Case Law Details
Taxpayer is not expected to step into the shoes of the Assessing Officer for examining whether the receipts in the hands of the recipient is income or not whether he is liable to pay tax thereon or not.
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “D”: NEW DELHI
I.T.A. No. 2126/D/2007
Assessment Year: 2003-04
| Van Oord ACZ India (P) Ltd.,6th Floor, Shanghvi Udyan, B-18, Vaikunthalal Mehta Road, J.V.P.D. Scheme, Mumbai- 400 049 |
Vs. |
ACIT,Circle 17 (1), New Delhi |
|
(Appellant) |
|
(Respondent) |
O R D E R
PER D.R. SINGH, JM
The assessee has filed this appeal against the order of CIT (A) passed in appeal no. 34/2006-07/CIT (A) –xx dated 30-3-2007 on the following grounds :-
1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the disallowance made by the Assessing Officer in respect of claim of mobilization and demobilization expenses of Rs. 8,65,57,909/-, reimbursed by the appellant to Van Oord ACZ Marine Contractors BV, Netherlands, (VOAMC), invoking the provisions of section 40 (a) (i) of the Act.
2. That the Commissioner of Income Tax (Appeals) erred on facts and In law In not holding that the provisions of section 40 (a) (i) did not apply, since the aforesaid amount reimbursed by the appellant did not constitute income of VOAMC liable to tax In India and consequently the appellant was not required to deduct tax a t source under section 195 of the Act.
2.1 Without prejudice, that the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the disallowance under section 40 (a) (i) had to be restricted to only that part of the mobilization and demobilization expenses reimbursed by the appellant which related to activity carried out in the Indian territorial waters.
3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that whether VOAMC claimed deduction of the aforesaid amount paid by that company to non-resident service providers was irrelevant for determining the appellant’s obligation to deduct tax at source from the aforesaid amount reimbursed by the appellant to VOAMC.
4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in alleging that the real transaction relating to mobilization and demobilization of dredgers was between the appellant and non-resident service providers (and not VOAMC) and that the appellant failed to discharge its obligation of deducting tax at source in respect of payment made in respect of the aforesaid transaction with the non-resident service providers.
4.1 That without prejudice, the Commission of Income Tax (Appeals) on the basis of orders dated 4.3.02 and 22.11.02, passed under section .195 (2) of the Act, having observed that VOAMC had a FE in India and the appellant had made payment to VOAMC for mobilization and demobilization services, fell in error in observing that the appellant paid the aforesaid amount to the non-resident service providers and was required to deduct tax at source in respect of such payment not appreciating that there was no privity of contract between the appellant and such non-resident service providers.
5. Without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the appellant having deducted tax at source under section 195 in respect of the sum of Rs. 6,98,26,456, included in the aforesaid amount of reimbursement of Rs. 8,65,57,909, in terms of the order dated 22.11.2002 passed u/s 195 (2) by DCIT, Circle-2, International Taxation New Delhi, no disallowance under section 40 (a) (i) of the Act could be made in respect of said amount of Rs. 6,98,26,456.
6. Further without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the aforesaid claim of reimbursement could not be disallowed invoking the provisions of section 40 (a) (i) of the Act, in view of the provisions of Article 24 of the India Netherlands Double Taxation Avoidance Agreement relating to non-discrimination.
2. Briefly stated, the facts relating to the issue of disallowance of Rs. 8,65,57,909/- by the Assessing Officer in respect of reimbursement of mobilization and demobilization charges to Van Oord ACZ Marine Contractors BV, Netherlands (VOAMC) u/s 40(a) (i) of the Income Tax Act as involved in the grounds of appeal of the assessee, as borne out from the orders of tax authorities below as well as synopsis filed by both the parties, are that the assessee/appellant is a wholly owned subsidiary of Van Oord ACZ Marine Contractors BV, Netherlands [VOAMC] . During the relevant previous year the assessee executed, inter-alia, dredging contract at Port Mundra for Gujarat Adani Port Ltd. As the assessee follows completed contract method to account for receipts from execution of dredging contracts and since the aforesaid contract at Port Mundra was completed during the relevant previous year, the assessee in the profit and loss account relating to the relevant previous year debited, inter-alia, mobilization and demobilization cost of Rs. 8,92,37,645/- reimbursed to VOAMC. Out of the aforesaid amount, Rs. 8,65,57,909/- pertained to the aforesaid dredging contract at Port Mundra which was completed during the relevant previous year. The said cost related essentially to transportation of dredger, survey equipment and other plant and machinery from countries outside India to the site in India and re-transportation of the same on completion of the contract, including fuel cost incurred on transportation. The aforesaid services were contracted by VOAMC and were provided by various non-resident parties. The appellant reimbursed the cost relating to mobilization and demobilization incurred by VOAMC on the basis of invoice received by VOAMC from the non-resident service providers.
3. The assessee had filed an application with DCIT, Circle 2 (2), International Taxation, New Delhi for issuing Nil tax withholding certificate in respect of reimbursement of various costs required to be made by the assessee to VOAMC in relation to the dredging contracts being executed by the assessee in India. The DCIT vide order dated 22.11.2002, held that the reimbursement of costs to VOAMC were liable to tax in India and determined 11% of the reimbursement amount as the profit arising to VOAMC in India and the assessee was directed to deduct tax at source on the above basis. The assessee in accordance with the aforesaid order had deducted tax at source In respect of mobilization and demobilization charges of Rs. 6,98,26,456/- reimbursed by it to VOAMC.
4. The DCIT Circle 2(2) International Taxation, New Delhi on the basis of an application moved by the assessee under section 195 (2) of the Act passed an order dated 22.11.2002 and rejected the application of the assessee for issuing a certificate authorizing the VOAMC, BV Netherlands (recipient) to receive the amount without deduction of tax, but, issued a certificate directing the assessee to deduct tax at source on the basis of the amount determined @ 11% of the reimbursement amount as profit to the recipient VOAMC in India, which came to Rs. 8,65,57,909/-, under consideration, in which it was also held that VOAMC has been in India and it received income by ways of mobilization and demobilization Charges from the assessee by virtue of its business connection in India. In this order, it was further held that the assessee has claimed deduction of the amount paid to VOAMC for the aforementioned services and the payment for such services rendered in India which resulted in accrual of income to VOAMC which was liable to tax in India in terms of Section 9 (1) (i) of the Act. Thereafter, the Assessing Officer by passing a detailed order held the business connection of the assessee with M/ s VOAMC BV Netherlands was established and, therefore, the reimbursement of the expenses in respect of mobilization and demobilization costs to the aforesaid foreign company was to be subjected to payment of tax. The foreign company had rendered services to the Indian company, assessee, In India on which the assessee was required to deduct tax the prescribed rate as envisaged In section 195 of the Act at the time of payment as ordered/determined by DCIT International Taxation in his order dated 22.11.2002, but since the assessee failed to do so, the learned Assessing Officer disallowed the deduction under section 40 (a) (i) of the Act of the entire mobilization and demobilization expenses of Rs. 8,65,57,909/- claimed by the assessee.
5. Aggrieved with the order of AO the assessee filed an appeal before the CIT (A) and contended before him that:-
“(i) All the expenses reimbursed were supported by the invoices of third parties and proper contracts. Since all the services were rendered outside India, these payments did not accrue or arise any taxable income in India. Therefore, the appellant had not deducted income tax at source from these payments.
(ii) The action of the ld. Assessing Officer is not in accordance with the law as he ignored the basic principle that if a particular amount is not includible in the total income of a person, then such amount cannot be considered as income for the purposes of deduction of tax a t source is not to collect a sum which is not a tax levied under the Act, it is to facilitate the collection of the tax lawfully leviable under the Act.
(iii) An interpretation which would result in collection of certain amounts by the State which is not a tax qualitatively is impermissible in the case of taxing statute.
(iv) The position of the statute is that unless the payment is such that the amount is chargeable under the Act, the liability upon the person responsible for paying it to deduct tax at source is not there. Reliance is placed in the case of Hyderabad industries Ltd. v/s ITO (1991), 188 ITR 749, 752 (Karn) and the case of CIT v/s Cooper Engineering Ltd. (1968) 68 ITR 457 (Bom).
(v) As per Circular No.152 dated 27 Nov 1974 (1975) 98 ITR (St.) 19, Tax should therefore be deducted in all cases where it is required to be deducted under section 195 before the payment made to the non-resident.
(vi) This issue is covered by the decision of the Income Tax Appellate Tribunal Delhi Bench in the case of Saipem S. P.A. v/s DCIT (2004) 88 ITD 213 (Del) (TM). The Hon’ble ITAT has held in the case that the mobilization charges, received by non- resident assessee outside India, attributable to the transportation of rigs outside territorial waters of India, were not chargeable to tax. The appellant had acted in conformity with the above legal decisions and circular issued by the Department.”
6. The CIT (A) thereafter confirmed the disallowance made by the AO mainly on the ground that in the order passed u/s 195 (2) of the Act VOAMC has a permanent establishment (PE) in India and since no evidence has been brought on record by the assessee to show VOAMC had not claimed expenses relating to mobilization and demobilization charges in its profit & loss account, it could not be said that the aforesaid reimbursement did not constitute income of VOAMC liable to tax In India and thereafter concluded that the assessee was required to deduct tax at source from payment made to VOAMC in terms of order dated 22.11.2002 passed u/s 195(2) and the disallowance u/s 40 (i) (a) of the Act was rightly made by the AO as the assessee failed to deduct tax at source from the aforesaid payment by further observing that the real transaction relating to mobilization and demobilization of dredgers was between the assessee and non-resident service providers (and not VOAMC) and that the assessee failed to discharge its obligation of deducting tax at source from the payment made in respect of the aforesaid transaction with non-resident service providers.
7. Before us the Id. AR for the assessee challenging the order of CIT (A) submitted that reimbursement of expenses on actual basis to VOAMC does not give rise to any income in the hands of VOAMC as no income is embedded in the amount reimbursed. In support of his contention he has placed reliance on following cases:-
i) CIT v/s Tejaji Farsaram Kharawalla Ltd: 67 ITR 95 (SC)
ii) Industrial Engg. Products (P) Ltd. 202 ITR 1014· (Del)
iii) Sedco Forex International Drilling Inc, v/s DCIT: 72 ITD 415 (ITAT-Del)
iv) ACIT v/s Enron Expats Services Inc. in ITA No. 4756 & 4757/D/05 (ITAT-Del)
v) ACIT v/s Enron Oil & Gas International Inc. in ITA No.2141 to 2143/05 (ITAT-Del)
vi) Coca Cola India Inc. v/s ACIT (2006): 7 SOT 224 (ITAT-Del) vii) United Hotels Ltd. v/s ITO: 93 TTJ 822 (ITAT-Del)
viii) ITO v/s Dr. Willmar Schwabe India (P) Ltd: 95 TTJ 53 (ITAT-Del)
ix) Clifford Chance, U.K. v/s DCIT: 82 ITD 106 (ITAT Mumbai)
x) DECTA v/s CIT; 237 ITR 190 (AAR)
xi) Hyder Consulting Ltd. v/s CIT: 236 ITR 640 (AAR)
8. AR for the assessee further submitted that the mobilization and demobilization were provided outside India and did not result in any income arising to VOAMC or to the non-resident service providers in India while referring to the decision of the ITAT Delhi Bench, in the case of Saipem SPA v/s DCIT: 88 ITD 213, wherein it was held that mobilization charges received by the non-resident assessee outside India attributable to the transportation of rigs outside territorial waters of India was not chargeable to tax in India.
The aforesaid decision has been distinguished by the lower authorities on the ground that delivery of equipment and machinery in the case of the appellant was within the territorial waters of India and, therefore, the services were rendered in India.
Further, that it has not been appreciated that the dredgers were transported from outside India and services in relation to the transportation of the same were rendered outside India. In any case, only a part of the payment (relating to transportation of rigs In Indian territorial waters) could at best be held liable to tax in India. Therefore, without prejudice, the disallowance under section 40 (a) (i) of the Act is to be restricted only to that part of mobilization and demobilization expenses reimbursed by the appellant which relates to the activity carried out in the Indian territorial waters. The disallowance of the whole of the amount of mobilization and demobilization expenses was, therefore, beyond the provisions of the Act.
9. Learned AR also contended that there is no basis to contend that VOAMC had a PE in India during the relevant previous year and the aforesaid reimbursement made by the appellant was liable to tax in its hands. No order has in the case of VOAMC holding that it had a PE in India. In any case, it is irrelevant factor since even if VOAMC were to have a PE in India, no income arose to it In respect of mobilization and demobilization expenses reimbursed to it by the appellant. The decision of the Delhi Bench of the Tribunal in the case of ACIT v/s Enron Oil & Gas International Inc. (Supra), supports the above view.
10. Further, according to him the issue whether VOAMC claimed deduction of the aforesaid amount paid by it to non-resident service providers was irrelevant for determining the obligation of the appellant to deduct tax at source from the aforesaid amount reimbursed by the appellant to VOAMC. In so far as the appellant was concerned, it only reimbursed to VOAMC the actual cost incurred by VOAMC, which had no element of income embedded on which tax was required to be deducted at source.
11. He also submitted that the CIT (A) has wrongly held that even if the aforesaid reimbursement of expenses to VOAMC does not give rise to income in the hands of VOAMC, the transaction of mobilization and demobilization of dredgers was between the appellant and the non-resident service providers and the appellant was required to deduct tax at source from the payment made to non-resident service providers. It has not been appreciated that there was no privity of contract between the appellant and the non-resident service provider and no payment was made by the appellant to the non-resident service providers. Further, CIT (A) having observed that VOAMC had a PE in India, in view of the order dated 22-11-2002 passed under section 195 (2), there was no basis of holding that the aforesaid amount was paid by the appellant to the non-resident providers and the appellant was required to deduct tax at source thereon under section 195 of the Act.
12. Further, he also contended that the decision of the ITAT in the case of Herbalife International India Pvt. Ltd. (supra) has been wrongly distinguished by the CIT (A) on the ground that the dealings between the appellant and VOAMC, who are associated enterprises were not at arm’s length and the provisions contained in Article 24(4) of the Indo Netherlands Double Tax Avoidance Treaty relating to non-discrimination did not apply to the facts of the case of the appellant. The payment relating to mobilization and demobilization charges was at arm’s length as the same represented the payment made by VOAMC to unrelated non-resident service providers. The order of the Transfer Pricing Officer specifically states that the transaction of reimbursement of expenses between the appellant and VOAMC is at arm’s length. The provisions of Article 24 of the India Netherlands Double Tax Avoidance Treaty, therefore, squarely applied and in view of the aforesaid decision of the Tribunal, the provisions of section 40 (a) (i) have been wrongly invoked in the present case to disallow the aforesaid amount.
13. In the last, the learned AR for the assessee, without prejudice, submitted that since the appellant had deducted tax at source under section 195 in respect of the sum of Rs. 6,98,26,456/- included in the aforesaid amount of reimbursement of Rs. 8,65,57,909/- in terms of the order dated 22.11.2002 passed u/s 195 (2) by DCIT, Circle-2, International Taxation New Delhi, no disallowance u/s 40 (a) (i) of the Act could be made in respect of said amount of Rs. 6,98,26,456/-.
14. On the other hand, countering the submissions of the ld. AR for the assessee, the ld. DR for the Revenue contended that the assessee had been in India as held by the AO in his order passed u/s 195. The charges were paid for services rendered In India and mobilization and demobilization is only for enabling to provide services In India and not the income earning economic activity. He further contended that mere payment of certain amount for services as advance do not alter the character of income and since the entire business activity is carried out in India (dredging in Indian seabed) the income was chargeable to tax u/s 9. The assessee had a business connection and also a PE in terms of Indo-Netherlands DTAA as besides other things it also had a branch office in India. Further according to him reference to Article 24 of Indo-Netherlands DTAA was not valid as the Hon’ble Apex Court in the case of Dredging Corporation of AP, 239 ITR 587 has held that provisions of section 195 did not adversely affect the rights of the parties. The deductability of expen5e5 i.5 determined u/s 37 which do not make a difference between payment to the resident or a non-resident. Section 40 (a) (i) and section 195 are machinery provision and permits allowances in the year in which tax is deducted at source and thus provisions of Indo-Netherlands DTAA cannot be attracted for discrimination. In this regard he has referred to para 55 of the OECD commentary on Article 24. Even otherwise, provisions of law (as per the Income Tax Act) have to be followed even if Hon’ble Tribunal finds that provision of article 24 of the DTAA are attracted. The validity of provisions of sec. 195 or 40(a) (i) cannot be adjudicated upon by the Hon’ble Tribunal. It is submitted with the utmost respect that the Hon’ble Tribunal does not have jurisdiction to adjudicate upon the validity of a provision of Income Tax Act – in view of the Full Bench decision of Hon’ble Supreme Court in case of K.S. Venkatrama and Company Pvt. Ltd. v/s State of Madras (1966) 60 ITR 112 (SC) .
15. Further he referred to the case of M/s. Saipan SPA v/s DCIT and submitted that the same is also not relevant as it was decided in reference to 44BB of the Income Tax Act. The Hon’ble Tribunal failed to appreciate that 44BB is a complete code as held by the Hon’ble High Court in the cases of Oil India v/s CIT, 212 ITR 225(Orissa) and CIT v/s ONGC 255 ITR 413(Raj).
16. He further contended that M/s. Von Cord Pvt. ACZ had made an application to AAR regarding tax effect on its joint venture with Hindustan and company Limited. The AAR held that applicant shall be liable to tax as a separate and independent entity thus indicating that M/ s Von Cord ACZ Ltd. has a PE in India.
17. Lastly, he contended that as regards discrimination Article it may be observed that not only the procedures but even a higher rate of taxation In case of a non-resident is not considered discriminatory.
17.1 Even in Indo-US treaty (on which Herberlife case is based) a higher rate of tax is not considered discriminatory. In case of another tax payer based in Netherland (a banking company) this issue was raised but it has not been held by the Tribunal and an explanatory memorandum to sec.90 has been introduced to clarify it.
18. We have heard the rival submissions of both the parties, perused the records and· carefully gone through the orders of the tax authorities below as well as the case law relied upon by both the parties and the written submissions filed by both the parties.
19. In the instant case, we are basically required to resolve the issue whether the tax authorities below were justified in disallowing a sum of Rs. 8,65,57,909/- the assessee as mobilization and demobilization costs debited by the assessee in the P&L Account u/s 40 (a) (i) of the Act.
19.1 The relevant provisions of sub-clause (i) of clause (a) of section 40 after substituted by Finance Act 1988 tax w. e. f. 1st April 1989 relevant to assessment year 2003-04, under consideration, is stated as under: –
“(i) Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B:
Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVIT-B in any subsequent year, such sum shall he allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted.”
20. On reading this provision, it is clear that as per sub-clause (i) of clause (a) of section 40 which has been substituted by Finance Act 1988 w.e.f 1st April 1989 to extend the applicability of the clause also to the payments made to non-resident of royalty, fee for technical services or any other payment chargeable under this Act. Now, the inclusion of the words ‘any another payments’ in the amended provision has widened the scope of the meaning of the word payment and so the payments made by the assessee through M/s Van Oord ACZ Marine Contractors BV, Netherlands to the non-residents in respect of mobilization and demobilization charges amounting to Rs. 8,65,57,909/- under consideration is covered within the provision of section 40 (a) (i) of the Act.
21. From the existing provisions of sub-clause (i) of clause (a) of the section 40 of the Act, it is further clear that no deduction is allowed in the computation of income on account of interest, royalty, fee for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company, if tax is not deducted at source from payment of these sums or after deduction of tax at source, payment is not made to the account of Central Government before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with other provisions of Chapter XVII-B. Deduction of the sum is, however, allowed where tax has been deducted or after deduction has been paid in any subsequent year in computing the income of that previous year.
22. The power to deduct tax at source is conferred by section 195(1) of the Act. On a combined reading of the provisions of section 40 (a) (i) and section 195 or 197 of the Act, it is clear that where deduction of tax is required to be made under section 195(1) the same cannot be avoided unless ‘nil’ deduction or deduction at a lower rate is authorized by the Assessing Officer under section 195(3) or 197 of the Act. In case the tax has not been deducted as per provisions of Section 195 of the Act in the manner as stated hereinabove, then the legislature in its wisdom, in order to ensure effective compliance of provision of section 195 of the Act relating to tax deductions at source in respect of payments outside India, extended the scope of the above provision to cover payments in respect of royalty, fees for technical services or other sources chargeable under the Act enacted this provision of section 40 (a) (i) of the Act mandating that no deduction for such payments is allowed to the assessee in computation of income for such payment outside India or in India to a non-resident or to a foreign company, if tax is not deducted at source from the payments of such sums.
23. The Apex Court In the case of Transmission Corporation of AP Ltd. & Another v/s. CIT 239 ITR 387 has clearly elucidated the scheme and purpose of deduction of tax at source u/s 195 as well as the duty of the tax payer for the payments made to non-residents. Their Lordships while discussing the Scheme of section 195 and other relevant provisions of section 197 of IT Act observed as under :-
“Section 195 deals with deduction of tax at source in case where payment is to be made to a non-resident. The scheme of sub-sections (1), (2) and (3) of section 195 and 197 leaves no doubt that the expression “any other sum chargeable under the provisions of this Act “would mean “sum” on which income tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act or not? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum, what would be the income is to be computed on the basis of various provisions of the Act including provisions for computation of the business income, if the payment is a trade receipt. However, what is to be deducted is income-tax payable thereon at the rates in force. Under the Act, total income for the previous year would become chargeable to tax under section 4. Sub-section (2) of section 4, inter alia, provides that In respect of income chargeable under sub-section (1), income-tax shall be deducted at source where it is so deductible under any provision of the Act. If the sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted.”
24. Their Lordships thereafter while discussing the purpose of the enactments of section 195 of the Act observed as under:-
“Whatever may be the position, if the income is from profits and gains of business, it would be computed under the Act as provided at the time of regular assessment. The purpose of sub-section (1) of section 195 is to see that the sum which is chargeable under section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income- tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not in any manner, adversely effected.”
25. Further, their while discussing the Lordships safeguards provided to the payee or the recipient under these provisions observed as under.
“Further, the rights of the payee or recipients are fully safeguarded under section 195 (2), 195 (3) and 197. The only thing which is required to be done by them is file application for to an determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such “sum” to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.”
26. Now, keeping in View these observations of the Apex Court we would like to discuss and deduce the meaning, scope, limitations, rights and duties of payer and the payee under the provisions of sections 195 of the IT Act as under :-
a) Section 195 deals with the deduction of tax at source by the payer i. e. assessee if the payments are to be made to a non-resident.
b) The payer/assessee is required to deduct Income tax on such payments made to non-resident at the specified rates in force.
c) If the parties feel that either the deduction of tax at source by the payer is required to be at a rate lower than the prescribed rate or no deduction is required to be made they are required to file an application before the ITO for obtaining such certificate. In case no such application is filed before Assessing Officer for obtaining such certificate or such application is rejected by Assessing Officer and direction is issued by the Assessing Officer to deduct such tax at a particular rate the payer is duty bound to deduct tax as per the directions of Assessing Officer and In case no such application for obtaining the certificate was filed before the Assessing Officer then the payer is duty bound to deduct tax as per the prescribed rates in force at the relevant time. If the payer still fails to comply with the provisions there is no escape for the payer from suffering the consequences provided under the IT Act.
d) Since the deduction of tax u/s 195 on such payments to non-residents is subject to regular assessments the rights of parties are not adversely affected in any manner whatsoever and is clearly indicative of a fact that such deductions are tentative.
27. From the above discussion we can further deduce that rights and duties of the payer now clearly stand demarcated and limited to the extent as laid down by the Apex Court in their order (Supra) i.e. that the payer/assessee is duty bound to deduct tax at source for the payments made to non-residents at the appropriate rates as provided under these provisions. The payer cannot escape the liability for doing so unless a certificate from ITO is obtained for the deduction of the tax either at a rate lower than the rate as prescribed or for non-deduction of tax at source and that the duty of the payer ends here only and he is not required to examine and look into other aspects beyond this like whether the payer received the services from the non-resident to whom such payments were made or from some other person through the non-resident; whether such receipt in the hands of the recipient non-resident would be his income or part of it would be his income on which he is liable to pay tax. The payer is not expected to step into the shoes of the Assessing Officer for examining whether the receipts in the hands of the recipient is income or not whether he is liable to pay tax thereon or not.
28. In our opinion it is also not material for the payer either to make the whole of the payment to the recipient/non-resident or to make part of the payment to the payee after deduction of the tax at source at the prescribed rates because in either of the conditions the payer/assessee has to part with the whole of the payment required to be made to the non-resident by him. More so when the deduction of the tax at source u/s 195 is subject to regular assessment and the right of non-resident is not adversely affected because at the time of regular assessment if the payee/recipient succeeds in proving before the Assessing Officer that such receipts, from the payer/assessee, were not its income and so it was not bound to pay tax thereon then such tax deducted at source by the payer/assessee and deposited with the Government is bound to be refunded or adjusted against the payment of tax, if any, to the recipient non-resident by the ITO at the time of regular assessment.
29. To sum up, we may mention that neither it is the duty nor it is desirable from the payer/assessee to examine whether any tax is deductible at source from the payments made to the non-resident. In case it feels that the tax is required to be deducted at source or required to be deducted at a lower rate then it is required to obtain such certificate u/s 195 (2) from ITO or for non-deduction of tax at source. This is a safeguard provided u/s 195 (2), 195 (3) and 197 to payer and payee because before the Assessing Officer while obtaining certificate such facts are required to be established by them.
30. For non-compliance of the statutory provisions of sec. 195 by the payer it would have to suffer the consequences laid down by the Legislature u/s 40(a) (i) of the IT Act.
31. The provision of section 40 (a) (i) has been enacted by the Legislature in its wisdom to ensure the effective compliance of provisions of section 195 of the Act relating to tax deductions at source In respect of payments made to non-residents outside India. Thus the provision mandates that no deduction for such payments made to non-residents outside India is to be allowed to the payer/assessee while computing its income while considering its claim of deduction for such payments made to non-resident at the time of assessment in case the tax is not deducted at source from the payment of such sums as per provisions of section 195.
32. With this enactment now the duty is cast upon the Assessing Officer to not allow the deduction to the payer/assessee for such payments in the cases where the provisions of section 195 are not complied with by the payer while computing the income of such payer assessee during the course of assessment proceedings.
33. Thus, In view of our detailed discussions and applying the ratio of the decision of the Apex Court in the case of Transmission Corporation of AP Ltd.
(Supra), we conclude that it is not for the assessee/payer to decide the taxability of payments made by it In the hands of non-resident recipient as the machinery for this purpose was provided in sub section (2) of section 195 itself, whereby the concerned Assessing Officer could have been approached to decide this aspect. That the chargeability of income in the hands of recipient non-resident to be taxed in India is a separate issue and in the absence of any certificate obtained from the concerned Assessing Officer u/s 195 (2) , it was obligatory on the part of the assessee to deduct tax at source from the payments made to the concerned non-resident. That the payer/assessee having failed to deduct such tax as required by section 195 the payments made to the recipient non-resident were liable to be disallowed as per the specific provisions contained in section 40 (a) (1). That while deciding the issue whether for such payments made to non-resident by the payer/assessee deduction u/s 40(a) (i) could be allowed to the payer or not. We are not required to look into the nature of such payments made to non-resident nor are to look into whether such payments are income or part of the income in the hands of recipient non-resident taxable in India and many other relevant factors relating to taxability of the payments in the hands of recipient non-resident as its income in India. That having held so the detailed arguments of both the parties on the question of the nature of the payments made by the payer to the payee non-resident and the taxability of such payment as income In the hands of recipient non-resident is thus beyond the scope of provisions of section 40 (a) (i) where we are only required to consider the deduction of such payments claimed by the payer/assessee to the non-resident in case of non compliance of provisions of section 195 of IT Act i.e. non-deduction of tax at source for the payments made to non-resident.
33.1 Hence for the reasons stated above, we are not considering the arguments of the parties on merits regarding the nature of payments and taxability of the same in the hands of recipient non-resident company as well as the related case laws relied upon by both the parties for deciding the issue u/s 40(a) (i) as being not relevant and so we are also not referring to the same in this order.
34. Hence, from our elaborate discussion now the rights and duties of the payer/payee u/s 195 and 197 of the Act as well as the duty of the Assessing Officer to take action against such payer/assessee under the provisions of section 40 (a) (i) of IT Act in case of non-compliance with the provisions of section 195 at an appropriate stage stand enlisted by us.
35. Now reverting to the facts of the instant case of the assessee, the undisputed position emerges as under:-
a) The payer/assessee has made payments to the non-resident for the services rendered for mobilization and demobilization of dredgers to Adani Port in India. An application u/s 195 was moved for issuing ‘Nil’ tax withholding certificate on which an order u/s 195(2) was passed on 4-3-2001 and 17-4-2002 wherein VOAMC i.e. the non-resident company was held to have a PE in India on the ground that it was executing the Adani contract in India as the assessee did not have the technical competence or the infrastructure to execute the aforesaid contract.
b) That reimbursement of charges/payments to VOAMC were liable to tax in India.
c) Though order u/s 195 dated 17-4-002 was agitated in appeal the same was dismissed in limine because the assessee had not deducted and paid the tax as per the order which was the condition precedent for entertaining an appeal u/s 248.
d) The order u/s 195(2) dated 4-3-2001, as per assessee was not challenged since the assessee decided not to pay the general cost amounting to 8% of the turnover to VOAMC.
36. The assessee claims to have deducted tax at source as per section 195 in respect of sum of Rs. 69826456/- included in the amount of Rs. 86557909/- in terms of order dated 22-11-2002 passed u/s 195(2) of IT Act.
37. It means that the order dated 22-11-2002 U/2 195(2) remained unchallenged by the assessee and the assessee/payer did not fully comply with the requirement of section 195 except allegedly deducting the tax at source at Rs. 69826456/- against Rs. 86557909/-determined In terms of order passed u/ s 195 (2) of the Act. .
38. Hence summing up we conclude that in the facts and circumstances since the payer assessee has moved an application under sub section (2) of section 195 to the Assessing Officer for obtaining a certificate for issuing ‘nil’ tax withholding certificate and the same having been rejected by the Assessing Officer and no appeal having been filed or the order being reversed the same has become final and for non compliance with the provisions of section 195 by the payer by not deducting tax at source the Assessing Officer was fully justified in refusing deduction claimed by the payer assessee for such payments u/s 40(a) (i) of IT Act. Hence the impugned order of CIT (Appeals) In this regard is upheld. Since before us the assessee has claimed to have deducted tax at source for a sum of Rs. 69826456/- in terms of the order dated 22-11-2002 u/s 195(2) out of the total amount of Rs. 86557909/-, under consideration, as determined in the order passed u/s 195(2) the Assessing Officer is directed to verify this fact and in case the same is found to be correct the Assessing Officer should allow the benefit of the same to the assessee out of the total 86557909/- under consideration. In this view of the matter the instant appeal and the grounds of appeal taken therein stand decided in terms of the order.
39. In the result the appeal of the assessee is partly allowed in terms of the order hereinabove.
Order pronounced in the open Court on 30-11-2007.
Subsequently CBDT a has issued Instruction 2/2014- which reduced the burden on the deductor