Award is enforceable under the provisions of Chapter II of the Act. The moment such a declaration is granted, an award shall be deemed to be a decree of the Court. Once its deemed to be a decree of the Court, it is open to the parties to seek its execution in accordance with the provisions of the Civil Procedure Code. ” (Underlining ours)
From the above, the legal position is clear. As in this case the parties have not approached the Court, the question of the court declaring that the “Foreign Award” is enforceable, does not arise and it cannot be considered a deemed decree. Thus for all these reasons, we reject the second proposition canvassed by the learned counsel for the assessee.
37. Even otherwise, looking at the facts of the case, the assessee approached the Court of appeal in London for permission to deduct tax at source from the award amount. Caribjet, on the other hand, argued that article 11(1) of the agreement did not survive the repudiation of the wet lease agreement by Air India and thus the assessee cannot deduct any portion of the tax from the award on quantum. It was also argued that foreign revenue laws cannot be enforced in U.K. and hence TDS cannot be recovered. Caribjet also argued that the Indian Income-tax Department had committed a complete volete face from the position it had originally adopted throughout the operation of wetlease, wherein only 2.75% was the withholding tax payable. Caribjet argued that the Indian revenue authorities completely departed from the position as understood by the parties when they reached an agreement of article 11.1 of the wetlease. It was never the case of Caribjet that this amount in question is a judgment debt and that no deductions are permissible. The commercial court had referred the tax dispute, as a fresh dispute to the Tribunal which determined the quantum damages. After hearing the parties the Tribunal in a majority decision on 22n May,2000 agreed with Caribjet point of view that clause 11.1 did not survive the repudiation of wetleast by the Air India and the clause was inapplicable to award on quantum damages and, therefore, the assessee cannot deduct the amount directed by the income tax authorities from the award of the Tribunal. On appeal by Air India, the court of appeals did not grant leave of appeal to the assessee. From the above it can be seen that the Tribunal has not based its decision on the ground that the award on quantum damages is a judgment debt and hence no deduction of tax can be made. In fact, this was not the contention of the assessee either. The basis of on which the assessee’s contention that it should be allowed to deduct tax at source was rejected, was that clause 11.1 of the agreement did not survive the repudiation of wetlease. Hence even on this count, the argument of the assessee fails.
38. We now take up the third proposition canvassed by the learned counsel for the assessee. The proposition is that simultaneous proceedings cannot be taken u/s 201 of the Act holding the assessee as an assessee in default and at the same time pass an order u/s 163, holding that the assessee is a representative assessee. The learned counsel mainly relied on the decision of the Hon’ble Calcutta High Court in the case of Bunge and Co. (supra). We have perused this decision. The Calcutta High Court has held that the group of sections from section 160 to section 163 and the group of sections from section 195 to 201 of the Act are mutually exclusive and operate in different fields. It further held that the same person cannot be treated as an agent u/s 163 of the Act and prosecuted against u/s 201 at the same time. On page 98 of the said judgment, it is clear that the counsel appearing on behalf of the Revenue did not contest this proposition and on the contrary had submitted that the Income-tax authorities have not yet made up their minds as to whether the petitioner is to be treated as an agent u/s 163 of the Act or is to be proceeded with as “any person within the meaning of section 195 thereof”. Under those circumstances the notice issued was held to be without jurisdiction. The learned Judge in this case has made it clear that he is not pronouncing any opinion on the merits of the other contentions raised by the petitioners. In this decision, we have to note the wording of Section 195(1) as it then existed as brought out at page 96. We extract the same for ready reference :
“195(1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being ‘interest on securities’, or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon at the rates in force :
Provided that nothing in this sub-section shall apply to any payment made in the course of transaction in respect of which a person responsible for the payment is deemed under the proviso to sub-section (1) of section 163 not to be an agent of the payee. “ (emphasis ours)
We will deal with these wordings in the coming paragraphs.
39. The next judgment relied upon by the learned counsel is the decision of the Hon’ble Bombay High Court in the case of CIT vs. Premier Tyres reported in 134 ITR 17. In this judgment the Hon’ble Court held as follows :
“A person who is himself liable to pay income-tax on a payment to be made to a non-resident as an agent of the said non-resident, under s. 161 of the I.T. Act, 1961, cannot be saddled with the further obligation to deduct income-tax under s. 195 of the I.T. Act, 1961 before making the payment to the non-resident and be deemed to be in default u/s 201 of the Act. ”
The Hon’ble Court followed the decision of the Hon’ble Calcutta High Court in the case of Bunge and Co. Ltd. (supra) and upheld the decision of the Tribunal.
40. Mr. Sonde has brought to our notice the amendments brought to section 195 with effect from 1-6-1987 by the Finance Act, 1987. In this amendment the words “unless he is himself liable to pay any income-tax” has been omitted in the section. The learned counsel argued that the Hon’ble Court in the case of Bunge and Co. Ltd. had not rested their decision on these wordings and hence the omission of the same with effect from 01-06-1987 by Finance Act, 1987 does not effect binding nature of the decision. We are not persuaded by this argument. In the case of Bunge and Co., as already stated, this issue has not been contested at all. At page 98 para 2 it was observed as follows:
“The former group of sections from sections 160 to 163 and the group of sections from sections 195 to 201 of the Act, it is contended mutually exclusive and operate on different fields. Pointed reference made in this connection to the proviso to section 195(1) of the Act prescribes that nothing in section 195(1) shall apply to any payment in the course of transactions in respect of which a person responsible for the payment is deemed to be an agent of the payee under the proviso to sub-section (1) of section 163 of the Act. This, it is pointed out, puts the matter beyond the pale of controversy. It is clearly an expression of the legislative intention that these two groups of sections are entirely independent of each other and are mutually exclusive. ”
This proviso has since been omitted from the statute. All the argument are based on provisions of law which have been amended. Such arguments based on old law cannot be entertained. In the absence of this proviso in the statute, in our opinion, these case laws have no application. The legal position has changed long back.
41. On the other hand the Special Bench of the Tribunal in the case of Mahendra & Mahendra 122 TTJ 577 had considered the issue, though in a different context, and concluded that non-initiation of proceedings u/s 163, treating the payee as an agent of a non-resident within the time provided under the Act for time barring, would result in the order passed u/s 201 being barred by limitation. At page 646 it concluded as follows :
“(xiii) No order under s. 201(1) or (1A) can be passed where the Revenue has not taken any action against the payee and further the time-limit for taking action against the payee under s. 147 has also expired.”
This shows that the Special Bench was of the opinion that both proceedings can take place simultaneously and that in fact not taking the same results in the order u/s 201 being bad in law.
42. In our humble opinion, the liability of an assessee to deduct tax at source u/s 195, is different from the liability of an assessee to file a return of income as an agent of a foreign principal. As rightly put by the learned DR, the assessee can be treated as an agent of the non-resident principal and assessments framed in that capacity. The tax deducted u/s 195 would be given credit against the tax so assessed. Being treated as an agent of the non-resident, and assessed as such, means that the assessee is assessed in a representative capacity and not in its own capacity. In many cases the assessees are regularly deducting tax u/s 195 and are also filing returns of income as an agent of the non-resident and are claiming credit of the tax deducted at source. The assessee has a legal duty under both the sections. In view of the above discussion, this submission of the learned counsel of the assessee is dismissed.
43. Coming to the last issue of grossing up, we uphold the order of the first appellate authority that the present case falls under the category “other arrangement” as occurring u/s 195A. We have already rejected the argument that this “Award” is a judgment debt and hence consequentially the arguments that this is an obligation under law and thus cannot be termed as “other arrangement”, is to be rejected.
44. At this stage at the cost of repetition, we feel it appropriate to recapitulate the facts of the case briefly, so as to understand the peculiar position in which the assessee was placed. The assessee had taken three Air Crafts on wetlease from M/s Caribjet Inc. in December, 1995, It terminated the lease in September, 1996. Caribjet disputed the termination and the matter was referred to Arbitration under the UNCITRAL RULES which is governed by English Laws. The Arbitrators held that the termination of wetlease was wrong and awarded termination losses to Caribjet. On appeal, the London Commercial Court rejected the appeal of Air India. The assessee sought permission from Reserve Bank and also applied u/s 195 to Income-tax authorities for remitting the amount. The Income-tax Department directed the assessee to remit the entire amount of US$ 2,36,35,251 into Government Treasury, in an order u/s 195(2). The assessee approached the Court of Appeal in London for being permitted to deduct the tax from the award amount. Caribjet opposed the same on various grounds. Pending stay, the assessee was directed by the Court of Appeals in London to remit the amount in the Escrow account maintained in the names of Solicitors of both the parties. Subject to the remittance they referred the dispute to the same Tribunal which determined the quantum damages. The Income-tax Department was informed and RBI permission taken and the amount was remitted to Escrow account. The reason for the same was that the assessee had assets in England and there was a serious risk of attachment of its overseas assets which would seriously affect the financial credibility of the assessee. The assessee took two senior officials of the Income-tax Department to London ,in order to observe the hearings and to assist them before the Tribunal, on the issue of deducting tax at source. The Tribunal in a majority decision had held that no tax can be deducted at source from the arbitration award. The assessee carried the matter in appeal and the Commercial Court in England held that the majority decision was not “obviously wrong” and dismissed the appeal. The Caribjet withdrew the amount from the Escrow account. These facts demonstrate beyond doubt that the assessee had bona-fide made all possible efforts to comply with the order of the income tax department u/s 195(2) of the act. The issues were not within the assessee’s control.
45. Though all the propositions canvassed by the learned counsel for the assessee are rejected, on a perusal of the facts of the case narrated above, it is clear that, the assessee has been prevented from deducting tax at source u/s 195 of the Act, despite its best bona-fide efforts. The assessee was in fact regularly deducing tax at source on the lease rentals paid to Caribjet earlier. The assessee has approached each and every forum and court with a plea that he be allowed to comply with the order passed u/s 195(2) of the Act passed by the AO despite the assessee making every effort to comply with the provisions of the Income-tax Act. The courts of appeal in United Kingdom have not permitted it to comply and on the other hand, by directing the assessee to pay the amount into the escrow account of the solicitors, for which even the RBI permitted and thereafter allowing Caribjet to withdraw the same, made it impossible for the assessee to deduct tax at source and put the issues beyond the control of the assessee.
46. It is well settled that an obligation gets discharged due to impossibility of performance. This is not the case where the assessee had mere difficulty of performance. The assessee involved senior I.R.S officials, by arranging their visit to U.K. in order to observe and help the assessee in the hearings, when the matter came before the Tribunal on February, 19th and 20th of 2000. The assessee also approached the Indian High Commissioner in U.K. to assist in getting appointments for the revenue officials who accompanied the assessee with the U.K. England Revenue authorities to discuss Caribjet tax liability. The assessee did everything possible in its control. The law of impossibility of performance does not necessarily require absolute impossibility, but also encompass the concept of severe impracticability. In our humble opinion, the doctrine of impossibility of performance applies in all fours in this case. Due to uncontrollable circumstances, the performance of the obligation to deduct tax at source and remit the same to the Government became impossible. The impossibility of performance releases the assessee from its obligation to deduct tax at source under sec. 195 of the Act. A default occurs only when an obligation is not performed. When the assessee is released from the obligation, it cannot be said he is in default. Thus when the assessee is prevented from deducting tax u/s 195, the question of his not performing the obligation under law does not arise and thus he cannot be held a defaulter.
47. For coming to such a conclusion we draw strength from the following case laws. The proposition is “when the assessee is prevented from performing his obligations under the law, despite his bonafide efforts, due to impossibility of performance, he would be discharged from such an obligation and hence cannot be regarded a defaulter”
In the case of I.T.O. vs L.I.C. of India, 79ITD 278 it was held as fallows:
“When the assessee deducted the tax or was required to deduct the ax at source, the City Compensatory Allowance was not taxable as held by the jurisdictional High Court in the case of All India Insurance Employees Association v. Union of India  176 ITR 2251, referred to by the C.I.T. (A) in his order. How can therefore it be said that the assessee was in default in not deducting the tax at source on such income? When the law was amended with retrospective effect from 1-4-1962 by Direct Tax Laws (Amendment) Act, 1989, the assessee had already paid the salary and, herefore, there was no possibility of deducting the tax at source, even if it wanted because there was nothing from which the tax could have beendeducted. To deduct anything, there must be something from which the deduction could be made. To put it in the wordsof Justice Ruma Pal, the Judge of the Calcutta High Court(as she then was) in the case of Modern Fibotex India Ltd.v. Dy. CIT  212 ITR 496 at page 512—”An assessee cannot be imputed with clairvoyance.”It was a case of making prima facie adjustment undersection 143(1)( a) and Their Lordships held that when the return was filed, cash compensatory support was held to be1.  41 Taxman 60 (Cal.).2001] ITO v. LIC of India (Cal.) 284exempt. At the time of filing the return, the285 Income-tax Tribunal Decisions [Vol. 79 assessee could not possibly have known that the decision on the basis of which cash compensatory support has been claimed as not amounting to assessee’s income ceased to be operative by reason of the retrospective legislation. In the present case also, when the assessee was required to deduct the tax at source, it could not possibly have conceived the idea of retrospective legislation and, therefore, to hold the assessee to be in default would amount to doing injustice and making it a defaulter for no fault of it.
5. The aforesaid Calcutta High Court decision in the case of Modern Fibotex India Ltd. was approved by Their Lordships of the Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd.  243 ITR 481 by quoting the following the observations of the Constitutional Bench of the Supreme Court in the case of Pannalal Binjraj v. Union of India  31 ITR 565 at page 597 :—
“A humane and considerate administration of the relevant provisions of the Income-tax Act would go a long way in allaying the apprehensions of the assessees and if that is done in the true spirit, no assessee will be in a position to charge the Revenue with administering the provisions of the Act with ‘an evil eye and unequal hand’.”
6. We may also quote the following observations from the decision of the Hyderabad Bench of the Tribunal in the case of Asstt. CIT v. Jindal Irrigation Systems Ltd.  56 ITD 164 at page 167 :—
“6. When the law creates a duty or charge and the party is disabled to perform it, without there being any default on his part, and there is no remedy for him, the law will in general excuse him. When the obligation is one implied by law, impossibility of performance is a good excuse, say, impotentia excusat legem.
7. Even under the Control Act, dealing with private rights and obligations of a party to the agreement, the contract is deemed to be void on account of impossibility of performance (section 56). The law regards the order and course of nature and will not force a man to demand that which he cannot recover. The law will not itself attempt to do an act which would be vain – lex nil frustra facit – nor enforce one which would be frivolous – lex neminem cogit ad vana seu inutilia – the law will not force any one to do a thing vain and fruitless.”
This was a case where the assessee had not yet started earning income and, therefore, the Tribunal held, how can the law expect him to estimate the advance tax liability and pay tax and consequently levy of interest for failure to do so ?
In the case of M/S Central Bank vs I.T.O 121ITD1 (Nagpur) at Para 68 &69 it was observed as fallows.
68. It is a well-settled law that law does not compel a man to do that which he cannot possibly perform as held by the Supreme Court in the case of Onkarmal Nathmal Trust (supra). The Supreme Court in the said case has held as follows :
46 Income-tax Tribunal Decisions [Vol. 121
“Where the law creates a duty or charge, and the party is disabled to perform it, without any default in him, and has no remedy over, there the law will in general excuse him, and though impossibility of performance is in general no excuse for not performing an obligation with a party has expressly undertaken by contract, yet when the obligation is one implied by law, impossibility of performance is a good excuse.”
“Under certain circumstances compliance with the provisions of statutes which prescribe how something is to be done will be excused. Thus, in accordance with the maxim of law, Lex non cogit ad impossibilia, if it appears that the performance of the formalities prescribed by a statute has been rendered impossible by circumstances over which the persons interested had no control, like the act of God or the King’senemies, these circumstances will be taken as a valid excuse.”
69. The Supreme Court also observed similarly in the case of Life Insurance Corporation of India (supra) that—
“It is obvious that in the surplus or deficit in any inter-valuation period relating to the Corporation which came to be formed only on the appointed day in 1956, this amount could not be reflected since it related to a period prior to the formation of the Corporation. The law does not contemplate or require the performance of an impossible act – lex non cogit ad impossibilia. It is now to be seen whether the expression “included therein” in rule 2(1)(b) is alone sufficient to negative the logical legal effect of section 7 of the LIC Act.” I
In the case of A.I.C.T.vs Sri Ramachandra 128 TTJ 408 The Chennai bench of the Tribunal appling this principle of Impossibility of performance held as fallows:
7. Having heard both the parties we find that the inability to invest the sum of Rs. 50 lakhs in accordance with the modes prescribed under s. 11(5) was caused due to the garnishee proceedings initiated by the TRO. Because of such proceedings the assessee was unable to make the investment in conformity with the provisions of s. 11(5) of the Act. 8. In the case of Krishnaswamy S. Pd. v. Union of India  201 CTR (SC) 183 :  281 ITR 305 (SC), the Hon’ble Supreme Court has held that the maxim actus curiae neminem garvabit, i.e., an act of Court shall prejudice no man, is founded upon justice and good sense which serves a safe and certain guide for the administration of law. The other relevant maxim is lex non cogit dimpossibilia – the law does not compel a man to do what he cannot dossiblyperform. The law itself and its administration is understood to disclaim as itdoes in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases.
9. It is abundantly clear from the records that the trust did its best to take backthe money from M/s Egmore Benefit Fund Society Ltd. Money could not berecovered because of the pendency of garnishee proceedings. As the investment was not under the control and possession of the assessee, therefore, switching over the same in conformity with the prescription of s. 11(5)of the Act was an impossibility. The case of the assessee trust, therefore,comes within, the ken of the maxim : hex non cogit ad Impossibilia. Taking intoconsideration the entire conspectus of the facts and respectfully following theprecedent we uphold the impugned order. The Ho’ble Supreme Court considered these concepts of law in the case of Krishnaswamy S. Pd. v. Union of India (SC)281 ITR305 and at paras 16 &17 observed as fallows
16. The maxim ‘actus curiae neminem gravabit’ i.e., an act of Court shall prejudice noman is an important one. The maxim “is founded upon justice and good sense, and affords a safe and certain guide for the administration of the law”, said Cresswell, J. inFreeman v. Tranah 12 CB 406. An unintentional mistake of the Court which mayprejudice the cause of any party must and alone could be rectified.
17. The maximum of equity, namely, actus curiae neminem gravabit – an act of courtshall prejudice no man, is founded upon justice and good sense which serves a safe andcertain guide for the administration of law. The other relevant maxim is, lex non cogitad impossibilia – the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its generalaphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases – UP SRTC v.Imtiaz Hussain  1 SCC 380, Shaikh Salim Haji Abdul Khagumsab v. Kumar 1 SCC 46, Mohammad Gazi v. State of MP  4 SCC 342 and GursharanSingh v. New Delhi Municipal Committee  2 SCC 459. (Emphasis ours)
48. In view of the above legal position and under these peculiar facts and circumastances of the case, we are of the humble opinion that the assessee cannot be held to be an assessee in default in terms of section 201 and 201(1A) of the Act. This is a case of impossibility of performance and the assessee is released from the obligation and hence the assessee is not an assessee in default.
49. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 3rd Nov, 2010.