M/s. Van Oord ACZ India (P) Ltd, Mumbai V. DCIT, New Delhi

ITA 1481/DEL/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1170 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 07-09-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 15-04-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MANISH GUPTA
• Assessee Lawyers: SANCHIT JOLLY S
• Keywords: Recovery proceedings; Business income; Double taxation relief; Question of law; Non-deduction of tax; Non compliance; Right to appeal; TDS; Set aside
• Section: 143(3); 201(1); 195; 201; 191; 207; 208; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H : NEW DELHI BEFORE SHRI RAJPAL YADAV, JM AND SHRI R.C.SHARMA, A M ITA NO.1481/DEL/2009 ASSESSMENT YEAR : 2004-05 M/S VAN OORD ACZ INDIA (P) LTD., 6 TH FLOOR, SHANGHVI UDYAN, B-18, VAIKUNTHLAL MEHTA ROAD, JVPD SCHEME, MUMBAI 400 049. PAN NO.AABCV0555B. VS. DY.COMMISSIONER OF INCOME TAX, CIRCLE-17(1), NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AJAY VOHRA AND SHRI SANCHIT JOLLY, ADVOCATES. RESPONDENT BY : SHRI MANISH GUPTA, SR.DR. ORDER PER R.C.SHARMA, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF CIT(A) DATED 5.2.2009 FOR THE AY 2004-05, IN THE MA TTER OF ORDER PASSED U/S 143(3) OF THE IT ACT. 2. IN THIS APPEAL, THE ASSESSEE IS BASICALLY AGGRIE VED BY THE ACTION OF CIT(A) IN CONFIRMING THE DISALLOWANCE MADE BY TH E AO IN RESPECT OF CLAIM OF MOBILIZATION AND DEMOBILIZATION EXPENSES O F RS.10,404,298/- REIMBURSED BY THE ASSESSEE TO VAN OORD ACZ MARINE C ONTRACTORS BV, NETHERLANDS (VOAMC), INVOKING THE PROVISIONS OF SEC TION 40(A)(I) OF THE ACT. 3. FACTS IN BRIEF ARE THAT DURING THE RELEVANT PRE VIOUS YEAR THE ASSESSEE EXECUTED, A DREDGING CONTRACT AT PORT DAHE J FOR BALLAST ITA-1481/D/2009 2 NEDAM INTERNATIONAL. THE ASSESSEE DEBITED IN ITS PR OFIT AND LOSS ACCOUNT A SUM OF RS.10,404,298/-, BEING THE AMOUNT REIMBURSED TO VOAMC TOWARDS EXPENSES INCURRED BY VOAMC ON MOBILIZ ATION AND DE- MOBILIZATION OF THE DREDGER. THE SAID AMOUNT WAS CL AIMED AS DEDUCTION BY THE ASSESSEE IN THE COMPUTATION OF INCOME FOR TH E RELEVANT ASSESSMENT YEAR. APART FROM THE AFORESAID, A SUM OF RS.2,679,736/- INCURRED ON MOBILIZATION AND DEMOBILIZATION DURING FINANCIAL YEAR 2002- 03, IN RELATION TO THE ABOVE CONTRACT WAS ALSO CLAI MED AS DEDUCTION DURING THE RELEVANT PREVIOUS YEAR, SINCE THE APPELL ANT HAD BEEN FOLLOWING THE COMPLETED CONTRACT METHOD AND THE CON TRACT WAS COMPLETED DURING THE RELEVANT PREVIOUS YEAR. THE SA ID COSTS RELATED ESSENTIALLY TO TRANSPORTATION OF DREDGER, SURVEY EQ UIPMENT 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 VARIO US NON-RESIDENT PARTIES. THE APPELLANT REIMBURSED THE COST RELATING TO MOBILIZATION AND DEMOBILIZATION INCURRED BY VOAMC ON THE BASIS OF IN VOICES RECEIVED BY VOAMC FROM THE NON-RESIDENT SERVICE PROVIDERS. IN T HE RETURN OF INCOME, THE ASSESSEE CLAIMED, DEDUCTION FOR REIMBUR SEMENT OF THE AFORESAID MOBILIZATION AND DEMOBILIZATION COST OF R S. 13,084,034/- (RS.10,404,298/- + RS.2,679,736/-) WHICH HAD BEEN D ISALLOWED BY THE ASSESSING OFFICER, ON THE GROUND THAT THE APPELLANT HAS NOT DEDUCTED TAX AT SOURCE UNDER SECTION 195, WHILE MAKING PAYME NT OF THE ABOVE AMOUNT TO VOAMC, INVOKING PROVISIONS OF SECTION 40( A)(I) OF THE ACT. THE ASSESSING OFFICER FOLLOWED THE ASSESSMENT ORDER FOR AY 2003-04 PASSED IN THE APPELLANTS OWN CASE WHEREIN SIMILAR DISALLOWANCE WAS MADE. THE ORDER OF ASSESSMENT FOR AY 2003-04 CAME T O BE CONFIRMED BY THE CIT(A) AND THE TRIBUNAL. ITA-1481/D/2009 3 4. AT THE OUTSET, LEARNED AR FAIRLY CONCEDED THAT I SSUE IN DISPUTE IS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL DATED 30.11.2007 IN ASSESSEES OWN CASE IN FAVOUR OF THE REVENUE. HE C ONTENDED THAT VARIOUS DECISIONS RELIED ON BY THE ASSESSEE WERE NO T TAKEN CARE OF BY THE TRIBUNAL WHILE ARRIVING AT THE CONCLUSION, THER EFORE MATTER MAY BE REFERRED TO THE SPECIAL BENCH FOR CONSIDERING THE V ARIOUS OTHER DECISIONS OF THE TRIBUNAL AND HIGH COURT SO CITED B Y HIM. AS PER LD AR THE TRIBUNAL, HOWEVER, VIDE ORDER DATED 30.11.2007, FOR ASSESSMENT YEAR 2003-04 DECLINED TO GO INTO THE ISSUE OF CHARG EABILITY TO TAX IN INDIA OF MOBILIZATION AND DEMOBILIZATION EXPENSES R EIMBURSED BY THE APPLICANT TO VOAMC ON THE GROUND THAT THE APPLICANT WAS REQUIRED TO APPROACH THE ASSESSING OFFICER FOR SUCH DETERMINATI ON UNDER SECTION 195(2) OF THE ACT AND THE TRIBUNAL COULD NOT DECIDE THE SAID ISSUE ON ITS OWN. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOU ND THAT TRIBUNAL VIDE ITS ORDER FOR AY 2003-04 IN ASSESSEES OWN CAS E, ORDER DATED 30.11.2007 HELD THAT SINCE ASSESSEE HAS FAILED TO D EDUCT TAX AT SOURCE AS REQUIRED BY SECTION 195, THE PAYMENT MADE TO THE NON-RESIDENT RECIPIENT WAS LIABLE TO BE DISALLOWED AS PER SPECIF IC PROVISIONS CONTAINED IN SECTION 40(A)(I). FOLLOWING WAS THE P RECISE OBSERVATION OF THE TRIBUNAL :- 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. (SU PRA), WE CONCLUDE THAT IT IS NOT FOR THE ASSESSEE/PAYER T O DECIDE THE TAXABILITY OF PAYMENTS MADE BY IT IN THE HANDS OF NON- RESIDENT RECIPIENT AS THE MACHINERY FOR THIS PURPOS E WAS PROVIDED IN SUB SECTION (2) OF SECTION 195 ITSELF, WHEREBY ITA-1481/D/2009 4 THE CONCERNED ASSESSING OFFICER COULD HAVE BEEN APPROACHED TO DECIDE THIS ASPECT. THAT THE CHARGEAB ILITY OF INCOME IN THE HANDS OF RECIPIENT NONRESIDENT TO BE TAXED IN INDIA IS A SEPARATE ISSUE AND IN THE ABSENCE OF ANY CERTIFICATE OBTAINED FROM THE CONCERNED ASSESSING O FFICER U/S 195 (2), IT WAS OBLIGATORY ON THE PART OF THE A SSESSEE TO DEDUCT TAX AT SOURCE FROM THE PAYMENTS MADE TO T HE CONCERNED NONRESIDENT. THAT THE PAYER/ASSESSEE HAVI NG FAILED TO DEDUCT SUCH TAX AS REQUIRED BY SECTION 19 5 THE PAYMENTS MADE TO THE RECIPIENT NON-RESIDENT WERE LI ABLE TO BE DISALLOWED AS PER THE SPECIFIC PROVISIONS CONTAI NED IN SECTION 40(A) (I). THAT WHILE DECIDING THE ISSUE WH ETHER FOR SUCH PAYMENTS MADE TO NON-RESIDENT BY THE PAYER/ASSESSEE DEDUCTION U/S 40(A) (I) COULD BE ALL OWED TO THE PAYER OR NOT. WE ARE NOT REQUIRED TO LOOK INTO THE NATURE OF SUCH PAYMENTS MADE TO NON-RESIDENT NOR AR E REQUIRED TO LOOK INTO WHETHER SUCH PAYMENTS ARE INC OME OR PART OF THE INCOME IN THE HANDS OF RECIPIENT NON-RE SIDENT TAXABLE IN INDIA AND MANY OTHER RELEVANT FACTORS RE LATING TO TAXABILITY OF THE PAYMENTS IN THE HANDS OF RECIPIEN T NON- RESIDENT AS ITS INCOME IN INDIA. THAT HAVING HELD S O THE DETAILED ARGUMENTS OF BOTH THE PARTIES ON THE QUEST ION OF THE NATURE OF THE PAYMENTS MADE BY THE PAYER TO THE PAYEE NON-RESIDENT AND THE TAXABILITY OF SUCH PAYME NT AS INCOME IN THE HANDS OF RECIPIENT NON-RESIDENT IS TH US BEYOND THE SCOPE OF PROVISIONS OF SECTION 40(A) (I) WHERE WE ARE ONLY REQUIRED TO CONSIDER THE DEDUCTION OF S UCH PAYMENTS CLAIMED BY THE PAYER/ASSESSEE TO THE NON- RESIDENT IN CASE OF NON COMPLIANCE OF PROVISIONS OF SECTION ITA-1481/D/2009 5 195 OF IT ACT I.E. NON-DEDUCTION OF TAX AT SOURCE F OR THE PAYMENTS MADE TO NON-RESIDENT. 6. IT WAS CONTENDED BY LEARNED AR THAT THE SAID OR DER OF THE TRIBUNAL IS CONTRARY TO THE PROVISIONS OF THE LAW A ND THE JUDICIAL PRONOUNCEMENTS AND CANNOT, THEREFORE BE REGARDED AS A BINDING PRECEDENT. THE SAME REQUIRES RECONSIDERATION IN THE LIGHT OF THE RELEVANT JUDICIAL PRECEDENT. LEARNED AR REFERRED T O DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF IN THE CASE OF HYDERABAD INDUSTRIES LTD. V. ITO: 188 ITR 749, 752, WHEREIN WHILE EXAMINING THE SCOPE OF SECTION 195 OF THE ACT, THE COURT OBSE RVED THAT THE PURPOSE OF DEDUCTION OF TAX AT SOURCE IS NOT TO COL LECT A SUM WHICH IS NOT A TAX LEVIED UNDER THE ACT BUT IS TO FACILITATE THE COLLECTION OF THE TAX LAWFULLY LEVIABLE UNDER THE ACT. IT FURTHER OBS ERVED, THAT AN INTERPRETATION, WHICH WOULD RESULT IN COLLECTION OF CERTAIN AMOUNTS BY THE STATE WHICH IS NOT A TAX QUALITATIVELY, IS IMPE RMISSIBLE IN CASE OF A TAXING STATUE. HE FURTHER CONTENDED THAT THAT THE T RIBUNAL ERRED IN CONFIRMING THE DISALLOWANCE OF THE AFORESAID AMOUNT INVOKING THE PROVISION OF SECTION 40(A)(I), READ WITH SECTION 19 5 OF THE ACT, WITHOUT DETERMINING THE CHARGEABILITY TO TAX IN INDIA OF TH E AFORESAID MOBILIZATION AND DEMOBILIZATION COSTS IN THE HANDS OF VOAMC, WHICH IS SINE QUA NON FOR INVOKING THE SAID SECTION. 7. AS PER LD. AR SECTION 195 ACT, WHICH FALLS UNDE R CHAPTER XVII-B OF THE ACT, REQUIRES AN ASSESSEE TO DEDUCT TAX AT S OURCE FROM PAYMENT BY WAY OF INTEREST, ROYALTY, FEE FOR TECHNICAL SERV ICES OR ANY OTHER SUM, TO A NON-RESIDENT, WHICH IS CHARGEABLE TO TAX IN IN DIA. IN CASE, THE ASSESSEE FAILS TO DEDUCT TAX AT SOURCE UNDER THE AF ORESAID PROVISION, THE ASSESSING OFFICER MAY DISALLOW DEDUCTION OF SUC H PAYMENTS BY INVOKING SECTION 40(A)(I) OF THE ACT. THEREFORE, IN TERMS OF SECTION 195 ITA-1481/D/2009 6 OF THE ACT, THE OBLIGATION TO DEDUCT TAX AT SOURCE IS TRIGGERED ONLY WHEN THE PAYMENT REQUIRED TO BE MADE TO THE NON RES IDENT IS CHARGEABLE TO TAX IN INDIA IN THE HANDS OF THE NON- RESIDENT RECIPIENT. EQUALLY, THE MISCHIEF OF SECTION 40(A)(I) IS ATTRAC TED ONLY WHEN THERE IS A CONTRAVENTION OF THE PROVISIONS CONTAINED IN SECT ION 195 OF THE ACT, I.E., WHERE TAX IS NOT DEDUCTED OUT OF PAYMENT CHAR GEABLE TO TAX IN INDIA, IN THE HANDS OF THE NON-RESIDENT. 8. IT WAS FURTHER SUBMITTED THAT THE LIABILITY TO D EDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT OR SUSTAINABILITY OF D ISALLOWANCE UNDER SECTION 40(A)(I) CANNOT BE DETERMINED IN VACCUM OF THE ULTIMATE LIABILITY TO PAY TAX FASTENED UPON THE NON-RESIDENT RECIPIENT. IT IS INCUMBENT UPON THE ASSESSING/APPELLATE AUTHORITY TO COME TO A DEFINITE FINDING THAT THE NON-RESIDENT IS CHARGEABL E TO TAX IN INDIA IN RESPECT OF THE REMITTANCE BEFORE INVOKING THE PROVI SIONS OF SECTION 40(A)(I) OF THE ACT. OUR R ATTENTION IN THIS REGAR D WAS INVITED TO THE LANDMARK DECISION OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF A.P. LTD. V. CIT: 239 ITR 587 WHEREI N THE APEX COURT, AT PAGE 594 OF THE JUDGMENT, OBSERVED THAT: . THE SCHEME OF SUB-SECTIONS (1), (2) AND (3) OF SECT ION 195 AND SECTION 197 LEAVES NO DOUBT THAT THE EXPRESSION 'ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS A CT' WOULD MEAN 'SUM' ON WHICH INCOME-TAX IS LEVIABLE. I N 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 I S CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT O R NOT ? THAT SUM MAY BE INCOME OR INCOME HIDDEN OR OTHERWIS E EMBEDDED THEREIN. IF SO, TAX IS REQUIRED TO BE DEDU CTED ON THE SAID SUM, WHAT WOULD BE THE INCOME IS TO BE COM PUTED ON THE BASIS OF VARIOUS PROVISIONS OF THE ACT INCLU DING PROVISIONS FOR COMPUTATION OF THE BUSINESS INCOME, IF THE ITA-1481/D/2009 7 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 DEDUCTIB LE UNDER ANY PROVISION OF THE ACT. IF THE SUM THAT IS TO BE PAID TO THE NON-RESIDENT IS CHARGEABLE TO TAX, TAX IS REQUI RED TO BE DEDUCTED. 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 AM OUNT IS TO BE PAID TO A NON-RESIDENT. 9. LD AR FURTHER CLARIFIED THAT THE AFORESAID DECIS ION BY THE APEX COURT LAYS DOWN THAT THE OBLIGATION TO DEDUCT TAX A T SOURCE IS ATTRACTED ONLY WHEN THAT PAYMENT IS CHARGEABLE TO TAX IN INDI A IN THE HANDS OF THE NON-RESIDENT. WHERE SUCH PAYMENT IS LIABLE TO T AX, IT IS NOT OPEN FOR THE ASSESSEE TO DECIDE WHAT IS THE PROPORTION O F INCOME EMBEDDED THEREIN. IN THAT EVENTUALITY, VIZ., THE PAYMENT BEI NG TAXABLE IN INDIA, THE ASSESSEE MUST NECESSARILY APPROACH THE ASSESSIN G OFFICER UNDER SECTION 195(2) OF THE ACT TO DETERMINE THE SUM ON W HICH TAX NEEDS TO BE DEDUCTED AND AT WHAT RATE. REFERENCE WAS ALSO BE MADE TO THE DECISION OF THE B OMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX V. COOPER ENGINEERING LT D. : 68 ITR 457 , WHEREIN THE COURT WHILE CONSIDERING SECTION 18(3B ) OF THE INCOME TAX ACT, 1922, WHICH CONTAINED PROVISIONS RE LATED TO TAX DEDUCTION AT SOURCE IN RESPECT OF PAYMENT OF INTERE ST TO NON RESIDENT AND IS SIMILARLY WORDED AS SECTION 195 OF THE ACT, HELD THAT IF THE INTEREST PAID TO THE NON RESIDENT WAS NOT CHARGEABL E TO TAX UNDER THE RELEVANT ACT, THEN THE LIABILITY TO DEDUCT TAX BY T HE PAYER/ASSESSEE UNDER SECTION 18(3B) DID NOT ARISE. ITA-1481/D/2009 8 10. OUR ATTENTION IN THIS REGARD WAS ALSO INVITED TO THE RECENT DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF MAHINDRA & MAHINDRA LTD. V. DY.CIT: 122 TTJ 577(MUM) (SB) WHEREIN THE TRIBUNAL HAS ELUCIDATED THE SCHEME AND SCOPE OF SEC TION 195 OF THE ACT AS UNDER: 18.4 IF HOWEVER THE AMOUNT PAID OR PAYABLE TO THE N ON-RESIDENT IS NOT CHARGEABLE TO TAX UNDER THE REGULAR PROVISIO NS OF THIS ACT OR SUCH AMOUNT IS NOT TAXABLE BY VIRTUE OF THE PROV ISIONS DOUBLE TAXATION AVOIDANCE. AGREEMENT (HEREINAFTER CALLED T HE DTAA) ENTERED INTO BY INDIA WITH SUCH OTHER COUNTRY OF WH ICH THE NON- RESIDENT IS RESIDENT, IN ACCORDANCE WITH CHAPTER IX , THEN THE PROVISIONS OF CHAPTER XVII ABOUT THE COLLECTION AND RECOVERY OF TAX ARE RULED OUT AND THE PERSON RESPONSIBLE FOR PA YING SUCH SUM CANNOT BE FASTENED WITH ANY LIABILITY FOR DEDUCTION OF TAX AT SOURCE AND CANNOT UNDER ANY CIRCUMSTANCE BE TREATED AS ASSESSEE IN DEFAULT. 18.10. THE UNDERLYING PRINCIPLE BEHIND THE DEDUCTIO N OF TAX AT SOURCE IS THE PRESUMPTION THAT THERE WILL BE SOME L IABILITY OF THE PAYEE TOWARDS TAX ON THE SUM PAID TO HIM. IF THERE IS NO SUCH LIABILITY THEN THE ENTIRE EXERCISE OF FIRSTLY GETTI NG THE AMOUNT OF TAX COLLECTED. DEDUCTED AT SOURCE AND THEN REFUNDIN G TO THE PAYEE WILL BE FUTILE. IF THERE IS NO TAX LIABILITY OF THE PAYEE THEN THERE CANNOT BE ANY QUESTION OF TREATING THE PERSON RESPONSIBLE FOR PAYING THE SUM WITHOUT DEDUCTING TAX AT SOURCE AS ASSESSEE IN DEFAULT. THUS THE ESSENCE OF THE PROVISIONS OF D EDUCTION OF TAX AT SOURCE IS THAT THERE IS A PRESUMPTION OF LIABILI TY OF THE PAYEE TO TAX ON THE INCOME. ******** ******* 18.12 ADVERTISING TO THE FACTS OF THE INSTANT CASE WE FIND THAT THAT NO ASSESSMENT HAS BEEN MADE IN THE HANDS OF TH E PAYEE IN RESPECT OF THE SUMS RECEIVED FROM THE ASSESSEE IN R ESPECT OF BOTH THE EURO ISSUES. SIMILARLY NO PROCEEDINGS HAVE BEEN TAKEN AGAINST HIM TILL DATE FOR ASSESSING SUCH INCOME. WE FURTHER FIND THAT NOW THE TIME LIMIT FOR ISSUING NOTICE U/S 148 HAS OBVIOUSLY COME TO AN END SINCE THE ASSESSMENT YEAR UNDER CONS IDERATION IS 1998-99. AS THE TIME LIMIT FOR TAKING ACTION AGAINS T THE PAYEE U/S 147 IS ALSO NOT AVAILABLE, AND THERE IS NO COUR SE LEFT TO THE REVENUE FOR MAKING THE ASSESSMENT OF THE NON-RESIDE NT, EX CONSEQUENTI, NO LAWFUL ORDER CAN BE PASSED AGAINST THE ASSESSEE EITHER U/S 201(1) OR (1A). WE THEREFORE HOLD THAT I N THE FACTS AND ITA-1481/D/2009 9 CIRCUMSTANCES OF THE PRESENT CASE, THE ORDER PASSED UNDER SECTION 195 READ WITH SECTION 201(1) OR (1A) OF THE INCOME TAX ACT. 1961 IS INVALID. RESULTANTLY THE IMPUGNED ORDE R, FLOWING OUT OF SUCH INVALID ORDER, WILL ALSO MEET WITH THE SAME FATE, WHICH IS HEREBY SET ASIDE. 11. OUR ATTENTION WAS ALSO INVITED TO THE DECISION OF THE DELHI TRIBUNAL IN THE CASE OF ACIT V. MODICON NETWORK (P) LTD.: (2007) 14 SOT 204 (DEL) . IN THAT CASE, THE ISSUE BEFORE THE TRIBUNAL WAS WHETHER THE ASSESSEE WAS REQUIRED TO D EDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT FROM REMITTANCE MADE BY IT TO M/S. DISTACOM COMMUNICATION LTD., HONG KONG WHIC H REPRESENTED REIMBURSEMENT OF EXPENSES ACTUALLY INCU RRED BY THE NON-RESIDENT. THE TRIBUNAL, WHILE DEALING WITH THE DECISION OF THE APEX COURT IN THE CASE OF TRANSMISSION CORPORATION ( SUPRA ), HELD AS FOLLOWS: 12. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. UNDER SECTION 195(1) OF THE ACT, ANY P ERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT ANY INTERE ST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF TH E ACT (EXCEPT SALARIES) SHALL, AT THE TIME OF CREDIT OF S UCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYME NT THEREOF, WHICHEVER IS EARLIER, DEDUCT INCOME-TAX TH EREON AT THE RATES IN FORCE. UNDER SUB-SECTION (2), THE PERS ON PAYING THE AMOUNT, IF HE CONSIDERS THAT THE WHOLE O F THE AMOUNT WOULD NOT BE INCOME CHARGEABLE TO TAX IN THE HANDS OF THE RECIPIENT, MAY MAKE AN APPLICATION TO THE ASSESSING OFFICER TO DETERMINE THE APPROPRIATE PROP ORTION OF SUCH SUM SO CHARGEABLE AND UPON SUCH DETERMINATI ON, THE TAX SHALL BE DEDUCTED ONLY ON THE CHARGEABLE PROPORTION OF THE AMOUNT. IT IS, THEREFORE, CLEAR T HAT THE OBLIGATION TO DEDUCT TAX IS ONLY WITH REFERENCE TO THE INCOME ELEMENT IMBEDDED IN THE REMITTANCE. THIS POS ITION HAS BEEN AFFIRMED BY THE JUDGMENT OF THE SUPREME CO URT IN THE CASE OF TRANSMISSION CORPN. OF AP LTD. (SUPR A) IN THE PENULTIMATE PARAGRAPH OF THE JUDGMENT WHERE IT HAS BEEN HELD THAT THE HIGH COURT WAS RIGHT IN HOLDING THAT THE OBLIGATION OF THE ASSESSEE TO DEDUCT TAX UNDER SECT ION 195 IS LIMITED ONLY TO THE APPROPRIATE PROPORTION OF IN COME CHARGEABLE UNDER THE ACT. IT IS THEREFORE CLEAR THA T ANY ITA-1481/D/2009 10 REMITTANCE WHICH DOES NOT HAVE AN INCOME ELEMENT WH ICH IS CHARGEABLE TO TAX NEED NOT SUFFER TAX DEDUCTION AT SOURCE. ******* ******* 14. IN THE VERY NATURE OF THINGS, REIMBURSEMENT OF EXPENSES CANNOT BE CONSIDERED AS HAVING AN INCOME ELEMENT IMBEDDED THEREIN SO AS TO ATTRACT SECTION 1 95(1) OF THE ACT. THE QUESTION HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN INDUSTRIAL ENGG. PROJEC TS (P.) LTD.'S CASE (SUPRA). IN THIS CASE, THE ASSESSEE HAD AN AGREEMENT WITH A FOREIGN COMPANY WHEREBY SOME SERVI CES WERE TO BE RENDERED BY THE ASSESSEE FOR REMUNERATIO N. . THE RELEVANT CLAUSE UNDER WHICH A CONSORTIUM PARTNE R IS ENTITLED TO DEFRAY HIS SHARE OF THE PRE-BID EXPENSE S AND GET THE SAME REIMBURSED BY THE JOINT VENTURE VEHICLE HA S ALSO BEEN PLACED BEFORE THE DEPARTMENTAL AUTHORITIES AND NO QUESTION HAS BEEN RAISED ABOUT THE EXISTENCE OF THE CLAUSE. SINCE THE HK COMPANY LACKED THE EXPERTISE TO DRAW U P THE PRE-BID DOCUMENTS, IT HAD TO ENGAGE THE SERVICES OF ANOTHER CONSULTANCY FIRM. IT PAID THE CONSULTANCY FIRM AND RAISED AN INVOICE FOR THE AMOUNT ON THE ASSESSEE-COMPANY, UND ER THE TERMS OF THE CONSORTIUM ARRANGEMENT, TO GET REIMBUR SED. THE ARGUMENT OF THE DEPARTMENT IS THAT THE NATURE OF TH E REMITTANCE AS FTS DOES NOT CHANGE MERELY BECAUSE TH E HK COMPANY HAD TO ENGAGE ANOTHER AGENCY TO PREPARE THE PRE- BID DOCUMENTS. IN OUR VIEW, THE ARGUMENT CANNOT BE ACCEPTED HAVING REGARD TO THE OBJECTIVE OF THE CONSORTIUM AN D THE AGREEMENT BETWEEN THE PARTNERS OF THE CONSORTIUM TO THE EFFECT THAT THE PRE-BID EXPENSES INCURRED BY THEM W ILL BE REIMBURSED BY THE JOINT VENTURE VEHICLE. FURTHERMOR E, IN OUR VIEW, IN THE LIGHT OF THE AUTHORITIES CITED ABOVE, REIMBURSEMENT PER SE CANNOT BEAR THE CHARACTER OF I NCOME. THUS, THE PRELIMINARY QUESTION, NAMELY, WHETHER THE AMOUNT REMITTED WOULD IN ITS ENTIRETY OR PARTLY BE CONSIDE RED AS INCOME OF THE HK COMPANY HAS TO BE RESOLVED IN FAVO UR OF THE VIEW THAT IT BEING A MERE REIMBURSEMENT IT CANNOT B E SO CONSIDERED. AS HELD BY THE KARNATAKA HIGH COURT IN THE CASE OF HYDERABAD INDUSTRIES LTD. (SUPRA), THE PURPOSE O F DEDUCTION OF TAX AT SOURCE IS NOT TO COLLECT A SUM WHICH IS NOT A TAX LEVIED UNDER THE ACT. IT IS ONLY TO FACILITAT E THE COLLECTION OF TAX LAWFULLY LEVIABLE UNDER THE ACT. THE INTERPR ETATION PUT ON THE STATUTE BY THE INCOME-TAX AUTHORITIES, AS PO INTED OUT IN THE JUDGMENT, WOULD RESULT IN COLLECTION OF AMOU NTS WHICH ARE NOT QUALITATIVELY TO BE CONSIDERED AS A TAX. ITA-1481/D/2009 11 12. THE FOLLOWING DECISIONS WERE ALSO REFERRED TO THE SAME EFFECT: I) CIT V. ESTEL COMMUNICATION PVT. LTD: 217 CTR 102 (DEL) II) CIT V. ICL SHIPPING LTD. 315 ITR 195 (MAD) III) RAYMOND LTD. V. ACIT: 86 ITD 791 (ITAT MUM) IV) SONATA SOFTWARE V. ITO (2006) 6 SOT 700 (ITAT BANGALORE). V) MPHSIS BFV V. ITO (2006) 9 SOT 756 (ITAT BANGALO RE) VI) ROYAL AIRWAYS LTD. V. ADIT: 90 ITD 259 (ITAT DE LHI) VII) NQA QUALITY SYSTEMS REGISTRAR LTD. V. DCIT (20 05): 2 SOT 249 (ITAT DELHI) VIII) WIPRO LTD. V. ITO: 90 TTJ 191 (ITAT BANGALOR E) IX) ACIT V. MALAYALEE MANORAMA CO. LTD: 94 ITD 121 (ITAT, COCHIN) X) CUSHMAN & WAKEFIELD (S) PTE LTD., IN RE: 305 ITR 208 (AAR) XI) KNOWERX EDUCATION INDIA (P) LTD. VS DIT: 301 IT R 207 (AAR) XII) CAIRN ENERGY INDIA (P) LTD V. ACIT IN ITA NOS. 208 TO 211/MDS/2006 FOR AYS 1996-97 TO 1999-2000 ITAT CH ENNAI XIII) IMP POWER LTD. V. ITO: 107 TTJ (MUM) 522 XIV) JCIT V. GEORGE WILLIAMSON (ASSAM) LTD: 116 ITD 328 (GAU) XV) AB HOTEL LTD. V. DCIT: 2008 25 SOT 368 XVI) DCIT V. VENKAT SHOES IN ITA NO. 996/MDS/2008 F OR AY 2004-05 XVII) HNS INDIA VSAT INC. V. DY. DIT: 95 ITD 157 (D EL) XVIII) ITO V. KIRTILAL KALIDAS DIAMOND EXPORTS IN I TA NO. 1868/MUM/2005 FOR AY 2001-02 XIX) ADVANCE ISPAT INDIA LTD V. DCIT IN ITA NOS. 23 78 & 4484/DEL/2002 FOR AYS 1998-99 & 99-00 ITA-1481/D/2009 12 13. AS PER LD AR ANOTHER ASPECT WHICH REQUIRES CONS IDERATION IS WHETHER THE ASSESSING OFFICER OR THE APPELLATE A UTHORITIES CAN GO INTO THE QUESTION OF CHARGEABILITY TO TAX IN INDIA OF TH E AMOUNT OF REMITTANCE IN THE HANDS OF THE NON-RESIDENT DURING THE ASSESSMENT/APPELLATE PROCEEDINGS OF THE REMITTER-AS SESSEE. LD AR FURTHER SUBMITTED THAT WHILE ANSWERING THE AFORESAI D QUESTION IN THE AFFIRMATIVE, THE KARNATAKA HIGH COURT IN THE CASE O F JINDAL THERMAL POWER: 182 TAXMANN 252 (KAR)(HC) HELD THAT SINCE THE PAYER- ASSESSEE IS ULTIMATELY RESPONSIBLE FOR AFFECTING TH E TDS, THE PAYER- ASSESSEE CAN QUESTION THE CHARGEABILITY OF THE SUM IN THE HANDS OF THE RECIPIENT IN ITS OWN ASSESSMENT PROCEEDINGS. THE RE LEVANT OBSERVATIONS OF THE COURT ARE AS UNDER: THE DECISION HOWEVER DOES NOT LAY DOWN THAT THE PE RSON IS OBLIGED TO EFFECT TDS U/S 195 HAS NO RIGHT TO QUEST ION THE ASSESSMENT OF TAX LIABILITY. SINCE IN LAW, IF TDS I S NOT EFFECTED BY THE PAYER (JINDAL), THE PAYER WOULD BE ULTIMATELY R ESPONSIBLE TO PAY THE TAX LIABILITY OF THE PAYEE (REOL). THE CONJ OINT READING OF SECTION 195, 201 READ WITH SECTION 246(1)(I) AND SE CTION 248 MAKES IT CLEAR THAT THE JINDAL AS A PAYEE HAS EVERY RIGHT TO QUESTION THE TAX LIABILITY OF ITS PAYEE TO AVOID TH E VICARIOUS CONSEQUENCES. THEREFORE THE CONTENTION THAT JINDAL HAS NO RIGHT OF APPEAL IS TO BE REJECTED. 14. SIMILARLY, THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V. AVANTHI LEATHERS LTD. IN ITA NO. 45/HYD/02 FOR AY 1998-99 [PGS 222-224 OF PB DATED 11.08.2009] HELD THAT THE ASSESSING OFFICER MUST COME TO A DEFINITE CONCLUSIO N THAT THE SUM PAYABLE BY THE ASSESSEE WAS CHARGEABLE TO TAX IN TH E HANDS OF THE RECIPIENT BEFORE THE SAID SUM COULD BE DISALLOWED B Y INVOKING SECTION 40(A)(I) OF THE ACT. THE RELEVANT OBSERVATIONS OF T HE COURT ARE AS UNDER: 7. WITH REGARD TO THE COMMISSION PAYMENT TO MR. BER GER, THE ASSESSING OFFICER RELIED ON THE DECISION OF THE SUP REME COURT IN THE CASE OF TRANSMISSION CORPORATION IN 239 ITR 587 AND THE DECISION OF THE TRIBUNAL IN THE CASE OF CHEMINOR DR UGS LTD. IN 76 ITA-1481/D/2009 13 ITD 307. IN THE CASE OF CHEMINOR DRUGS, THE ASSESSE E HAD NOT DEDUCTED TAX U/S 195 UNDER SIMILAR CIRCUMSTANCES AN D HENCE AN ORDER U/S 201 WAS PASSED RAISING DEMAND AGAINST THE ASSESSEE OF THE SAID TAX AMOUNT. IT WAS IN THE BACKDROP OF S EC. 201 PROCEEDINGS, THE TRIBUNAL HELD THAT THE PROVISIONS CONTAINED IN SEC.195 ARE URGENT PROVISIONS MEANT FOR COLLECTING TAX DURING THE FINANCIAL YEAR ITSELF. THEREFORE, THE NATURE OF ENQ UIRY AND THE NATURE OF ADJUDICATION U/S 195 (1) IS NECESSARILY S UMMARY AND GENERALLY PEREMPTORY IN NATURE. THE PROCEEDINGS U/S 201 PROVIDES AN OPPORTUNITY TO THE ASSESSEE TO SHOW THA T HE IS NOT LIABLE TO DEDUCT TAX AND THE ONLY WAY TO SHOW IT IS EITHER U/S 195(2) OR BY PRODUCING A CERTIFICATE U/S 195(3). IT WAS IN THIS CONTEXT, THE TRIBUNAL HELD THAT IT WAS OBLIGATORY F OR THE ASSESSEE TO APPROACH THE ASSESSING OFFICER U/S 195(2) OR FOR THE PAYEE TO OBTAIN A CERTIFICATE U/S 195(3), ONLY TO ABSOLVE TH E ASSESSEE OF HIS LIABILITY. HOWEVER, IN THE PRESENT CASE, WE ARE DEALING WITH THE REGULAR ASSESSMENT OF THE ASSESSEE ITSELF IN WH ICH WE ARE CONCERNED WITH THE DEDUCTIBILITY OF EXPENDITURE U/S 40(A)(I) OF THE ACT. UNDER THESE PROCEEDINGS, THE ASSESSING OFF ICER HAS TO COME TO A DEFINITE FINDING WHETHER COMMISSION PAID TO FOREIGN AGENT WAS IN FACT CHARGEABLE TO TAX IN INDIA OR NOT BECAUSE ON THAT FINDING DEPENDS THE DETERMINATION OF THE TOTAL INCOME OF THE ASSESSEE. ACCORDINGLY, IN THESE PROCEEDINGS, THE RE VENUE CANNOT BE HEARD OF SAYING THAT SINCE THE ASSESSEE HAS NOT DEDUCTED TAX U/S 195(1), IT WILL MAKE DISALLOWANCE U/S 40(A)(I) OF THE ACT. TO REPEAT, IT HAS TO COME TO A DEFINITE CONCLUSION THA T THE INCOME WAS CHARGEABLE TO TAX IN INDIA. 15. IN VIEW OF THE ABOVE ARGUMENTS, LEARNED AR CON TENDED THAT MATTER MAY BE REFERRED TO THE SPECIAL BENCH FO R CONSIDERING THE ISSUE IN CORRECT PERSPECTIVE. 16. AS PER OUR CONSIDERED VIEW, LEARNED ARS SUBM ISSION FOR REFERRING THE MATTER TO THE SPECIAL BENCH, WHEN IN ASSESSEES OWN CASE THE TRIBUNAL HAS TAKEN ONE VIEW, CANNOT BE ACCEPTED , MORE PARTICULARLY IN VIEW OF THE FACT THAT AGAINST THE ORDER OF THE T RIBUNAL THE ASSESSEE HAS ALREADY APPROACHED TO THE HIGH COURT AND THE HO NBLE HIGH COURT VIDE ITS ORDER DATED 5.10.2009 HAD ACCEPTED THE SUB STANTIAL QUESTION OF LAW. AS THE MATTER IS ALREADY BEFORE THE HIGH C OURT, THERE DOES NOT ITA-1481/D/2009 14 APPEAR TO BE ANY JUDICIAL PROPRIETY TO REFER THE MA TTER TO THE SPECIAL BENCH. 17. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUN AL IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING ASSES SMENT YEAR, THE APPEAL OF THE ASSESSEE IS DISMISSED. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMI SSED. DECISION PRONOUNCED IN THE OPEN COURT ON 30 TH OCTOBER, 2009. SD/- SD/- (RAJPAL YADAV) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :30.10.2009. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR ITA-1481/D/2009 15