ITO, CHENNAI V. M/s. CMS (India) Operations & Maintenance Co.Pvt.Ltd., Vriddhachalam

ITA 1264/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0778 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 04-02-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 08-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Keywords: Double taxation relief

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 1264/MDS/2012 (ASSESSMENT YEAR : 2007-08) THE INCOME TAX OFFICER, INTERNATIONAL TAXATION II(2), CHENNAI - 600 034. (APPELLANT) V. M/S CMS (INDIA) OPERATIONS & MAINTENANCE CO. PVT. LTD., ST-CMA 240 MW LFPP, UTHANGAL VIRUDACHALAM TALUK, TAMIL NADU 607 804. PAN : AABCC 1944 R (RESPONDENT) APPELLANT BY : DR. S. MOHARANA, CIT-DR RESPONDENT BY : DR. ANITA SUMANTH, ADVOC ATE SHRI S.P. CHIDAMBARAM, ADVOCATE DATE OF HEARING : 04.02.2013 DATE OF PRONOUNCEMENT : 14.02.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, DIRECTED AGA INST AN ORDER DATED 23.12.2011 OF COMMISSIONER OF INCOME TAX (APP EALS)-XII, CHENNAI, ITS GRIEVANCE IS THAT CIT(APPEALS) ENTERTA INED ASSESSEES APPEAL UNDER SECTION 248 OF INCOME-TAX ACT, 1961 (I N SHORT 'THE ACT') AND HELD ASSESSEE NOT LIABLE TO DEDUCT TAX AT SOURC E ON I.T.A. NO. 1264/MDS/12 2 REIMBURSEMENT OF SALARIES PAID TO ONE M/S CMS RESOU RCE MANAGEMENT COMPANY. 2. FACTS APROPOS ARE THAT ASSESSEE IS A SUBSIDIARY COMPANY OF ONE US COMPANY. ASSESSEE WAS ENGAGED IN OPERATION AND MAINTENANCE OF POWER PLANT. ASSESSEE HAD PAID CERT AIN AMOUNTS DURING THE IMPUGNED ASSESSMENT YEAR TO ONE M/S CMS RESOURCE MANAGEMENT COMPANY (IN SHORT CMS RDC) AND CLAIMED S UCH EXPENDITURE UNDER THE HEAD REIMBURSEMENT OF MANPOW ER COST. M/S CMS RDC HAD DEPUTED SOME OF ITS EMPLOYEES TO INDIA TO WORK FOR THE ASSESSEE. EXPENSES FOR THE DEPUTED EMPLOYEES I NCURRED BY M/S CMS RDC WERE REIMBURSED BY THE ASSESSEE. ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE ON THE PAYMENTS EFFECTED TO M/S CMS RDC FOR ANY YEAR UPTO AND INCLUDING ASSESSMENT YEAR 200 6-07. FOR THOSE YEARS, ASSESSING OFFICER TOOK A VIEW THAT ASSESSEE HAVING NOT DEDUCTED TAX AT SOURCE, AS STIPULATED UNDER SECTION 195 OF THE ACT, RIGOURS OF SECTION 40(A)(IA) OF THE ACT WAS ATTRACT ED. HE HAD DISALLOWED THE CLAIM OF EXPENDITURE FOR ASSESSMENT YEAR 2002-03 TO ASSESSMENT YEAR 2006-07. APPEALS WERE FILED BY TH E ASSESSEE, AGAINST SUCH DISALLOWANCE, AND IT WAS SUCCESSFUL. ACCORDING TO CIT(APPEALS), AGREEMENT BETWEEN ASSESSEE AND M/S CM S RDC WAS ONE FOR REIMBURSEMENT AND THERE WAS NO SUPPLEMENTAR Y AGREEMENT I.T.A. NO. 1264/MDS/12 3 FOR TRANSFER OF TECHNICAL KNOWHOW. REVENUE HAD MOV ED IN APPEAL BEFORE THIS TRIBUNAL FOR ALL THESE YEARS AGAINST TH E DIRECTIONS OF THE CIT(APPEALS) TO ALLOW THE CLAIM OF THE ASSESSEE AND THIS TRIBUNAL, VIDE ITS ORDER DATED 9 TH FEBRUARY, 2012, HELD AT PARAS 8 TO 13 AS UNDER:- 8. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. NO DOUBT, THERE ARE OBVIOUS CONTRADICTIONS IN THE CLAI M OF THE ASSESSEE. AT ONE PLACE IT SAYS THAT THE PERSONS CONCERNED NAMED MR.H ENRY HOFFMAN AND MR. THOMAS W. BOWES WERE ITS EMPLOYEES, WHO WERE PAID S ALARIES WHEREAS AT ANOTHER PLACE THE ASSESSEE HAS CLAIMED THAT THE PAY MENTS EFFECTED TO CMS RDC WERE ONLY REIMBURSEMENT OF EXPENDITURE. 9.(A) FOR ASSESSMENT YEARS 2002-03 & 2003-04, ASSES SEE HAS PLACED RELIANCE ON CERTAIN LETTERS GIVEN BY CMS RDC, USA. THE FIRST LETTER DT.21.03.07 READ AS UNDER:- CMS RESOURCE DEVELOPMENT COMPANY IS ENGAGED PRIMAR ILY IN THE ACTIVITIES OF PROVIDING VARIOUS SERVICES IN CONNECT ION WITH THE SECONDING OF CERTAIN EMPLOYEES WHO HAVE BEEN IDENTI FIED FROM WITHIN CMS GROUP OF COMPANIES WORLD WIDE AS BEING QUALIFIE D FOR THE PARTICULAR NEEDS OF CERTAIN COMPANIES WITH WHICH CM S IS AFFILIATED. IT IS FURTHER CERTIFIED THAT CMS RESOURCE DEVELOPME NT COMPANY IS NOT EARNING ANY NET PROFIT OUT OF SUCH ACTIVITIES. 9.(B) THE SECOND LETTER DT.10.03.08 READ AS UND ER:- WE REFER TO THE AGREEMENTS ENTERED INTO BETWEEN CMS RESOURCE DEVELOPMENT COMPANY AND CMS(INDIA) OPERATIONS & MAI NTENANCE CO. PVT. LTD. ENTITLED REIMBURSEMENT OF COST AGREEMEN T DATED MAY 1, 2001 AND AGREEMENT FOR REIMBURSEMENT OF COST FOR D EPUTATION OF PERSONNEL DATED JUNE 1, 2003, PERTAINING TO THE DE PUTATION OF MR. HANK HOFFMAN AND MR.THOMAS W. BOWES, RESPECTIVELY. IT MAY BE NOTED THAT THE AMOUNT OF SALARY CREDITED TO THE AC COUNTS OF MR.HOFFMAN FOR FYS 2001-2004 AND MR.BOWES FOR FY 2 003-04 WAS I.T.A. NO. 1264/MDS/12 4 NOT AN EXPENDITURE FOR CMS RESOURCE DEVELOPMENT COM PANY, BUT RATHER WAS MADE TO ASSIST CMS (INDIA) OPERATIONS & MAINTENANCE CO. PVT. LTD. IN THE PAYMENT OF SALARY TO MR.HOFFMAN A ND MR.BOWES OUTSIDE OF INDIA. ACCORDINGLY, THE AGREEMENTS ARE OF REIMBURSEMENTS OF MONIES ADVANCED BY CMS RESOURCE D EVELOPMENT COMPANY. 9(C) THE THIRD LETTER DT.15.12.2009 READ AS UNDE R:- AT THE END OF THE MONTH, RESOURCE CHARGED CMS INDI A O&M COMPANY, AND OTHER COMPANIES, WITH THE SALARIES, RE CORDING ACCOUNTS RECEIVABLE FROM THEM. THE CREDIT SIDE OF THE ENTRY WENT TO BILLED PROJECT COSTS, WHICH WAS NOT A REVENUE ACCOUNT, BUT RATHER A CONTRA ACCOUNT TO SALARY EXPENSE. THUS, THE SALARIES OF M R.HOFFMAN AND MR.BOWES WERE TEMPORARILY RECORDED IN AN EXPENSE AC COUNT AS PART OF A JOURNAL ENTRY INTENDED TO RECORD TOTAL PAYROLL, B UT WERE REVERSED TO ZERO AT THE END OF THE MONTH 9(D) FOR THE OTHER ASSESSMENT YEARS, ASSESSEE ALSO PRODUCED A COPY OF THE AGREEMENT DT.01.06.2003 BETWEEN ASSESSEE AND CMS RD C AND RELEVANT ARTICLES 2, 4 & 5 OF THE SAID AGREEMENT READ AS FOL LOWS: ARTICLE II-SCOPE : 2.1. THIS AGREEMENT COVERS THE DEPUTATION OF THE EM PLOYEE BY RDC TO O&M AND THE TERMS AND CONDITIONS THEREOF. ARTICLE IV DEPUTATION OF EMPLOYEE : 4.1. THE EMPLOYEE DEPUTED SHALL MAKE HIS SERVICES AVAILA BLE TO O&M (THE ASSESSEE COMPANY) IN CONNECTION WITH THE O PERATION MAINTENANCE OF ELECTRIC POWER PLANT IN THEIR RESPEC TIVE FIELDS OF SPECIALIZATION. ARTICLE V REIMBURSEMENT OF EXPENSES : 5.1. O & M SHALL REIMBURSE RDC ON ACTUAL BASIS REMU NERATION PAID OR PAYABLE TO THE EMPLOYEE DEPUTED BY THE RDC INCLUDING I.T.A. NO. 1264/MDS/12 5 ASSOCIATED COSTS PAID TO AND/OR INCURRED IN RESPECT OF EMPLOYEE DEPUTED BY RDC. FOR THESE PURPOSES, ASSO CIATED COSTS SHALL INCLUDE SALARY AND OTHER RELATED COST. 5.2. O & M SHALL ALSO REIMBURSE ON ACTUAL BASIS TH E EXPENSES INCURRED TOWARDS TRAVELING LIVING INCLUDING ACCOMMO DATION AND MEDICAL DURING THE PERIOD OF DEPUTATION. 5.3. NO OTHER FEE SHALL BE PAYABLE TO RDC AS SERVIC ES FEES FOR THE DEPUTATION OF THE EMPLOYEE IN PURSUANCE OF THE AGREEMENT EXCEPT THE SALARY AND REIMBURSABLE EXPENSES ON ACTU AL BASIS AS PROVIDED IN CLAUSE 5.1. & 5.2. ABOVE. 10. BEFORE GOING INTO THE ISSUE, IT WILL BE APPROP RIATE TO REPRODUCE SEC.40(A)(I) OF THE ACT, WHICH HAS BEEN RELIED ON B Y THE ASSESSING OFFICER FOR MAKING THE DISALLOWANCE. SEC.40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 67 [ 38 ], THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCO ME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, 68 ( A ) IN THE CASE OF ANY ASSESSEE 69 [( I ) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISSUED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), ROYALTY, FEES F OR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYAB LE, ( A ) OUTSIDE INDIA; OR ( B ) IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY O R TO A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAI D DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY O F THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEE N DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCTED IN THE PREVIO US YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PRESCR IBED UNDER SUB-SECTION (1) OF SECTION 200, SUCH SUM SHALL BE ALLOWED AS A DEDU CTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS B EEN PAID. EXPLANATION. FOR THE PURPOSES OF THIS SUB-CLAUSE, ( A ) ROYALTY SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE ( VI ) OF SUB-SECTION (1) OF SECTION 9 ; I.T.A. NO. 1264/MDS/12 6 ( B ) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAM E MEANING AS IN EXPLANATION 2 TO CLAUSE ( VII ) OF SUB-SECTION (1) OF SECTION 9 ; THE ABOVE CLAUSE STIPULATES BLANKET DISALLOWANCE WH ERE A PERSON HAS MADE A PAYMENT OF THE NATURE MENTIONED THEREIN, TO A NON-R ESIDENT WITHOUT DEDUCTING TAX AT SOURCE. THE TERMINOLOGY USED IS T HAT AMOUNT SHOULD BE ONE ON WHICH THE TAX IS DEDUCTIBLE AT SOURCE UNDER CHA PTER XVII-B. THE SAID CHAPTER-XVII-B CONSISTS OF SECTIONS 192 TO 206-AA. OUT OF THESE SECTIONS, THERE ARE ONLY TWO SECTIONS ON WHICH ASSESSEE COULD BE FASTENED WITH A LIABILITY TO DEDUCT TAX AND THESE ARE SECTION 195 A ND SECTION 192. SEC.192 MANDATES DEDUCTION OF TAX AT SOURCE ON PAYMENT OF SALARIES AND SEC.195 MANDATES DEDUCTION OF TAX AT SOURCE ON PAYMENTS EFF ECTED TO NON-RESIDENT WHETHER INTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT. 11. APPLYING THIS POSITION OF LAW TO THE FACTS HE RE, IF THE PAYMENTS EFFECTED WERE SALARIES, NO DOUBT BY VIRTUE OF SEC.1 92, WHICH DOES NOT MAKE ANY DIFFERENTIATION BETWEEN RESIDENT OR NON-RESIDEN T RECIPIENT, ASSESSEE WAS BOUND TO DEDUCT TAX. BUT HERE ADMITTEDLY THE PERS ONS INVOLVED WERE NOT EMPLOYEES OF THE ASSESSEE AND THERE WAS NO EMPLOYEE -EMPLOYER RELATIONS BETWEEN THE ASSESSEE AND THE SAID PERSONS. LD. AS SESSING OFFICER HIMSELF HAS NOTED THIS AT PARA-12 OF ASSESSMENT ORDER FOR A SSESSMENT YEAR 2002- 03. LD. C.I.T.(A) HAS GIVEN A FINDING IN HIS ORDER THAT THE EXPATRIATES HAD FILED THEIR TAX RETURNS IN INDIA AND M/S.CMS RDC HA D DEDUCTED TAX AT SOURCE ON PAYMENT OF SALARIES EFFECTED TO THESE PER SONS WHO WERE ON THEIR ROLLS. THIS HAS NOT BEEN REBUTTED. THE PERSONS WER E THUS IN THE PAYROLL OF CMS RDC AND THUS COULD ONLY BE CONSIDERED AS EMPLOY EE OF CMS RDC. THIS LEAVES US WITH QUESTION WHETHER THE PAYMENTS WOULD FALL UNDER SEC.195. 12. TO FALL UNDER SECTION195, THE PAYMENT SHOULD B E A SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT. NO DOUBT IF IT WA S FEES FOR TECHNICAL SERVICES, IT WOULD DEFINITELY FALL U/S.9(1)(VII) OF THE ACT AND IRRESPECTIVE OF THE PLACE OF BUSINESS OR BUSINESS CONNECTION OF THE NON-RESIDENT ENTITY IN INDIA SUCH INCOME HAS TO BE DEEMED AS ACCRUING OR A RISING TO THE NON- RESIDENT ENTITY IN INDIA. DEFINITION OF THE FEES F OR TECHNICAL SERVICES GIVEN IN EXPLANATION 2 TO CLAUSE (VII) OF SEC.9(1) OF THE ACT RUN AS UNDER:- EXPLANATION 79 [ 2 ] . FOR THE PURPOSES OF THIS CLAUSE, FEES FOR TECHNIC AL SERVICES MEANS ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERA TION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCL UDING THE PROVISION OF SERVICES OF I.T.A. NO. 1264/MDS/12 7 TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION 80 , ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER T HE HEAD SALARIES.] EVEN IF WE CONSIDER THE SERVICES RENDERED BY THE CO NCERNED PERSONS AS FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF THE AB OVE DEFINITION, ASSESSEE COULD STILL FALL BACK ON THE SEC.90(2) OF THE ACT, AND SAY THAT DOUBLE TAXATION AGREEMENT BETWEEN THE TWO COUNTRIES SHOULD BE APPLIED. DEFINITION AS PER DOUBLE TAXATION AGREEMENT AND THA T IN THE ACT AS TO WHAT IS A FEE FOR TECHNICAL SERVICES DIFFER. DOUBLE TAX ATION AGREEMENT BETWEEN INDIA AND U.S.A. AND THE MEMORANDUM OF UNDERSTANDIN G DATED 15 TH MAY, 1989 BETWEEN THESE COUNTRIES, WHICH DEFINES THE TER MINOLOGY USED IN THE DTAA, SPECIFY AT PARAGRAPH-4 THAT TECHNICAL SERVICE S SHOULD BE MADE AVAILABLE. ASSESSEE MIGHT HAVE COME TO A BONA FID E BELIEF THAT THERE WAS NO TECHNICAL SERVICES MADE AVAILABLE TO IT BY M/S.C MS RDC. AS ALREADY MENTIONED BY US, THERE IS A CLEAR FINDING BY THE CO MMISSIONER OF INCOME TAX(A) THAT WHEN SALARIES WERE PAID TO THE DEPUTED EMPLOYEES BY CMS RDC, TAXES WERE DULY DEDUCTED AND SUCH TAX DEDUCTED WERE REFLECTED IN THE INCOME TAX RETURN FILED BY THE SAID EMPLOYEES. THE AGREEMENTS BETWEEN ASSESSEE AND M/S.CMS RDC WHICH HAS BEEN REPRODUCED AT PARA - 9(D) CLEARLY SHOW THAT NO TECHNICAL KNOW-HOW WAS MADE AV AILABLE TO THE ASSESSEE. ASSESSEE COULD THEREFORE, HAVE FORMED A BONA FIDE I MPRESSION THAT NO PART OF THE PAYMENT IT HAD EFFECTED TO M/SCMS RDC HAD A NY ELEMENT OF INCOME THEREIN. IN OUR OPINION, DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN PRASAD PRODUCTIONS LTD (SUPRA) READILY COMES TO THE AID OF THE ASSESSEE. PARA NOS.26 & 27 OF THE SAID ORDER, WHICH IS RELEVANT IS REPRODUCED HEREUNDER FOR BREVITY. 26. A PERTINENT QUESTION WAS RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE AS TO WHO DECIDES WHETHER THE PAYMEN T BEARS ANY INCOME CHARACTER OR NOT. IN HIS VIEW, IT COULD BE EITHER T HE ASSESSING OFFICER OR A CHARTERED ACCOUNTANT AS PRESCRIBED BY THE BOARD, BU T CERTAINLY NOT THE ASSESSEE (THE PAYER). THE ROLE OF THE CHARTERED AC COUNTANT COMES INTO PLAY IN THE ALTERNATIVE PROCEDURE PRESCRIBED BY THE BOAR D AND TO WHICH WE SHALL ADVERT TO IT A LITTLE LATER. HOWEVER, WE ARE NOT I N AGREEMENT WITH THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE (I.E. THE PAYER) HAS NO ROLE TO PLAY. THE IT ACT IS ENACTED TO LEVY TAXES ON INCOM E EARNED BY A PERSON. IT IS THE STATUTORY OBLIGATION OF THE PERSON EARNING INCO ME TO PREPARE HIS TAX RETURN, DETERMINE HIS TAX LIABILITY, PAY THE SAME A ND FURNISH THE RETURN. HE ALSO PAYS TAX IN ADVANCE DURING THE FINANCIAL YEAR AS HE EARNS INCOME. ALL THESE OBLIGATIONS ARE ON THE PERSON EARNING THE INC OME AND HE IS TO FULFILL THESE OBLIGATIONS ACCORDING TO HIS UNDERSTANDING OF THE VARIOUS PROVISIONS OF THE ACT. THE QUESTION IS, IF HE IS EXPECTED TO KNOW THAT INCOME IS TAXABLE OR I.T.A. NO. 1264/MDS/12 8 NOT TAXABLE IN HIS OWN CASE, WHY CANT HE DECIDE IN RESPECT OF THE PAYMENT HE IS MAKING TO NON-RESIDENT. IT IS TO BE APPRECIA TED THAT THE PAYER HAS NOT TO DETERMINE THE TAX LIABILITY OF THE TOTAL INCOME OF THE PAYEE. HE HAS TO CONSIDER THE CHARGEABILITY ONLY IN RESPECT OF THE P AYMENT HE IS MAKING TO THE PAYEE. FURTHER, SUB-S. (2) STATES, WHERE THE PERSO N RESPONSIBLE FOR PAYING ANY SUCH SUM CHARGEABLE UNDER THIS ACT TO A NON-RES IDENT CONSIDERS THAT THE WHOLE OF SUCH SUM WOULD NOT BE INCOME CHARGEABLE IN THE CASE OF THE RECIPIENT ..(EMPHASIS, ITALICIZED IN PRINT, SUPPLI ED). CONSIDER THE WORDS WHICH ARE UNDERLINED BY US (ITALICIZED IN PRINT). THEY CLEARLY INDICATE THAT IT IS THE PAYER WHO WILL FIRST CONSIDER WHETHER THE PAYME NT OR ANY PART OF IT BEARS INCOME CHARACTER. THEREFORE, IN OUR VIEW, IT IS THE PAYER WHO IS THE PERSON TO DECIDE WHETHER THE PAYMENT HE IS MAKING BEARS ANY I NCOME CHARACTER OR NOT. NOW, WE CAN VISUALIZE VARIOUS SITUATIONS THAT CAN A RISE FOR THE APPLICABILITY OF S.195: (A) IF THE BONA FIDE BELIEF IS THAT NO PART OF THE PAYMENT HAS ANY PORTION CHARGEABLE TO TAX, S.195 WOULD BE TOTALLY INAPPLICA BLE. (B) IF THE PAYER BELIEVES THAT WHOLE OF THE PAYMENT IS INCOME CHARGEABLE TO TAX, HE WILL BE LIABLE TO DEDUCT TAX UNDER S.195(1) OF THE ACT. (C) IF HE BELIEVES THAT ONLY A PART OF THE PAYMENT IS CHARGEABLE TO TAX, HE CAN APPLY UNDER S.195(2) FOR DEDUCTION AT APPROPRIA TE RATES. (D) IF THE PAYER BELIEVES THAT A PART OF THE PAYMEN T IS INCOME CHARGEABLE TO TAX AND DOES NOT MAKE AN APPLICATION UNDER S.195(2) , HE WILL HAVE TO DEDUCT TAX FROM THE ENTIRE PAYMENT. (E) IF THE PAYER BELIEVES THAT THE ENTIRE PAYMENT O R A PART OF IT IS INCOME CHARGEABLE TO TAX AND FAILS TO DEDUCT TAX AT SOURCE , HE WILL FACE ALL THE CONSEQUENCES UNDER THE ACT. (F) IF THE PAYER BELIEVES THAT HE HAS TO DEDUCT TAX AND EXPRESSES THIS DUTY OF HIS TO THE PAYEE, IT IS FOR THE PAYEE THEN TO AP PLY UNDER S.195(3) TO RECEIVE THE PAYMENT WITHOUT ANY DEDUCTION AT SOURCE . (G) IF THE PAYEE FAILS TO OBTAIN CERTIFICATE UNDER S.195(3), THE PAYER, BASED ON HIS BELIEF WILL CERTAINLY WITHHOLD THE TAX. THUS, IN OUR OPINION, THESE ARE THE VARIOUS SITUATI ONS WHICH ONE CAN VISUALIZE FOR THE APPLICATION OF THE ENTIRE PROVISION OF S.19 5. THE ABOVE DISCUSSION GOES TO SHOW THAT IN CASE OF A BONA FIDE BELIEF BY THE PAYER THAT NO PART OF THE PAYMENT BEARS INCOME CHARACTER, IT IS NOT MANDATORY FOR HIM TO UNDERGO THE PROCEDURE OF S.195(2) BECOME MAKING ANY PAYMENT TO A NON-RESIDENT. I.T.A. NO. 1264/MDS/12 9 27. HAVING VISUALIZED THE VARIOUS SITUATIONS LET U S CONSIDER THE FALLOUT OF EACH SITUATION AND HOW THE INTERESTS OF BOTH, THE T AXPAYER AS WELL AS THE TAX COLLECTOR ARE SAFEGUARDED UNDER THE ACT. (A) IF THE BONA FIDE BELIEF OF THE PAYER IS THAT N O PART OF THE PAYMENT HAS ANY PORTION CHARGEABLE TO TAX, HE WILL NOT ENTER INTO A NY PROCEDURE UNDER S.195. HOWEVER, IF THE DEPARTMENT IS OF THE VIEW THAT THE PAYER OUGHT TO HAVE DEDUCTED TAX AT SOURCE, IT WILL HAVE RECOURSE UNDER S.201 OF THE ACT. THUS, HERE THE INTEREST OF THE REVENUE IS PROTECTED. IN THE PROCEEDINGS UNDER S.201, THE ASSESSING OFFICER WILL DETERMINE THE POR TION CHARGEABLE TO TAX ACCORDING TO THE PROVISIONS OF THE ACT AND DETERMIN E THE TAX PAYABLE BY THE PAYER. THE ASSESSING OFFICER IS BOUND TO DETERMINE THE INCOME CHARGEABLE TO TAX IN ACCORDANCE WITH THE PROVISIONS OF THE ACT FOR TWO REASONS. FIRSTLY, BECAUSE IT IS THE MANDATE OF THE SUPREME COURT IN T HE CASE OF TRANSMISSION CORPORATION (SUPRA) AS OBSERVED AT P.595 OF 239 ITR . SECONDLY, THE DELHI HIGH COURT HAS HELD IN THE CASE OF DELHI DEVELOPMEN T AUTHORITY VS.ITO (SUPRA) THAT AN ORDER PASSED UNDER S.201(1) IS AN A SSESSMENT ORDER AND THE SAID DECISION HAS BEEN AFFIRMED BY THE SUPREME COUR T IN (2001) 171 CTR (SC) 546: (2001) 252 ITR 772 (SC)(SUPRA). IN ANY CA SE, THE LIABILITY OF THE PAYER CANNOT EXCEED THAT OF THE PAYEE. AND IF THE PAYER IS DISSATISFIED WITH THE ORDER UNDER S.201, HE WILL RECOURSE TO APPEAL A GAINST THE SAID ORDER. THUS, INTERESTS OF BOTH THE PARTIES ARE PROTECTED. (B) IF THE PAYER BELIEVES THAT WHOLE OF THE PAYMENT IS INCOME CHARGEABLE TO TAX AND IF HE DEDUCTS AND PAYS THE TAX, NO PROBLEM ARISES. (C) IF THE PAYER BELIEVES THAT ONLY A PART OF THE PAYMENT IS CHARGEABLE TO TAX, HE CAN APPLY UNDER S.195(2) FOR DEDUCTION AT APPROP RIATE RATES AND ACT ACCORDINGLY. NO INTEREST IS JEOPARDIZED. (D) IF THE PAYER BELIEVES THAT A PART OF THE PAYMEN T IS INCOME CHARGEABLE TO TAX, AND DOES NOT MAKE AN APPLICATION UNDER S.195(2 ), HE WILL HAVE TO DEDUCT TAX FROM THE ENTIRE PAYMENT. THIS IS THE MANDATE OF THE JUDGEMENT IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) AND THE RE LEVANT OBSERVATION IS ON P.595 OF THE REPORT. THUS, THE INTEREST OF THE REV ENUE STANDS PROTECTED. (E) IF THE PAYER BELIEVES THAT THE ENTIRE PAYMENT O R A PART OF IT IS INCOME CHARGEABLE TO TAX AND FAILS TO DEDUCT TAX AT SOURCE , HE WILL FACE ALL THE I.T.A. NO. 1264/MDS/12 10 CONSEQUENCES UNDER THE ACT. THE CONSEQUENCES CAN B E THE RAISING OF DEMAND UNDER S.201, DISALLOWANCE UNDER S.40(A)(I), PENALTY, PROSECUTION ETC. THE INTEREST OF THE REVENUE STANDS PROTECTED. (F) IF THE PAYEE WANTS TO RECEIVE THE PAYMENT WITHO UT DEDUCTION OF TAX, HE CAN APPLY FOR A CERTIFICATE TO THAT EFFECT UNDER S.195( 3) AND IF HE GETS THE CERTIFICATE, NO ONE IS ADVERSELY AFFECTED. (G) IF THE PAYEE FAILS TO GET THE CERTIFICATE, HE W ILL HAVE TO RECEIVE PAYMENT NET OF TAX. NO INTEREST IS JEOPARDIZED. THUS, IN ALL THE POSSIBLE SITUATIONS DESCRIBED ABOV E, THE INTERESTS OF ALL THE PARTIES ARE PROTECTED. FURTHER, ONE CANNOT LOSE SI GHT OF ONE UNDERLYING PRINCIPLE IN THE ABOVE PROCESSES THAT THE ENTIRE EX ERCISE IS TENTATIVE AS HAS BEEN HELD IN THE CASE OF TRANSMISSION CORPORATION ( SUPRA). FROM THE ABOVE DISCUSSION, ONE IMPORTANT POINT WE ARE TRYING TO DR IVE HOME IS THAT IF THE PAYER IS UNDER A BONA FIDE BELIEF THAT NO PART OF T HE PAYMENT IS CHARGEABLE TO TAX, HE WILL HAVE THE RIGHT TO DEFEND THAT BELIEF I N THE PROCEEDINGS UNDER S.201 OF THE ACT. NUMBER OF SUCH PROCEEDINGS HAVE TAKEN PLACE AND HAVE BEEN ADJUDICATED UPON BY VARIOUS HIGH COURTS AS WELL AS BY THE SUPREME COURT. TO REPEAT, THE PAYER IS AN ASSESSEE UNDER THE ACT A ND THE ORDER UNDER S.201 IS AN ASSESSMENT ORDER. THEREFORE, THE PAYER HAS T HE RIGHT TO GET HIS LIABILITY DETERMINED AS PER THE PROVISIONS OF THE ACT DESPITE THE ENTIRE EXERCISE BEING TENTATIVE IN NATURE. THE ULTIMATE RESULT WOULD DEP END ON WHAT IS DETERMINED IN THE ASSESSMENT OF THE RECIPIENT. THE ULTIMATE R ESULT WOULD DEPEND ON WHAT IS DETERMINED IN THE ASSESSMENT OF THE RECIPIE NT. THE ULTIMATE RESULT IN THE CASE OF THE RECIPIENT WILL DETERMINE WHETHER TH E PAYER CAN BE TREATED AS AN ASSESSEE IN DEFAULT OR NOT. YET, THE ENTIRE TE NTATIVE EXERCISE DESCRIBED ABOVE MAY HAVE TO BE UNDERGONE. THIS HAS BEEN HELD IN A RECENT DECISION (SO FAR UNREPORTED) OF THE DELHI HIGH COURT IN THE CASE OF VAN OORD ACZ INDIA (P) LTD VS. C.I.T. (IT APPEAL NO.439 OF 2008) DECID ED ON 15 TH MARH, 2010 [SINCE REPORTED AT (2010) 230 CTR (DEL) 365: (2010) 36 DTR (DEL) 425-ED.]. 13. IN OUR OPINION THE CIRCUMSTANCES HERE WERE SU CH THAT THE ASSESSEE COULD BE JUSTIFIED IN REACHING A BONA FIDE IMPRESSI ON THAT PAYMENTS EFFECTED BY IT TO CMS RDC WAS NOT SUMS ON WHICH TAX WAS CHARGEABLE IN INDIA. THE VIEW TAKEN BY THE SPECIAL BENCH HAS BEEN REINFORCED BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF GE IN DIA TECHNOLOGY CENTRE (P) LTD. VS. COMMISSIONER OF INCOME TAX(SUPRA). WE ARE THEREFORE, OF THE OPINION THAT ASSESSEE WAS NOT AT DEFAULT OF CHAPTER XVII-B AND THEREFORE, COULD NOT HAVE BEEN FASTENED WITH THE CONSEQUENCES OF THE NATURE SPECIFIED IN SEC.40(A)(I) OF THE ACT. DISALLOWANCES WERE NO T WARRANTED. LD. COMMISSIONER OF INCOME TAX (A) HAD RIGHTLY DELETED THE DISALLOWANCE. WE DO NOT FIND ANY REASON TO INTERFERE. I.T.A. NO. 1264/MDS/12 11 3. MEANWHILE, FOR THE IMPUGNED ASSESSMENT YEAR 2007 -08, ASSESSEE AS A MATTER OF ABUNDANT PRECAUTION, DEDUCT ED TAX AT SOURCE ON THE PAYMENT EFFECTED BY IT TO M/S CMS RDC. HOWE VER, THE ASSESSEE, AFTER DEDUCTING SUCH TAX AT SOURCE, MOVED BEFORE THE CIT(APPEALS) UNDER SECTION 248 FOR A RULING THAT TH ERE WAS NO NECESSITY FOR DEDUCTING TAX AT SOURCE. CIT(APPEALS ), ON SUCH APPEAL OF THE ASSESSEE, GAVE A DECLARATION THAT ASSESSEE W AS NOT REQUIRED TO DEDUCT TAX AT SOURCE ON THE AMOUNTS PAID BY IT T O M/S CMS RDC. AS PER CIT(APPEALS), THERE WAS AN EMPLOYEE-EMPLOYER RELATIONSHIP BETWEEN THE ASSESSEE AND EXPATRIATE EMPLOYEES AND W ITHHOLDING OF TAX ON SALARIES OF SUCH EMPLOYEES HAVING BEEN ALREA DY DONE BY M/S CMS RDC, ASSESSEE WAS NOT OBLIGED TO DEDUCT ANY TAX . LD. CIT(APPEALS) ALSO NOTED THAT SUCH DEPUTED EMPLOYEES WERE FILING RETURNS IN INDIA. THUS ASSESSEE WAS NOT REQUIRED T O DEDUCT TAX AT SOURCE ON REIMBURSEMENT OF SALARIES GIVEN TO M/S CM S RDC. HE THUS RULED IN FAVOUR OF ASSESSEE. 4. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMITTED THAT CIT(APPEALS) FELL IN E RROR IN ENTERTAINING THE APPEAL FILED BY THE ASSESSEE UNDER SECTION 248 OF THE ACT. ACCORDING TO HIM, ASSESSEE OUGHT HAVE APPROACHED TH E DEPARTMENT I.T.A. NO. 1264/MDS/12 12 FOR A CERTIFICATE UNDER SECTION 195(2) OF THE ACT A ND COULD NOT DENY ITS LIABILITY FOR DEDUCTING TAX AT SOURCE, AFTER HAVING EFFECTED SUCH DEDUCTIONS SO, SUO MOTO . AS PER LEARNED D.R., THE CIT(APPEALS), IN ANY CASE, FELL IN ERROR IN HOLDING THAT THERE WAS A N EMPLOYEE-EMPLOYER RELATIONS BETWEEN ASSESSEE AND EXPATRIATE EMPLOYEES DEPUTED BY M/S CMS RDC TO THE ASSESSEE-COMPANY. FURTHER, AS P ER LEARNED D.R., THE PAYMENTS EFFECTED BY THE ASSESSEE TO M/S CMS RDC WERE NOT TOWARDS SALARY, BUT, FOR MANAGERIAL SERVICES RE NDERED AND THEREFORE, FELL WITHIN THE PURVIEW OF SECTION 9(1)( VII) OF THE ACT. 5. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF CIT(APPEALS). 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IN OUR OPINION, SECTION 248 DOES ENABLE AN ASSESSEE TO FILE AN APPEAL EVEN AFTER DEDUCTION OF TAX AT SOURCE CLAIMING THAT NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE SINCE SUCH APPEAL IS ONLY FOR A DECLARATION REGARDING TAX LIABILITY, IF ANY. WE CA NNOT FIND FAULT WITH CIT(APPEALS) ENTERTAINING SUCH APPEAL OF THE ASSESS EE. 7. INSOFAR AS MERITS OF THE CASE IS CONCERNED, IN O UR OPINION, THE MATTER STANDS COVERED IN FAVOUR OF ASSESSEE BY VIRT UE OF ORDER OF THIS TRIBUNAL IN I.T.A. NOS. 1048 TO 1052/MDS/2011 DATED 9 TH FEBRUARY, 2012, FOR ASSESSMENT YEARS 2002-03 TO 2006-07, PERT INENT PARTS OF I.T.A. NO. 1264/MDS/12 13 WHICH HAVE BEEN REPRODUCED AT PARA 3 ABOVE. OF COU RSE, THE SAID ORDER WAS ON A DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT. HOWEVER, THERE IS A CLEAR FINDING IN FAVOUR OF ASSE SSEE THAT NO TAX WAS DEDUCTIBLE AT SOURCE ON PAYMENTS EFFECTED BY IT TO M/S CMS RDC. WE ARE, THEREFORE, OF THE OPINION THAT CIT(AP PEALS) WAS JUSTIFIED IN HOLDING THE ASSESSEE TO BE NOT LIABLE TO DEDUCT TAX AT SOURCE ON SUCH PAYMENTS. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF CIT(APPEALS). 9. IN THE RESULT, APPEAL FILED BY THE REVENUE STAND S DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 14 TH OF FEBRUARY, 2013, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 14 TH FEBRUARY, 2013. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-XII, CHENNAI-34 (4) DIT(INTERNATIONAL TAXATION) (5) D.R. (6) GUARD FILE