KPMG, MUMBAI V. JCIT 11(2), MUMBAI

ITA 2497/MUM/2009

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1781 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 18-12-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 17-04-2009
• Result in Favour of: Set Aside
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR
• Assessee Lawyers: SUNIL LALA
• Keywords: Double taxation relief; Non-deduction of tax
• Section: 143(3); 5(2); 194C

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 2497/MUM./2009 ( &) * !+* / ASSESSMENT YEAR : 200405 ) KPMG, KPMG HOUSE KAMALA MILLS COMPOUND 448, SENAPATI BAPAT MARG LOWER PAREL, MUMBAI 400 013 .. ,- / APPELLANT ) V/S JT. COMMISSIONER INCOME TAX RANGE11(2), AAYAKAR BHAVAN 101, M.K. MARG, MUMBAI 400 020 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAAFK1415H . / ITA NO. 1820/MUM./2009 ( &) * !+* / ASSESSMENT YEAR : 200405 ) ASSTT. COMMISSIONER INCOME TAX RANGE11(2), AAYAKAR BHAVAN 101, M.K. MARG, MUMBAI 400 020 .. ,- / APPELLANT ) V/S KPMG, KPMG HOUSE KAMALA MILLS COMPOUND 448, SENAPATI BAPAT MARG LOWER PAREL, MUMBAI 400 013 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AABCH2171F &) *1# 2 3 / ASSESSEE BY : MR. SUNIL LALA 4 ! 2 3 / REVENUE BY : MR. NARENDRA KUMAR K P M G 2 )! 2 # / DATE OF HEARING 18.12.2012 $ 5+ 2 # / DATE OF ORDER 22.02.2013 $ $ $ $ / ORDER ./ ./ ./ ./ PER BENCH THESE CROSS APPEALS ARE DIRECTED AGAINST THE IMPUGN ED ORDER DATED 18 TH DECEMBER 2008, PASSED BY THE LEARNED COMMISSIONER ( APPEALS)XI, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ), FOR THE ASSESSMENT YEAR 2004 05. SINCE THE GROUNDS RAISED BY EITHER PARTY ARE IN TERCONNECTED, THEREFORE, AS A MATTER OF CONVENIENCE, THESE APPEALS WERE HEAR D TOGETHER AND ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDE R. 2. WE FIRST TAKE UP ASSESSEES APPEAL IN ITA NO.2497/M UM./2009, VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN THE COMMISSIONER OF INC OME TAX (APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF RS .3,20,83.122 MADE BY THE ASSESSING OFFICER U/S 40(A)(I) OF THE I NCOME TAX ACT 1961 IN RESPECT OF THE APPELLANTS SHARE OF CENTRAL COSTS I.E. CASH CALLS PAID TO KPMG INTERNATIONAL. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN U PHOLDING THE DISALLOWANCE OR RS.7,27,627 MADE BY THE ASSESSING O FFICER U/S 40(A)(I) OF THE INCOME TAX ACT 1961 HI RESPECT OF REIMBURSEMENT OF OUT OF POCKET EXPENSES TOWARDS AIRFARE, CONVEYANCE. TELEPHONE, HOTEL AND OTHER EXPENSES MADE TO KPMG DUBAL, UAE (S OLE PROPRIETORSHIP OF MR.VIJAY MALHOTRA) THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN U PHOLDING THE DISALLOWANCE OF RS. 1.38,41,163 MADE BY THE ASSESSI NG OFFICER U/S 40(A)(I) OF THE INCOME TAX ACT 1961 IN RESPECT OF P ROFESSIONAL FEES PAID TO KPMG DUBAI, UAB (SOLE PROPRIETORSHIP OF MR. VIJAY MALHOTRA) K P M G 3 3. INSOFAR AS GROUND NO.1, IS CONCERNED, BOTH THE PAR TIES AGREED BEFORE US THAT SIMILAR ISSUE HAS COME UP BEFORE THE TRIBUN AL IN ASSESSEES OWN CASE RIGHT FROM THE ASSESSMENT YEAR 1997-98 TO 2006-07, WHEREIN THIS ISSUE HAS BEEN RESTORED TO THE FILE OF THE COMMISSIONER (APPE ALS) TO ADJUDICATE THE ISSUE OF CHARGEABILITY OF TAX ON THE PAYMENTS MADE TO KPMG INTERNATIONAL AND ALSO ON ACCOUNT OF PRINCIPLE OF MUTUALITY. 4. RIVAL CONTENTIONS HEARD. ON A PERUSAL OF VARIOUS TR IBUNAL DECISIONS REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE , WE FIND THAT IDENTICAL ISSUE WAS INVOLVED IN ALL THE PREVIOUS YEARS, WHERE IN THE MATTER HAS BEEN RESTORED BACK TO THE FILE OF THE COMMISSIONER (APPE ALS) FOR TAKING APPROPRIATE DECISION AS PER THE OBSERVATIONS GIVEN BY THE TRIBUNAL. THE RELEVANT OBSERVATIONS GIVEN BY THE TRIBUNAL IN ASSE SSMENT YEARS 2000-01 TO 2003-04 ARE REPRODUCED HEREIN BELOW:- 5. BEFORE US, BOTH THE LEARNED REPRESENTATIVES SUB MITTED THAT SIMILAR ISSUE HAS COME UP BEFORE THE MUMBAI L BEN CH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 20001-0 2, AS WELL AS 1999-2000, 2001-02, AND THAT THE APPEALS SHOULD BE RESTORED TO THE FILE OF COMMISSIONER (APPEALS) TO ADJUDICATE THE IS SUE OF CHARGEABILITY OF INCOME OF PAYMENTS MADE TO KMPG INTERNATIONAL. T HE TRIBUNAL IN ITA NO.1959 AND 1823/MUM./ 2007, AT PARAS-9 AND 10 / PAGE-7, HELD AS FOLLOWS:- 9. THE HAS RAISED LEGAL ARGUMENT THAT THE PAYMENT M ADE TO M/S KPMG INTERNATIONAL IS NOT CHARGEABLE UNDER T HE PROVISIONS OF THE ACT, FOR THE REASON THAT M/S KPMG INTERNATIONAL IS A MUTUAL ORGANIZATION AND THE ASSE SSEE IS A MEMBER OF SUCH MUTUAL ORGANIZATION. THIS ARGUMENT HAS NOT BEEN ADJUDICATED UPON BY THE FIRST APPELLAT E AUTHORITY FOR THE REASONS GIVEN AT PARA 5.5 AT PAG E 15 OF HIS ORDER, WHICH IS ALREADY EXTRACTED BY US HEREIN ABOVE. IN OUR CONSIDERED VIEW THE FIRST APPELLATE AUTHORIT Y WAS IN ERROR IN NOT ADJUDICATING THE ISSUE. THE ASSESSEE H AS A RIGHT TO ARGUE THAT, THE AMOUNT PAID BY IT TO M/S K PMG INTERNATIONAL DOES NOT GIVE RISE TO ANY INCOME CHAR GEABLE TO TAX IN INDIA AND THUS THE AGES DEDUCT ANY TAX AT SOURCE. THE ISSUE WHETHER THE ASSESSEE CAN TAKE SUC H AN ARGUMENT HAS ATTAINED FINALITY BY THE DECISION OF T HE HONBLE SUPREME OF INDIA IN THE CASE OF G.E. INDIA TECHNOLOGY CENTRE PVT. LTD. V/S CIT AND OTHERS, CIV IL APPEAL NO.7541-7542 OF 2010 JUDGMENT DATED 9 TH SEPTEMBER 2010. IN VIEW OF THE ABOVE, WE ARE OF THE K P M G 4 OPINION, THAT THE FIRST APPELLATE AUTHORITY SHOULD HAVE ADJUDICATED ON THE GROUND WHETHER THE PAYMENT MADE BY THE ASSESSEE IS CHARGEABLE TO TAX UNDER THE ACT. TH E APPREHENSION OF THE LEARNED DR, THAT THE DECISION O N THIS MATTER WOULD HAVE REMIFICATION IN THE OTHER CASES A ND ALSO THE ARGUMENT THAT, THE ISSUE WHETHER M/S. KPMG INTERNATIONAL IS A MUTUAL CONCERN OR NOT, CANNOT BE DECIDED IN THIS CASE, IS DEVOID OF MERIT. THE ASSES SEE IS A MEMBER OF KPMG INTERNATIONAL AND IT IS FOR THE ASSE SSEE TO SATISFY THE ADJUDICATOR, WITH ALL POSSIBLE EVIDE NCES, THAT M/S. KPMG INTERNATIONAL IS A MUTUAL CONCERN. WHEN T HE ASSESSEE IS MAKING A CLAIM IT IS FOR THE ASSESSEE T O PROVE ITS CASE. THUS, WE REJECT THIS ARGUMENT OF THE LEAR NED DR. 10. IN VIEW OF THE ABOVE DISCUSSION, WE SET ASIDE B OTH THE APPEALS TO THE FILE OF CIT(APPEALS) WITH A DIRE CTION TO ADJUDICATE THE ISSUE RAISED BY THE ASSESSEE ON THE CHARGEABILITY TO INCOME TAX OF PAYMENTS MADE TO M/S . KPMG INTERNATIONAL . 6. THE AFORESAID FINDINGS OF THE TRIBUNAL WAS SUBSE QUENTLY FOLLOWED BY A CO-ORDINATE BENCH OF THE TRIBUNAL IN ITA NO.46 05/MUM./2005, AND OTHER APPEALS, ORDER DATED 31 ST JANUARY 2011. 7. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE SET A SIDE THE IMPUGNED ORDERS PASSED BY THE COMMISSIONER (APPEALS ) AND RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DENOVO ADJUDICATION IN ACCORDANCE WITH LAW. THUS, THE GROUND RAISED IN THE SE APPEALS IS ALLOWED FOR STATISTICAL PURPOSES . 5. SIMILAR DIRECTIONS WERE ALSO GIVEN IN THE APPEALS F OR ASSESSMENT YEARS 2005-06 AND 2006-07, WHICH ARE REPRODUCED BELOW FOR READY REFERENCE:- 3. WE HAVE HEARD BOTH THE PARTIES M THE MATTER. TH E LEARNED AR FOR THE ASSESSEE AT THE VERY OUTSET POINTED OUT THAT TH E SAME ISSUE HAD ARISEN EARLIER IN RELATION TO SIMILAR OTHER PAYMENT S IN RESPECT OF WHICH ALSO THE ASSESSEE HAD BEEN TREATED AS ASSESSEE IN D EFAULT. IN THESE CASES ALSO SIMILAR ARGUMENTS HAD BEEN ADVANCED AND CIT(A) HAD HELD THAT PAYMENTS TOWARDS INSURANCE PREMIUM AND GUARANT EE CHARGES WERE REIMBURSEMENT OF COST AND NO TAX WAS REQUIRED TO BE DEDUCTED. IN THESE CASES ALSO CIT(A) DID NOT ADJUDICATE THE I SSUE RELATING TO MUTUALITY. BOTH THE PARTIES HAD APPEALED TO THE TRI BUNAL AND THE TRIBUNAL VIDE ORDER DATED 20-10-2010 IN ITA NO. 195 9 AND 1823/M/2007 HELD THAT CIT(A) WAS NOT JUSTIFIED IN N OT ADJUDICATING THE GROUND RELATING TO NON TAXABILITY OF THE PAYMENT ON ACCOUNT OF MUTUALITY. THE TRIBUNAL ALSO OBSERVED THAT IT WAS F OR THE ASSESSEE WHO WAS A MEMBER OF KPMG INTERNATIONAL TO SATISFY THE A DJUDICATOR WITH ALL POSSIBLE EVIDENCES THAT KPMG INTERNATIONAL WAS A MU TUAL CONCERN. THE TRIBUNAL THEREAFTER SET ASIDE THE APPEALS TO THE FI LE OF CIT(A) WITH K P M G 5 DIRECTION TO ADJUDICATE THE ISSUE RAISED BY THE ASS ESSEE ON THE CHARGEABILITY OF INCOME-TAX ON PAYMENTS MADE TO M/S . KPMG INTERNATIONAL. BOTH THE PARTIES AGREED THAT THE FAC TS IN THE PRESENT APPEALS WERE IDENTICAL AND THEREFORE THERE WAS NO O BJECTION TO THE MATTER BEING RESTORED TO THE FILE OF CIT(A) FOLLOWI NG THE EARLIER DECISION OF THE TRIBUNAL. WE THEREFORE SET ASIDE THE ORDERS OF CIT(A) AND RESTORE THE ISSUE TO THE FILE OF CIT(A) FOR PASSING FRESH O RDERS AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. IN THE RESULT ALL THE APPEALS OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. 6. THUS, CONSISTENT WITH THE VIEW TAKEN THEREIN, WE AL SO SET ASIDE THE IMPUGNED ORDER PASSED BY THE COMMISSIONER (APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE COMMISSIONER (APPEALS) FOR DENOVO ADJUDICATION IN THE LIGHT OF THE DECISION OF THE TRIBUNAL GIVEN IN ASSE SSEES OWN CASE FOR ASSESSMENT YEARS 1997-98, 2005-06 AND 2006-07, WHIC H ARE THE LATEST ORDERS. CONSEQUENTLY, THIS GROUND IS ALLOWED FOR ST ATISTICAL PURPOSES. 7. IN GROUND NO.2, THE ASSESSEE HAS MAINLY CHALLENGED THE DISALLOWANCE UNDER SECTION 40A(I) IN RESPECT OF REIMBURSEMENT OF EXPENDITURE AND PROFESSIONAL FEE PAID TO KMPG, DUBAI, U.A.E., WHICH IS THE SOLE PROPRIETORSHIP OF MR. VIJAY MALHOTRA. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS REMITTED ` 2,67,997 TO KPMG MIDDLE EAST AND SOUTH ASIA, SHARJ AH, U.A.E. ` 8,21,487 TO KPMG, DUBAI, U.A.E. AND ` 1,38,41,163 TO KPMG, DUBAI. FURTHER, IT WAS STATED THAT THESE PAYMENTS WERE MAD E IN PURSUANCE OF PROFESSIONAL SERVICES CARRIED OUT BY THE KPMG, DUBA I (PROPRIETOR MR. VIJAY MALHOTRA) AS UNDERSTOOD IN ARTICLE 14 OF THE INDOU AE TREATY DEALING WITH INDEPENDENT PERSONAL SERVICES. IT WAS STATED THAT T HE INCOME IS NOT CHARGEABLE TO TAX IN INDIA SINCE MR. MALHOTRA WAS N OT IN INDIA FOR MORE THAN 183 DAYS DURING THE PREVIOUS YEAR AND, THEREFORE, T HE QUESTION OF DEDUCTION OF TAX AT SOURCE DOES NOT ARISE. 8. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTE NTIONS AND HELD THAT MR. VIJAY MALHOTRA, IS A RESIDENT OF U.A.E. AND AS PER U.A.E. DECREE HE IS NOT LIABLE TO PAY TAX IN U.A.E. AND, THEREFORE, HE DOES NOT SATISFY THE K P M G 6 REQUIREMENTS OF THE EXPRESSION RESIDENT OF A CONTRACTING STATE SO HE CANNOT BE TREATED AS RESIDENT OF U.A.E. WITHIN THE MEANING OF ARTICLE4(1) OF THE TREATY. HE HELD THAT, SINCE INCOME HAS ACCRUED OR ARISEN IN INDIA, THEREFORE, IT IS CHARGEABLE TO TAX IN INDIA AND THE ASSESSEE WAS LIABLE TO DEDUCT TAX IN INDIA BEFORE MAKING PAYMENT TO MR. VI JAY MALHOTRA, PROPRIETOR OF KPMG, DUBAI. IN ANY CASE, NO APPROVAL UNDER SECT ION 195 OR SECTION 197 WAS TAKEN BEFORE REMITTANCE AND THE DECISION OF SUP REME COURT IN TRANSMISSION CORPORATION OF A.P. LTD. V/S CIT, [199 9] 239 ITR 587 (SC) IS SQUARELY APPLICABLE IN THIS CASE. SINCE THE PAYMENT OF ` 1,49,30,647 WAS MADE WITHOUT DEDUCTION OF TAX, THE SAME WAS DISALLO WED UNDER SECTION 40(A)(I) OF THE ACT. 9. BEFORE THE COMMISSIONER (APPEALS), IT WAS SUBMITTED THAT THE PAYMENTS WERE MADE TOWARDS REIMBURSEMENT OF THE COS T AND IN SUPPORT, COPIES OF VOUCHERS WERE PRODUCED. WITH REGARD TO TH E PROFESSIONAL SERVICES, THE ASSESSEES MAIN CONTENTIONS WERE THAT THE PAYME NTS WERE MADE IN PURSUANCE OF PROFESSIONAL SERVICES CARRIED OUT BY K PMG, DUBAI, THROUGH PROPRIETOR MR. VIJAY MALHOTRA, THE INCOME OF HIS WA S NOT CHARGEABLE IN INDIA SINCE HE WAS NOT IN INDIA FOR MORE THAN 183 DAYS. T HE MAIN CONTENTIONS OF THE ASSESSEE, AS INCORPORATED BY THE COMMISSIONER ( APPEALS), ARE AS UNDER:- MR. VIJAY MAIHOTRA DID NOT HAVE A FIXED BASE IN IN DIA. HE DID NOT STAY IN INDIA FOR MORE THAN 183 DAYS. THE SERVICES WERE RENDERED BY MR. MALHOTRA TO THE A PPELLANT IN INDIA AND AT UAE. PROVISIONS OF ARTICLE 3(E), 4(1) AND 14 OF THE DTAA WITH UAE WAS REFERRED TO. THE DECISION OF THE APEX COURT IN AZADI BACHAO ANDO LAN 2003, 263 ITR 706 WAS ALSO REFERRED TO. IN VIEW OF THE SAID SUPREME COURTS DECISION READ W ITH THE SAID TRIBUNAL DECISION THE APPELLANT ARGUED THAT MR. MAL HOTRA WAS LIABLE TO PAY TAX IN UAE BECAUSE AS HELD IN THE SAID DECISION OF THE TRIBUNAL, IT IS THUS CLEAR THAT A TAX TREATY NOT ONLY PREVENTS CURRENT BUT ALSO K P M G 7 POTENTIAL DOUBLE TAXATION... IT IS THUS CLEAR THA T TAXABILITY IN ONE COUNTRY IS NOT SINE QUA NON FOR AVAILING RELIEF UND ER THE TREATY FROM TAXABILITY IN THE OTHER COUNTRY. ALL THAT IS NECESS ARY FOR THIS PURPOSE IS THAT THE PERSON SHOULD BE LIABLE TO TAX IN THE CONT RACTING STATE BY REASON OF DOMICILE, RESIDENCE, PLACE OF MANAGEMENT, PLACE OF INCORPORATION OR ANY OTHER CRITERION OF SIMILAR NAT URE WHICH ESSENTIALLY REFERS TO THE FISCAL DOMICILE OF SUCH A PERSON. SECTION 195 AND 197 OF THE I.T. ACT IN RELATION TO NON-DEDUCTION CERTIFICATE OBTAINED FROM THE A.O. WAS NOT RELEVANT BECAUSE THE APPELLANT HAD SUBMITTED CERTIFICATE OF THE C.A. PUR SUANT TO CIRCULAR NO.759 DATED 18/11/97 READ WITH CIRCULAR NO.767 DAT ED 22/5/98 AND CIRCULAR NO.10/2002 DATED 9/10/2002 (PAGE 3 PARA 1. 9 OF THE WRITTEN SUBMISSION DATED 25/11/08). AS FAR AS THE CASE OF TRANSMISSION CORPORATION OF I NDIA [239 ITR 857 (SC)] IS CONCERNED, THE APPELLANTS CASE IS THAT TH E CORRECT INTERPRETATION OF THE SAID DECISION WAS THAT IN CAS E OF REMITTANCE TO A NON-RESIDENT, TAX NEEDED TO BE DEDUCTED AT SOURCE O NLY ON THE INCOME EMBEDDED IN THE REMITTANCES AND NOT FROM THE ENTIRE REMITTANCE AS INTERPRETED BY THE A.O. THAT, IN THIS CASE, THERE W AS NO INCOME ELEMENT AT ALL. 10. THE COMMISSIONER (APPEALS), ON THE ISSUE OF REIMBUR SEMENT OF EXPENDITURE, HAS PARTLY DELETED SOME OF EXPENDITURE AND CONFIRMED PAYMENT FOR VARIOUS REIMBURSEMENT OF EXPENDITURE LIKE TRAVE L, HOTEL, CONVEYANCE AND PAYMENT OF PROFESSIONAL SERVICES, AFTER OBSERVING A ND HOLDING AS UNDER:- 6.3 I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND TH E MATERIALS ON RECORD. ITS A FACT THAT MR. MALHOTRA WAS A RESIDEN T OF U.A.E. AND AS PER THE U.A.E. DECREE, HE WAS NOT LIABLE TO PAY TAXES T HERE. MR. MALHOTRA DID NOT SATISFY THE CONDITION OF BEING RESIDENT OF A CONTRACTING STATE. HENCE, HE COULD NOT BE TREATED AS A RESIDENT OF UAE WITHIN THE MEANING OF ARTICLE 4(1) OF DTAA WITH UAE. I, THEREF ORE, AGREE WITH THE A.O.S CONTENTION THAT THE INCOME HAD ACCRUED OR AR ISEN IN INDIA AND WAS CHARGEABLE TO TAX IN INDIA. TDS SHOULD HAVE BEE N MADE WHICH, IN FACT, WAS NOT MADE. THEREFORE, THE ADDITION WAS JUS TIFIABLY MADE. GROUNDS NO. 9 AND 10 DESERVE TO BE REJECTED. 6.4 AS FAR AS PART OF GROUND NO.8 IS CONCERNED, THE APPELLANT HAD STATED THAT THESE WERE REIMBURSEMENT OF SOME EXPENS ES LIKE TRAVEL, HOTEL, CONVEYANCE ETC. IT IS NOT CLEAR FROM THE APP ELLANTS CONTENTIONS AS TO WHY WAS THE APPELLANT OBLIGED TO MAKE SUCH RE IMBURSEMENTS AND, IN ANY CASE, NO ONE-TO-ONE RELATION WAS ESTABL ISHED BETWEEN TO SUCH EXPENSES AND THE SO-CALLED REIMBURSEMENTS. THE ALTERNATIVE PLEA THAT THE SAME WERE COVERED WITHIN THE MEANING OF AR TICLE 14 WITH REGARD TO INDEPENDENT PERSONAL SERVICES IS ALSO NOT SUSTAINABLE BECAUSE NO SERVICES HAVE BEEN IDENTIFIED SO AS TO B E COVERED WITHIN K P M G 8 THE MEANING OF SUCH PROVISION. THIS PART OF GROUND NO. 8 DESERVES TO BE REJECTED. 11. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE, AF TER REITERATING THE CONTENTIONS MADE BEFORE THE COMMISSIONER (APPEALS), SUBMITTED THAT THE MAIN ALLEGATION OF THE INCOME TAX AUTHORITIES WAS T HAT MR. MALHOTRA, IS NOT PAYING TAX IN U.A.E. AND, THEREFORE, HE IS NOT A RE SIDENT OF U.A.E. WITHIN THE MEANING OF ARTICLE-4(1) OF DTAA INDO-U.A.E. SUCH RE ASONING IS WHOLLY ERRONEOUS AS HE WAS LIABLE TO TAX IN U.A.E. WHICH I S A SUFFICIENT CONDITION AND IT IS NOT NECESSARY TO ACTUALLY PAY THE TAX. IN SUP PORT OF THIS CONTENTION, HE RELIED UPON CATENA OF DECISIONS, WHICH ARE AS FOLLO WS:- AZADI BACHAO ANDOLAN & ANR, [2003] 263 ITR 706 (SC) ; GREEN EMIRATE SHIPPING & TRAVELS [2006] 100 ITD 203 (MUM.); BHAGWAN T. SHIVLANI [2012] 12 TAXMAN.COM 821 (MUM.) ; MEERA BHATIA [2010] 38 SOT 95 (MUM.); RAMSHKUMAR GOENKA [2010] 39 SOT 132 (MUM.); RESOURCE CONNECTIONS [2010] 42 SOT 23 (MUM.) (URO); MAHAVIRCHAND MEHTA [ 2011] 11 TAXMAN.COM 194 (MUM.) ; MUSTAQ AHMAD VAKIL [2011] 47 SOT 454 (DEL.) . 12. ON THE ISSUE OF REIMBURSEMENT OF EXPENDITURE, HE DR EW OUR ATTENTION TO VARIOUS DEBIT NOTES AND DETAILS OF EXPENDITURE A LONG WITH THE PAYMENT, VOUCHERS AS GIVEN IN THE PAPER BOOK AND SUBMITTED T HAT THESE WERE PURELY REIMBURSEMENT OF EXPENDITURE. SUCH REIMBURSEMENT OF EXPENDITURE CANNOT BE HELD TO BE TAXABLE IN VIEW OF VARIOUS DECISIONS, WHICH ARE AS UNDER:- SIEMENS ATTIONGESELLSCHAFT [ 2008] 220 CTR 425 (BOM .) INFORMATION ARCHITECTS [2010] 322 ITR 1 (BOM.) VAN OORD ACZ INDIA (P) LTD. [ 2010] 230 CTR 365 (DE L.) SAPIEM S.A. [2012] 26 TAXMAN.COM 77 (MUM.) NATHPA JHAKRI JOINT VENTURE [2010] 37 SOT 160 (MUM. ) LINKLATERS LLP [2010] 132 TTJ 20 (MUM.) MAHINDRA & MAHINDRA LTD. [2012] 134 ITD 312 (MUM.) VIZCRAFT INTERNATIONAL ENTERTAINMENT [2011] 8 ITR ( TRI.) 334 (MUM.) MODICON NETWORK P. LTD. [2007] 14 SOT 204 (DEL.) K P M G 9 KRANAVANTI CO. OP. BANK LTD. [2012] 68 DTR 41 (AHD. ) LOUIS BERGER INTERNATIONAL INC. [2010] 40 SOT 370 ( HYD.) GLOBAL E BUSINESS OPERATIONS [ 2012] 23 TAXMAN.COM 455 (BANG.) 13. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE RELIED, HEAVILY, UPON THE FINDINGS OF THE COMMISSIONER (APP EALS) AND THE ASSESSING OFFICER AND SUBMITTED THAT, ALTERNATIVELY, THE MATT ER SHOULD BE RESTORED TO THE FILE OF THE ASSESSING OFFICER AS BOTH THE AUTHO RITIES BELOW HAVE NOT EXAMINED THESE ISSUES ON MERIT BUT HAVE DECIDED THE ISSUE ON THE BASIS OF DTAA. EVEN WITH REGARD TO THE REIMBURSEMENT, THE NA TURE OF EXPENDITURE AND ITS CO-RELATION WITH THE REIMBURSEMENT HAS NOT BEEN PROPERLY ESTABLISHED AND THE ENTIRE ISSUE NEEDS TO BE EXAMINED PROPERLY. 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE MATERIAL PLACED ON RECORD. INSOFAR AS THE PAYMENT MADE TO MR. VIJAY MALHOTRA, WHO WAS THE SOL E PROPRIETOR OF THE KPMG, DUBAI, IT IS NOT IN DISPUTE THAT HE HAS NOT S TAYED IN INDIA FOR MORE THAN 183 DAYS AND DID NOT HAVE FIXED BASE IN INDIA. THE MAIN ALLEGATION OF THE ASSESSING OFFICER WHICH HAS BEEN CONFIRMED BY T HE COMMISSIONER (APPEALS) IS THAT MR. MALHOTRA, CANNOT BE TREATED A S RESIDENT OF U.A.E. WITHIN THE MEANING OF ARTICLE-4(1) OF DTAA, AS MR. MALHOTR A, WAS NOT PAYING TAX IN U.A.E. ARTICLE-4(1) PROVIDES THAT UNDER THE AGREEME NT, THE TERM RESIDENT OF A CONTRACTING STATE MEANS ANY PERSON, WHO, UNDER THE LAWS OF THAT STATE (U.A.E.), IS LIABLE TO TAX THEREIN BY REASON OF HIS DOMICILE RESIDENT PLACE OF MANAGEMENT, PLACE OF INCORPORATION, OR ANY OTHER CRITERION OF SIMILAR NATURE. THE TERM LIABLE TO TAX IN THE CONTRACTING STATE HAVE BEEN HELD BY CATENA OF DECISIONS THAT IT DOES NOT NECESSARILY IM PLY THAT THE PERSON SHOULD ACTUALLY PAY THE TAX IN THAT CONTRACTING STATE. RIG HT TO TAX ON SUCH PERSON IS SUFFICIENT. THIS ASPECT OF THE MATTER WAS CLARIFIED BY THE HON'BLE SUPREME COURT IN UNION OF INDIA V/S AZADI BACHAO ANDOLAN & ANR., [2003] 263 ITR 706 (SC). THIS PRINCIPLE HAS BEEN REITERATED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN SEVERAL CASES. THE TRIBUNAL IN ACIT V/S GREEN EMIRATES SHIPPING TRAVEL, CONCLUDED IN THE FOLLOWING MANNER:- K P M G 10 IT IS THUS CLEAR THAT A TAX TREATY NOT ONLY PREVENT S CURRENT' BUT ALSO POTENTIAL' DOUBLE TAXATION. THEREFORE, IRRESPECTIVE OF WHETHER OR NOT THE UAE ACTUALLY LEVIES TAXES ON NON-CORPORATE ENTI TIES, ONCE THE RIGHT TO TAX UAE RESIDENTS IN SPECIFIED CIRCUMSTANCES VES TS ONLY WITH THE GOVERNMENT OF UAE, THAT RIGHT, WHETHER EXERCISED OR NOT, CONTINUES TO REMAIN EXCLUSIVE RIGHT OF THE GOVERNMENT OF UAE. AS NOTED ABOVE, THE EXEMPTION AGREED TO UNDER THE 'ASSIGNMENT' OR 'DIST RIBUTIVE' RULE, IS INDEPENDENT OF 'WHETHER THE CONTRACTING STATE IMPOS ES A TAX IN THE SITUATION TO WHICH EXEMPTION IMPLIES'. IN THE CASE OF JOHN N. GLADDEN VS. HER MAJESTY THE QUEEN 85 TAX CASES 5188, WHICH WAS QUOTED WITH APPROVAL BY THE HON'BLE SUPREME COURT IN AZADI BACH AO ANDOLAN'S CASE (SUPRA), FEDERAL COURT OF CANADA HAS OBSERVED THAT THE NON- RESIDENT CAN BENEFIT FROM THE EXEMPTION (UNDER THE TREATY) REGARDLESS OF WHETHER OR NOT HE IS TAXABLE ON THAT CAPITAL GAI N IN HIS OWN COUNTRY. IF CANADA OR THE US WERE TO ABOLISH THE CAPITAL GAI NS TAX COMPLETELY, WHILE THE OTHER COUNTRY DID NOT, A RESIDENT OF THE COUNTRY WHICH HAS ABOLISHED THE CAPITAL GAINS WOULD STILL BE EXEMPT F ROM CAPITAL GAINS IN THAT OTHER COUNTRY'. IT IS THUS CLEAR THAT TAXABILI TY IN ONE COUNTRY IS NOT SINE QUA NON FOR AVAILING RELIEF UNDER THE TREATY F ROM TAXABILITY IN THE OTHER COUNTRY. ALL THAT IS NECESSARY FOR THIS PURPO SE IS THAT THE PERSON SHOULD BE 'LIABLE TO TAX IN THE CONTRACTING STATE B Y REASON OF DOMICILE, RESIDENCE, PLACE OF MANAGEMENT, PLACE OF INCORPORAT ION OR ANY OTHER CRITERION OF SIMILAR NATURE' WHICH ESSENTIALLY REFE RS TO THE FISCAL DOMICILE OF SUCH A PERSON. IN OTHER WORDS, IF FISCAL DOMICIL E OF A PERSON IS IN A CONTRACTING STATE, IRRESPECTIVE OF WHETHER OR NOT T HAT PERSON IS ACTUALLY LIABLE TO PAY TAX IN THAT COUNTRY, HE IS T O BE TREATED AS RESIDENT OF THAT CONTRACTING STATE. THE EXPRESSION 'LIABLE TO TAX' IS NOT TO READ IN ISOLATION BUT IN CONJUNCTION WITH THE WO RDS IMMEDIATELY FOLLOWING IT, I.E., BY REASON OF DOMICILE, RESIDENC E, PLACE OF MANAGEMENT, PLACE OF INCORPORATION OR ANY OTHER CRI TERION OF SIMILAR NATURE'. THAT WOULD MEAN THAT MERELY A PERSON LIVIN G IN A CONTRACTING STATE SHOULD NOT BE SUFFICIENT, THAT PERSON SHOULD ALSO HAVE FISCAL DOMICILE IN THAT COUNTRY. THESE TESTS OF FISCAL DOM ICILE WHICH ARE GIVEN BY WAY OF EXAMPLES FOLLOWING THE EXPRESSION 'LIABLE TO TAX BY REASON OF', I.E., DOMICILE, RESIDENCE, PLACE OF MANAGEMENT , PLACE OF INCORPORATION, ETC., ARE NO MORE THAN EXAMPLES OF L OCALITY-RELATED ATTACHMENTS THAT ATTRACT RESIDENCE TYPE TAXATION. T HEREFORE, AS LONG AS A PERSON HAS SUCH LOCALITY-RELATED ATTACHMENTS WHIC H ATTRACT RESIDENCE TYPE TAXATION, THAT 'PERSON' IS TO BE TREATED AS RE SIDENT AND THIS STATUS OF BEING A 'RESIDENT' OF THE CONTRACTING STATE IS I NDEPENDENT OF THE ACTUAL LEVY OF TAX ON THAT PERSON. VIEWED IN THIS P ERSPECTIVE, WE ARE OF THE CONSIDERED OPINION THAT BEING 'LIABLE TO TAX' I N THE CONTRACTING STATE DOES NOT NECESSARILY IMPLY THAT THE PERSON SH OULD ACTUALLY BE LIABLE TO TAX IN THAT CONTRACTING STATE BY VIRTUE O F AN EXISTING LEGAL PROVISION BUT WOULD ALSO COVER THE CASES WHERE THAT OTHER CONTRACTING STATE HAS THE RIGHT TO TAX SUCH PERSONS IRRESPECTIV E OF WHETHER OR NOT SUCH A RIGHT IS EXERCISED BY THE CONTRACTING STATE. IN OUR HUMBLE UNDERSTANDING, THIS IS THE LEGAL POSITION EMERGING OUT OF HON'BLE SUPREME COURTS JUDGMENT IN AZADI BACHAO ANDOLAN'S C ASE (SUPRA). THE PLEA TAKEN BY THE REVENUE THAT THE ASSESSEE WAS NOT 'LIABLE TO K P M G 11 TAX', WHICH WAS ANYWAY NOT TAKEN BY THE AO OR BEFOR E THE CIT(A), IS ALSO NOT SUSTAINABLE IN LAW EITHER. 9. FOR THE REASONS SET OUT ABOVE, AND EVEN THOUGH W E DO NOT APPROVE THE REASONING ADOPTED BY THE CIT(A), WE APPROVE THE CONCLUSION ARRIVED AT BY THE CIT(A). HIS HAVING ARRIVED AT RIG HT CONCLUSION MAY HAVE BEEN FORTUITOUS BUT WHAT IS MATERIAL IS THAT H E REACHED THE RIGHT CONCLUSION. WE APPROVE HIS CONCLUSION AND DECLINE T O INTERFERE IN THE MATTER. 15. ALL OTHER JUDGMENTS RELIED UPON BY THE LEARNED COUN SEL HAS FOLLOWED THE AFORESAID PROPOSITION. THUS, RESPECTFULLY FOLLO WING THE SEVERAL JUDICIAL PRECEDENCE, WE HOLD THAT TAXABILITY IN ONE COUNTRY IS NOT SIN QUA NON FOR AVAILING RELIEF UNDER THE TREATY FROM TAXABILITY IN OTHER COUNTRY. ALL THAT IS NECESSARY IS THAT A PERSON SHOULD BE LIABLE TO TAX IN THE CONTRACTING STATE BY REASON OF DOMICILE, RESIDENT, PLACE OF MANAGEMENT, PLACE OF INCORPORATION OR ANY OTHER SIMILAR CRITERION WHICH REFERS TO FISCAL DOMICILE OF SUCH PERSON. IF A FISCAL DOMICILE OF A PERSON IS IN THE CONTRACTING S TATE, WHICH IN THE PRESENT CASE HAS NOT BEEN DOUBTED IS IN U.A.E. THEN IS TO B E TREATED AS RESIDENT OF THAT CONTRACTING STATE IRRESPECTIVE OF WHETHER OR N OT THAT PERSON IS ACTUALLY LIABLE TO PAY TAX IN THAT COUNTRY. LIABLE TO TAX IN THE CONTRACTING STATE CANNOT BE IMPLIED AS THE PERSON IS ACTUALLY LIABLE TO TAX BUT WOULD ALSO COVER THE CASES WHERE THE OTHER CONTRACTING STATE HAS THE RIG HT TO TAX SUCH PERSON. IT IS IMMATERIAL WHETHER OR NOT SUCH RIGHT HAS BEEN EX ERCISED. WE, ACCORDINGLY, REJECT THE BASIS FOR DEDUCTING THE TDS UNDER SECTIO N 195 BY THE ASSESSEE FOR MAKING THE PAYMENT TO MR. VIJAY MALHOTRA, AMOUNTING TO ` 1,38,41,163. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 16. THE OTHER ISSUE IS WITH REGARD TO DISALLOWANCE OF ` 7,27,627, ON ACCOUNT OF REIMBURSEMENT OF VARIOUS EXPENSES TOWARD S AIR FARE, CONVEYANCE, TELEPHONE, HOSPITAL BILLS, ETC., MADE TO KPMG, DUBA I, I.E., MR. VIJAY MALHOTRA. 17. ON A PERUSAL OF THE BILLS AND DETAILS OF EXPENSES, AS ARE APPEARING IN THE PAPER BOOK, IT IS SEEN THAT THEY ARE ALL IN THE NATURE OF EXPENSES INCURRED BY MR. VIJAY MALHOTRA, FOR THE PROFESSIONAL SERVICE S RENDERED BY HIM IN INDIA. ON SUCH REIMBURSEMENT OF EXPENSES, THERE IS NO REQU IREMENT TO DEDUCT TDS. K P M G 12 OTHERWISE ALSO, IT IS A SETTLED PRINCIPLE OF LAW TH AT OBLIGATION TO DEDUCT TAX ARISE ONLY IF THE SUM PAID IS TAXABLE TO TAX IN IND IA. THERE HAS TO BE SOME ELEMENT OF INCOME EMBEDDED IN THE REMITTANCES. THIS ISSUE HAS NOW BEING SETTLED BY THE HON'BLE SUPREME COURT IN G.E. INDIA TECHNOLOGY CENTRE PVT. LTD. V/S CIT, [2010] 327 ITR 456, WHERE THE HON'BLE SUPREME COURT CONCLUDED THAT OBLIGATION TO DEDUCT TAX IS LIMITED TO THE APPROPRIATE PORTION OF INCOME WHICH IS CHARGEABLE UNDER THE ACT. FURTHE R, ON THE ISSUE THAT PROVISIONS OF SECTION 40A(I) CANNOT BE APPLICABLE O N REIMBURSEMENT OF EXPENSES, HAS BEEN UPHELD BY VARIOUS DECISIONS, AS RELIED UPON BY THE LEARNED COUNSEL WHICH HAS BEEN INCORPORATED HEREIN ABOVE. THUS, ON THIS SCORE ALSO, WE HOLD THAT NO TDS WAS DEDUCTIBLE ON T HE REIMBURSEMENT OF EXPENSES. ACCORDINGLY, THIS GROUND IS TREATED AS AL LOWED. 18. 1 ` #7 &) *1# 2 82 9:; ' '$ !# < 2 4# => ? 19. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. WE NOW TAKE UP REVENUES APPEAL IN ITA NO.1020/MUM./2008, VIDE WHICH FOLLOWING GROUNDS HAVE BEEN RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION O F ` 3,04,08,658 BEING REIMBURSEMENT OF PROFESSIONAL INDEMNITY INSUR ANCE CHARGES AND ` 20,14,111 BEING BANK GUARANTEE CHARGES HOLDING THA T THESE AMOUNTS ARE ONLY REIMBURSEMENT OF ACTUAL EXPENSES AND HENCE ARE NOT SUBJECT TO TDS WHILE REMITTING TO FOREIGN CONCERN. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION O F ` 32,85,625 (12,22,221 + 14,49,452 + 6,13,9520 U/S 40(A)(I) OF THE ACT WITHOUT APPRECIATING THE REASONING GIVEN IN THE ASSESSMENT ORDER AND THE ORDER OF THE HON'BLE SUPREME COURT IN THE CASE OF T RANSMISSION CORPORATION. 20. BEFORE US, BOTH THE PARTIES AGREE THAT THIS ISSUE I S INTER-LINKED WITH GROUND NO.1, RAISED BY THE ASSESSEE IN ITS APPEAL I N ITA NO. 2497/MUM./ K P M G 13 2009. CONSISTENT WITH THE VIEW TAKEN THEREIN, THIS GROUND IS RESTORED TO THE FILE OF THE COMMISSIONER (APPEALS) FOR DECIDING THE ISSUE AFRESH. CONSEQUENTLY, GROUND NO.1 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 21. IN GROUND NO.2, THE DEPARTMENT HAS CHALLENGED THE D ELETION OF ADDITION AGGREGATING TO ` 32,85,625, WHICH WAS PAID TO VARIOUS PERSONS IN AB ROAD IN RESPECT OF TRAINING, PROFESSIONAL SERVICES PROVIDED IN INDIA. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS MADE PAYMENT OF ` 12,22,221, TO SOFTWARE TECHNOLOGY TRANSITION, U.S.A. OF ` 14,49,452, TO CONFLICT RESOLUTION COMPANY, U.K. AND ` 6,13,952, TO BALAKUMAR THAMBIAH, MALAYSIA, WITHOUT DEDUCTION OF TAX. APPLYING THE PRINCIPLE LAID DOWN BY THE HON'BLE SUPREME COURT IN TRANSMISSION CORPORATION OF A.P. LTD. V/S CIT, [1999] 239 ITR 587 (SC), THE ASSESSING OFFICER DISALLOWED THE SAME UND ER SECTION 40A(I). 22. BEFORE THE COMMISSIONER (APPEALS), IT WAS SUBMITTED THAT THE REMITTANCE MADE TO SOFTWARE TECHNOLOGY TRANSITION ( STT), U.S.A. WAS ON ACCOUNT OF PROFESSIONAL SERVICES RENDERED BY STT IN PURSUANCE OF PROFESSIONAL SERVICE AGREEMENT DATED 6 TH APRIL 2003. THE STT IS A SOLE PROPRIETORSHIP OF MR. RONALD RADICES, WHO IS A RESI DENT OF U.S.A. THESE SERVICES ARE TO BE UNDERSTOOD IN ARTICLE-15 OF INDO U.S.A. DTAA WHICH DEALS WITH THE INDEPENDENT PERSONAL SERVICE. MR. RADICES DID NOT HAVE ANY FIXED BASE OR P.E. IN INDIA AND HAS STAYED IN INDIA WAS F OR LESS THAN 90 DAYS. THEREFORE, IN VIEW OF THE PROVISIONS OF ARTICLE-15, THE INCOME FROM THIS SERVICE WAS NOT CHARGEABLE TO TAX IN INDIA. WITHOUT PREJUDICE, IT WAS ALSO SUBMITTED THAT REMITTANCE CANNOT BE TREATED AS ROYA LTIES OR FEES FOR INCLUDED SERVICES AS THERE IS NO MAKE AVAILABLE OF TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESS. WITH REGARD TO THE REMI TTANCE MADE TO CONFLICT RESOLUTION COMPANY, U.K. (CRC), IT WAS SUBMITTED TH AT PAYMENT WAS MADE FOR CONDUCTING WORKSHOPS ON FEE NEGOTIATION MASTER CLASS. THE CRC IS A PARTNERSHIP FIRM REGISTERED IN U.K. AND RESIDENT OF U.K. THE PARTNER OF CRC HAVE PROVIDED THIS SERVICE IN INDIA FOR A TIME OF 2 0 DAYS. IF THE INCOME OF SUCH SERVICE IS SAID TO BE COVERED UNDER ARTICLE-7 OF THE TREATY DEALING WITH K P M G 14 BUSINESS PROFIT, THEN THE SAME CANNOT BE TAXED IN I NDIA BECAUSE CRC DID NOT HAVE P.E. OR FIXED BASE IN INDIA. LIKEWISE ALSO, TH ERE WAS NO MAKE AVAILABLE OF ANY TECHNICAL KNOWLEDGE, EXPERIENCE SKILLS, KNOW -HOW OR PROCESS. LASTLY, ON ACCOUNT OF REMITTANCE MADE TO BALA KUMAR THAMBIA , MALAYSIA, WAS ON ACCOUNT OF CONDUCTING ADVANCE ADVISORY CONSULTING A ND PROJECT LEADERSHIP WORKSHOPS, IT WAS SUBMITTED THAT HE IS A RESIDENT O F MALAYSIA, AND WAS IN INDIA FOR 14 DAYS FOR PROVIDING SUCH PROFESSION SER VICES. HE ALSO DID NOT HAVE ANY P.E. OR FIXED BASE IN INDIA, THEREFORE, THE SAM E CANNOT BE HELD TO BE TAXABLE IN INDIA. 23. REGARDING APPLICABILITY OF THE JUDGMENT OF HON'BLE SUPREME COURT IN TRANSMISSION CORPORATION OF A.P. LTD. (SUPRA) DETAI L ANALYSIS WAS GIVEN BEFOR THE COMMISSIONER (APPEALS). THE COMMISSIONER (APPEA LS), AFTER APPRECIATING THE CONTENTIONS OF THE ASSESSEE, DELETED THE SAID D ISALLOWANCE MADE UNDER SECTION 40A(IA) ON THE GROUND THAT THE ASSESSING OF FICER HAS NOT PROPERLY APPRECIATED THE FACTS AND THE CONTENTIONS OF THE AS SESSEE AND THE FINDINGS OF THE ASSESSING OFFICER, HAS NO BASIS. 24. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT FEE PAID TO ALL THE THREE CONCERNS / PERSONS WAS IN THE NATURE OF T ECHNICAL SERVICE AND RELIANCE WAS PLACED ON THE DECISION OF STEEL AUTHOR ITY OF INDIA LTD. V/S ITO, [2009] 120 TTJ (DEL.) 297. HE FURTHER SUBMITTED THA T LOOKING TO THE NATURE OF PROFESSIONAL SERVICES, THESE WERE OF IN THE NATU RE OF TECHNICAL SERVICES LIABLE TO BE TAXED UNDER THE PROVISIONS OF DTAA. HE STRONGLY RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER. 25. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSE SSEE, AFTER REITERATING THE NATURE OF PAYMENTS AND THE FACTS OF THE ISSUE INVOLVED, SUBMITTED THAT THE ASSESSING OFFICER HAS DISALLOWED ONLY ON THE GORUND OF APPLICABILITY OF THE JUDGMENT OF HON'BLE SUPREME CO URT IN TRANSMISSION CORPORATION OF A.P. LTD. (SUPRA) WHICH HAS BEEN DUL Y EXPLAINED IN THE SUBSEQUENT JUDGMENT OF THE HON'BLE SUPREME COURT IN G.E. INDIA TECHNOLOGY CENTRE PVT. LTD. V/S CIT, [2010] 327 ITR 456 (SC). HE FURTHER SUBMITTED THAT K P M G 15 ALL THESE PAYMENTS CANNOT BE TAXED UNDER THE RESPEC TIVE DTAA, FIRSTLY, THE NATURE OF SERVICES WERE NOT IN THE NATURE OF MAKE, AVAILABLE OF TECHNICAL SERVICE, ETC., AS GIVEN IN RESPECTIVE ARTICLES OF I NDO-U.S. AND INDO-U.K. DTAA, AND SECONDLY, ALL THESE TRAININGS WERE COMMER CIAL IN NATURE AND NOT TECHNICAL AND, HENCE, NOT COVERED BY THE PROVISIONS OF DTAA. THESE PAYMENTS ALSO CANNOT BE TAXED UNDER ARTICLE-7, AS N ONE OF THESE PERSONS HAD ANY P.E. OR FIXED BASE IN INDIA. 26. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND THE CASE LAWS RELIED UPON BY EITHER PARTY. WE FIND THAT THE ASSES SING OFFICER HAS MADE THE DISALLOWANCE OF THE PAYMENT MADE TO VARIOUS PERSONS MENTIONED ABOVE UNDER SECTION 40A(I) ON THE BASIS OF THE JUDGMENT O F HON'BLE SUPREME COURT ON TRANSMISSION CORPORATION OF A.P. LTD. (SUPRA). L OOKING TO THE NATURE OF SERVICES RENDERED BY ALL THESE PERSONS, WHICH HAS B EEN DISCUSSED IN DETAIL, IT IS SEEN THAT, FIRSTLY, NONE OF THESE SERVICES FALL IN THE NATURE OF MAKE AVAILABLE OF ANY TECHNICAL KNOWLEDGE, EXPERIENCE, S KILL, KNOW-HOW OR PROCESS. THE PROVISIONS OF INDO-U.S. AND U.K. TREATIES ARE A BSOLUTELY CLEAR THAT IN CASE OF FEES FOR TECHNICAL SERVICES, IT IS ESSENTIAL THA T TECHNICAL KNOWLEDGE SKILL KNOW-HOW SHOULD BE MADE AVAILABLE TO THE ASSESSEE A ND THE ASSESSEE SHOULD BE AT LIBERTY TO USE THEM IN ITS OWN RIGHT. IF THE SERVICE DOES NOT RESULT IN MAKING AVAILABLE OF ANY SUCH THING, THEN THE SAME W OULD NOT FALL WITHIN THE AMBIT OF FEES FOR TECHNICAL SERVICE. THESE PAYMENTS ALSO CANNOT BE TAXED UNDER ARTICLE-7 AS NONE OF THEM WERE HAVING ANY P.E . OR FIXED BASE IN INDIA AND THE DURATION OF THEIR VISIT IN INDIA WAS ALSO F OR A VERY LESS PERIOD AS HAS BEEN DISCUSSED UPON. THEREFORE, SUCH A PAYMENT DOES NOT ATTRACT THE PROVISIONS OF TDS UNDER SECTION 195. PROVISIONS OF SECTION 195(1) USES THE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT . THE PAYER IS BOUND TO DEDUCT TAX AT SOURCE ONLY IF THE SUM PAID IS ASS ESSABLE TO TAX IN INDIA. THE OBLIGATION TO DEDUCT TAX IS LIMITED TO THE APPROPRI ATE PROPORTION OF INCOME WHICH IS CHARGEABLE UNDER THE ACT AND NOT OTHERWISE . THE HON'BLE SUPREME COURT IN G.E. INDIA TECHNOLOGY CENTRE PVT. LTD.(SUP RA), AFTER ANALYZING THE PROVISIONS OF SECTION 195 AND THE DECISION IN TRANS MISSION CORPORATION OF K P M G 16 A.P. LTD. (SUPRA) HAS MADE A VERY IMPORTANT OBSERVA TION, WHICH FOR THE SAKE OF READY REFERENCE, IS REPRODUCED BELOW:- 7. UNDER S. 195(1), THE TAX HAS TO BE DEDUCTED AT SOURCE FROM INTEREST (OTHER THAN INTEREST ON SECURITIES) OR ANY OTHER SUM (NOT BEING SALARIES) CHARGEABLE UNDER THE IT ACT IN THE CASE O F NONRESIDENTS ONLY AND NOT IN THE CASE OF RESIDENTS. FAILURE TO DEDUCT THE TAX UNDER THIS SECTION MAY DISENTITLE THE PAYER TO ANY ALLOWANCE A PART FROM PROSECUTION UNDER S. 276B. THUS, S. 195 IMPOSES A S TATUTORY OBLIGATION ON ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESID ENT, ANY INTEREST (NOT BEING INTEREST ON SECURITIES) OR ANY OTHER SUM (NOT BEING DIVIDEND) CHARGEABLE UNDER THE PROVISIONS OF THE IT ACT, TO DEDUCT INCOME-TAX AT THE RATES IN FORCE UNLESS HE IS LIABL E TO PAY INCOME-TAX THEREON AS AN AGENT. PAYMENT TO NON-RESIDENTS BY WA Y OF ROYALTY AND PAYMENT FOR TECHNICAL SERVICES RENDERED IN INDIA AR E COMMON EXAMPLES OF SUMS CHARGEABLE UNDER THE PROVISIONS OF THE IT ACT TO WHICH THE AFORESTATED REQUIREMENT OF TDS APPLIES. T HE TAX SO COLLECTED AND DEDUCTED IS REQUIRED TO BE PAID TO THE CREDIT O F CENTRAL GOVERNMENT IN TERMS OF S. 200 OF THE IT ACT R/W R. 30 OF THE IT RULES 1962. FAILURE TO DEDUCT TAX OR FAILURE TO PAY TAX W OULD ALSO RENDER A PERSON LIABLE TO PENALTY UNDER S. 201 R/W S. 221 OF THE IT ACT. IN ADDITION, HE WOULD ALSO BE LIABLE UNDER S. 201(1A) TO PAY SIMPLE INTEREST AT 12 PER CENT PER ANNUM ON THE AMOUNT OF SUCH TAX FROM THE DATE ON WHICH SUCH TAX WAS DEDUCTIBLE TO THE DATE O N WHICH SUCH TAX IS ACTUALLY PAID. THE MOST IMPORTANT EXPRESSION IN S. 195(1) CONSISTS OF THE WORDS 'CHARGEABLE UNDER THE PROVISIONS OF THE A CT'. A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON-RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT CHARGEABLE TO TAX UND ER THE IT ACT. FOR INSTANCE, WHERE THERE IS NO OBLIGATION ON THE PART OF THE PAYER AND NO RIGHT TO RECEIVE THE SUM BY THE RECIPIENT AND THAT THE PAYMENT DOES NOT ARISE OUT OF ANY CONTRACT OR OBLIGATION BETWEEN THE PAYER AND THE RECIPIENT BUT IS MADE VOLUNTARILY, SUCH PAYMENTS CA NNOT BE REGARDED AS INCOME UNDER THE IT ACT. IT MAY BE NOTED THAT S. 195 CONTEMPLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INC OME PAYMENTS, IT ALSO COVERS COMPOSITE PAYMENTS WHICH HAS AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THUS, WHERE AN AM OUNT IS PAYABLE TO A NON-RESIDENT, THE PAYER IS UNDER AN OBLIGATION TO DEDUCT TAS IN RESPECT OF SUCH COMPOSITE PAYMENTS. THE OBLIGATION TO DEDUCT TAS IS, HOWEVER, LIMITED TO THE APPROPRIATE PROPORTION OF I NCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONE Y PAYABLE TO THE NONRESIDENT. THIS OBLIGATION BEING LIMITED TO THE A PPROPRIATE PROPORTION OF INCOME FLOWS FROM THE WORDS USED IN S. 195(1), N AMELY, 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT'. IT IS FOR THIS RE ASON THAT VIDE CIRCULAR NO. 728, DT. 30TH OCT., 1995 [(1995) 129 CTR (ST) 1 ] THE CBDT HAS CLARIFIED THAT THE TAX DEDUCTOR CAN TAKE INTO CONSI DERATION THE EFFECT OF DTAA IN RESPECT OF PAYMENT OF ROYALTIES AND TECHNIC AL FEES WHILE DEDUCTING TAS. IT MAY ALSO BE NOTED THAT S. 195(1) IS IN IDENTICAL TERMS WITH S. 18(3B) OF THE 1922 ACT. IN CIT VS. CO OPER ENGINEERING LTD. (1968) 68 ITR 457 (BOM) IT WAS POINTED OUT THA T IF THE PAYMENT K P M G 17 MADE BY THE RESIDENT TO THE NON-RESIDENT WAS AN AMO UNT WHICH WAS NOT CHARGEABLE TO TAX IN INDIA, THEN NO TAX IS DEDU CTIBLE AT SOURCE EVEN THOUGH THE ASSESSEE HAD NOT MADE AN APPLICATION UND ER S. 18(3B) [NOW S. 195(2) OF THE IT ACT)]. THE APPLICATION OF S. 195(2) PRESUPPOSES THAT THE PERSON RESPONSIBLE FOR MAKING THE PAYMENT TO THE NON-RESIDENT IS IN NO DOUBT THAT TAX IS PAYABLE IN RESPECT OF SOME PART OF THE AMOUNT TO BE REMITTED TO A NON-RESIDENT BUT IS NOT SURE AS TO WHAT SHOULD BE THE PORTION SO TAXABLE OR IS NOT SURE AS TO THE AMOUNT OF TAX TO BE DEDUCTED. IN SUCH A SITUATION, HE IS REQUIRED TO MAKE AN APPLICATION TO THE ITO(TDS) FOR DETERMINING THE AMOUNT. IT IS ONLY WHEN THESE CONDITIONS ARE SATISFIED AND AN APP LICATION IS MADE TO THE ITO(TDS) THAT THE QUESTION OF MAKING AN ORDER U NDER S. 195(2) WILL ARISE. IN FACT, AT ONE POINT OF TIME, THERE WA S A PROVISION IN THE IT ACT TO OBTAIN A NOC FROM THE DEPARTMENT THAT NO TAX WAS DUE. THAT CERTIFICATE WAS REQUIRED TO BE GIVEN TO RBI FOR MAK ING REMITTANCE. IT WAS HELD IN THE CASE OF CZECHOSLOVAK OCEAN SHIPPING INTERNATIONAL JOINT STOCK CO. VS. ITO (1971) 81 ITR 162 (CAL) THA T AN APPLICATION FOR NOC CANNOT BE SAID TO BE AN APPLICATION UNDER S. 19 5(2) OF THE ACT. WHILE DECIDING THE SCOPE OF S. 195(2) IT IS IMPORTA NT TO NOTE THAT THE TAX WHICH IS REQUIRED TO BE DEDUCTED AT SOURCE IS D EDUCTIBLE ONLY OUT OF THE CHARGEABLE SUM. THIS IS THE UNDERLYING PRINCIPL E OF S. 195. HENCE, APART FROM S. 9(1), SS. 4, 5, 9, 90, 91 AS WELL AS THE PROVISIONS OF DTAA ARE ALSO RELEVANT, WHILE APPLYING TDS PROVISIONS. REFERENCE TO ITO(TDS) UNDER S. 195(2) OR 195(3) EIT HER BY THE NONRESIDENT OR BY THE RESIDENT PAYER IS TO AVOID AN Y FUTURE HASSLES FOR BOTH RESIDENT AS WELL AS NONRESIDENT. IN OUR VIEW, SS. 195(2) AND 195(3) ARE SAFEGUARDS. THE SAID PROVISIONS ARE OF P RACTICAL IMPORTANCE. THIS REASONING OF OURS IS BASED ON THE DECISION OF THIS COURT IN TRANSMISSION CORPORATION (SUPRA) IN WHICH THIS COUR T HAS OBSERVED THAT THE PROVISION OF S. 195(2) IS A SAFEGUARD. FROM THIS IT FOLLOWS THAT WHERE A PERSON RESPONSIBL E FOR DEDUCTION IS FAIRLY CERTAIN THEN HE CAN MAKE HIS OWN DETERMINATI ON AS TO WHETHER THE TAX WAS DEDUCTIBLE AT SOURCE AND, IF SO, WHAT S HOULD BE THE AMOUNT THEREOF. SUBMISSIONS AND FINDINGS THEREON IF THE CO NTENTION OF THE DEPARTMENT THAT THE MOMENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS ARISES IS TO BE ACCEPTED THEN WE ARE OBL ITERATING THE WORDS 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN S. 195(1). THE SAID EXPRESSION IN S. 195(1) SHOWS THAT THE REMITTANCE H AS GOT TO BE OF ATRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIA BLE TO TAX IN INDIA. THE PAYER IS BOUND TO DEDUCT TAS ONLY IF THE TAX (S IC-INCOME) IS ASSESSABLE IN INDIA. IF TAX (SIC-INCOME) IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAS BEING DEDUCTED. [SEE : VIJAY SHI P BREAKING CORPN. & ORS. VS. CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74 : (2009) 314 ITR 309 (SC) ]. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. SEC. 195 F ALLS IN CHAPTER XVII WHICH DEALS WITH COLLECTION AND RECOVERY. CHAP TER XVII-B DEALS WITH DEDUCTION AT SOURCE BY THE PAYER. ON ANALYSIS OF VARIOUS PROVISIONS OF CHAPTER XVII ONE FINDS USE OF DIFFERE NT EXPRESSIONS, HOWEVER, THE EXPRESSION 'SUM CHARGEABLE UNDER THE P ROVISIONS OF THE K P M G 18 ACT' IS USED ONLY IN S. 195. FOR EXAMPLE, S. 194C C ASTS AN OBLIGATION TO DEDUCT TAS IN RESPECT OF 'ANY SUM PAID TO ANY RESID ENT'. SIMILARLY, SS. 194EE AND 194F INTER ALIA PROVIDE FOR DEDUCTION OF TAX IN RESPECT OF 'ANY AMOUNT' REFERRED TO IN THE SPECIFIED PROVISION S. IN NONE OF THE PROVISIONS WE FIND THE EXPRESSION 'SUM CHARGEABLE U NDER THE PROVISIONS OF THE ACT', WHICH AS STATED ABOVE, IS A N EXPRESSION USED ONLY IN S. 195(1). THEREFORE, THIS COURT IS REQUIRE D TO GIVE MEANING AND EFFECT TO THE SAID EXPRESSION. IT FOLLOWS, THEREFOR E, THAT THE OBLIGATION TO DEDUCT TAS ARISES ONLY WHEN THERE IS A SUM CHARG EABLE UNDER THE ACT. SEC. 195(2) IS NOT MERELY A PROVISION TO PROVI DE INFORMATION TO THE ITO(TDS). IT IS A PROVISION REQUIRING TAX TO BE DED UCTED AT SOURCE TO BE PAID TO THE REVENUE BY THE PAYER WHO MAKES PAYMENT TO A NON- RESIDENT. THEREFORE, S. 195 HAS TO BE READ IN CONFO RMITY WITH THE CHARGING PROVISIONS, I.E., SS. 4, 5 AND 9. THIS REA SONING FLOWS FROM THE WORDS 'SUM CHARGEABLE UNDER THE PROVISIONS OF THE A CT' IN S. 195(1). THE FACT THAT THE REVENUE HAS NOT OBTAINED ANY INFO RMATION PER SE CANNOT BE A GROUND TO CONSTRUE S. 195 WIDELY SO AS TO REQUIRE DEDUCTION OF TAS EVEN IN A CASE WHERE AN AMOUNT PAI D IS NOT CHARGEABLE TO TAX IN INDIA AT ALL. WE CANNOT READ S . 195, AS SUGGESTED BY THE DEPARTMENT, NAMELY, THAT THE MOMENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS ARISES. IF WE WERE TO ACCE PT SUCH A CONTENTION IT WOULD MEAN THAT ON MERE PAYMENT INCOME WOULD BE SAID TO ARISE OR ACCRUE IN INDIA. THEREFORE, AS STATED EARLIER, IF T HE CONTENTION OF THE DEPARTMENT WAS ACCEPTED IT WOULD MEAN OBLITERATION OF THE EXPRESSION 'SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT' FR OM S. 195(1). WHILE INTERPRETING A SECTION ONE HAS TO GIVE WEIGHT AGE TO EVERY WORD USED IN THAT SECTION. WHILE INTERPRETING THE PROVIS IONS OF THE IT ACT ONE CANNOT READ THE CHARGING SECTIONS OF THAT ACT DE HO RS THE MACHINERY SECTIONS. THE ACT IS TO BE READ AS AN INTEGRATED CO DE. SEC. 195 APPEARS IN CHAPTER XVII WHICH DEALS WITH COLLECTION AND REC OVERY. AS HELD IN THE CASE OF CIT VS. ELI LILLY & COMPANY (INDIA) (P) LTD. (2009) 223 CTR (SC) 20 : (2009) 21 DTR (SC) 74 : (2009) 312 ITR 22 5 (SC) THE PROVISIONS FOR DEDUCTION OF TAS WHICH IS IN CHAPTER XVII DEALING WITH COLLECTION OF TAXES AND THE CHARGING PROVISIONS OF THE IT ACT FORM ONE SINGLE INTEGRAL, INSEPARABLE CODE AND, THEREFORE, T HE PROVISIONS RELATING TO TDS APPLIES ONLY TO THOSE SUMS WHICH ARE 'CHARGE ABLE TO TAX' UNDER THE IT ACT. IT IS TRUE THAT THE JUDGMENT IN ELI LIL LY (SUPRA) WAS CONFINED TO S. 192 OF THE IT ACT. HOWEVER, THERE IS SOME SIM ILARITY BETWEEN THE TWO. IF ONE LOOKS AT S. 192 ONE FINDS THAT IT IMPOS ES STATUTORY OBLIGATION ON THE PAYER TO DEDUCT TAS WHEN HE PAYS ANY INCOME 'CHARGEABLE UNDER THE HEAD SALARIES'. SIMILARLY, S. 195 IMPOSES A STATUTORY OBLIGATION ON ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT ANY SUM 'CHARGEABLE UNDER THE PROVISIONS O F THE ACT', WHICH EXPRESSION, AS STATED ABOVE, DO NOT FIND PLACE IN O THER SECTIONS OF CHAPTER XVII. IT IS IN THIS SENSE THAT WE HOLD THAT THE IT ACT CONSTITUTES ONE SINGLE INTEGRAL INSEPARABLE CODE. H ENCE, THE PROVISIONS RELATING TO TDS APPLIES ONLY TO THOSE SUMS WHICH AR E CHARGEABLE TO TAX UNDER THE IT ACT. IF THE CONTENTION OF THE DEPARTME NT THAT ANY PERSON MAKING PAYMENT TO A NON-RESIDENT IS NECESSARILY REQ UIRED TO DEDUCT TAS THEN THE CONSEQUENCE WOULD BE THAT THE DEPARTME NT WOULD BE ENTITLED TO APPROPRIATE THE MONEYS DEPOSITED BY THE PAYER EVEN IF THE SUM PAID IS NOT CHARGEABLE TO TAX BECAUSE THERE IS NO PROVISION IN THE K P M G 19 IT ACT BY WHICH A PAYER CAN OBTAIN REFUND. SEC. 237 R/W S. 199 IMPLIES THAT ONLY THE RECIPIENT OF THE SUM, I.E., THE PAYEE COULD SEEK A REFUND. IT MUST THEREFORE FOLLOW, IF THE DEPARTMENT IS RIGH T, THAT THE LAW REQUIRES TAX TO BE DEDUCTED ON ALL PAYMENTS. THE PA YER, THEREFORE, HAS TO DEDUCT AND PAY TAX, EVEN IF THE SO-CALLED DEDUCT ION COMES OUT OF HIS OWN POCKET AND HE HAS NO REMEDY WHATSOEVER, EVEN WH ERE THE SUM PAID BY HIM IS NOT A SUM CHARGEABLE UNDER THE ACT. THE INTERPRETATION OF THE DEPARTMENT, THEREFORE, NOT ONLY REQUIRES THE WORDS 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT' TO BE OMITTED, IT ALSO LEADS TO AN ABSURD CONSEQUENCE. THE INTERPRETATION PLACED BY TH E DEPARTMENT WOULD RESULT IN A SITUATION WHERE EVEN WHEN THE INC OME HAS NO TERRITORIAL NEXUS WITH INDIA OR IS NOT CHARGEABLE I N INDIA, THE GOVERNMENT WOULD NONETHELESS COLLECT TAX. IN OUR VI EW, S. 195(2) PROVIDES A REMEDY BY WHICH A PERSON MAY SEEK A DETE RMINATION OF THE 'APPROPRIATE PROPORTION OF SUCH SUM SO CHARGEABLE' WHERE A PROPORTION OF THE SUM SO CHARGEABLE IS LIABLE TO TA X. THE ENTIRE BASIS OF THE DEPARTMENT'S CONTENTION IS BASED ON ADMINISTRAT IVE CONVENIENCE IN SUPPORT OF ITS INTERPRETATION. ACCORDING TO THE DEP ARTMENT HUGE SEEPAGE OF REVENUE CAN TAKE PLACE IF PERSONS MAKING PAYMENTS TO NON-RESIDENTS ARE FREE TO DEDUCT TAS OR NOT TO DEDU CT TAS. IT IS THE CASE OF THE DEPARTMENT THAT S. 195(2), AS INTERPRET ED BY THE HIGH COURT, WOULD PLUG THE LOOPHOLE AS THE SAID INTERPRE TATION REQUIRES THE PAYER TO MAKE A DECLARATION BEFORE THE ITO(TDS) OF PAYMENTS MADE TO NON-RESIDENTS. IN OTHER WORDS, ACCORDING TO THE DEP ARTMENT S. 195(2) IS A PROVISION BY WHICH PAYER IS REQUIRED TO INFORM THE DEPARTMENT OF THE REMITTANCES HE MAKES TO THE NON-RESIDENTS BY WH ICH THE DEPARTMENT IS ABLE TO KEEP TRACK OF THE REMITTANCES BEING MADE TO NONRESIDENTS OUTSIDE INDIA. WE FIND NO MERIT IN THE SE CONTENTIONS. AS STATED HEREINABOVE, S. 195(1) USES THE EXPRESSION ' SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT.' WE NEED TO GIVE W EIGHTAGE TO THOSE WORDS. FURTHER, S. 195 USES THE WORD 'PAYER' AND NO T THE WORD 'ASSESSEE'. THE PAYER IS NOT AN ASSESSEE. THE PAYER BECOMES AN ASSESSEE IN DEFAULT ONLY WHEN HE FAILS TO FULFILL T HE STATUTORY OBLIGATION UNDER S. 195(1). IF THE PAYMENT DOES NOT CONTAIN TH E ELEMENT OF INCOME THE PAYER CANNOT BE MADE LIABLE. HE CANNOT B E DECLARED TO BE AN ASSESSEE-IN-DEFAULT. THE ABOVEMENTIONED CONTENTI ON OF THE DEPARTMENT IS BASED ON AN APPREHENSION WHICH IS ILL FOUNDED. THE PAYER IS ALSO AN ASSESSEE UNDER THE ORDINARY PROVIS IONS OF THE IT ACT. WHEN THE PAYER REMITS AN AMOUNT TO A NON-RESIDENT O UT OF INDIA HE CLAIMS DEDUCTION OR ALLOWANCES UNDER THE IT ACT FOR THE SAID SUM AS AN 'EXPENDITURE'. UNDER S. 40(A)(I), INSERTED VIDE FIN ANCE ACT, 1988 W.E.F. 1ST APRIL, 1989, PAYMENT IN RESPECT OF ROYALTY, FEE S FOR TECHNICAL SERVICES OR OTHER SUMS CHARGEABLE UNDER THE IT ACT WOULD NOT GET THE BENEFIT OF DEDUCTION IF THE ASSESSEE FAILS TO DEDUC T TAS IN RESPECT OF PAYMENTS OUTSIDE INDIA WHICH ARE CHARGEABLE UNDER T HE IT ACT. THIS PROVISION ENSURES EFFECTIVE COMPLIANCE OF S. 195 OF THE IT ACT RELATING TO TDS IN RESPECT OF PAYMENTS OUTSIDE INDIA IN RESP ECT OF ROYALTIES, FEES OR OTHER SUMS CHARGEABLE UNDER THE IT ACT. IN A GIVEN CASE WHERE THE PAYER IS AN ASSESSEE HE WILL DEFINITELY CLAIM D EDUCTION UNDER THE IT ACT FOR SUCH REMITTANCE AND ON INQUIRY IF THE AO FI NDS THAT THE SUMS REMITTED OUTSIDE INDIA COMES WITHIN THE DEFINITION OF ROYALTY OR FEES FOR TECHNICAL SERVICE OR OTHER SUMS CHARGEABLE UNDER TH E IT ACT THEN IT K P M G 20 WOULD BE OPEN TO THE AO TO DISALLOW SUCH CLAIM FOR DEDUCTION. SIMILARLY, VIDE FINANCE ACT, 2008, W.E.F. 1 ST APRIL, 2008 SUB-S. (6) HAS BEEN INSERTED IN S. 195 WHICH REQUIRES THE PAYER TO FURNISH INFORMATION RELATING TO PAYMENT OF ANY SUM IN SUCH FORM AND MAN NER AS MAY BE PRESCRIBED BY THE BOARD. THIS PROVISION IS BROUGHT INTO FORCE ONLY FROM 1ST APRIL, 2008. IT WILL NOT APPLY FOR THE PERIOD W ITH WHICH WE ARE CONCERNED IN THESE CASES BEFORE US. THEREFORE, IN O UR VIEW, THERE ARE ADEQUATE SAFEGUARDS IN THE ACT WHICH WOULD PREVENT REVENUE LEAKAGE. APPLICABILITY OF THE JUDGMENT IN THE CASE OF TRANSM ISSION CORPORATION (SUPRA) IN TRANSMISSION CORPORATION CASE (SUPRA) A NON-RESIDENT HAD ENTERED INTO A COMPOSITE CONTRACT WITH THE RESIDENT PARTY MAKING THE PAYMENTS. THE SAID COMPOSITE CONTRACT NOT ONLY COMP RISED SUPPLY OF PLANT, MACHINERY AND EQUIPMENT IN INDIA, BUT ALSO C OMPRISED THE INSTALLATION AND COMMISSIONING OF THE SAME IN INDIA . IT WAS ADMITTED THAT THE ERECTION AND COMMISSIONING OF PLANT AND MA CHINERY IN INDIA GAVE RISE TO INCOME TAXABLE IN INDIA. IT WAS, THERE FORE, CLEAR EVEN TO THE PAYER THAT PAYMENTS REQUIRED TO BE MADE BY HIM TO THE NON- RESIDENT INCLUDED AN ELEMENT OF INCOME WHICH WAS EX IGILBLE TO TAX IN INDIA. THE ONLY ISSUE RAISED IN THAT CASE WAS WHETH ER TDS WAS APPLICABLE ONLY TO PURE INCOME PAYMENTS AND NOT TO COMPOSITE PAYMENTS WHICH HAD AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THE CONTROVERSY BEFORE US IN THIS BATCH OF CASES IS, THEREFORE, QUITE DIFFERENT. IN TRANSMISSION CORPORATION CASE ( SUPRA) IT WAS HELD THAT TAS WAS LIABLE TO BE DEDUCTED BY THE PAYER ON THE GROSS AMOUNT IF SUCH PAYMENT INCLUDED IN IT AN AMOUNT WHICH WAS EXIGIBLE TO TAX IN INDIA. IT WAS HELD THAT IF THE PAYER WANTED TO DEDU CT TAS NOT ON THE GROSS AMOUNT BUT ON THE LESSER AMOUNT, ON THE FOOTI NG THAT ONLY A PORTION OF THE PAYMENT MADE REPRESENTED 'INCOME CHA RGEABLE TO TAX IN INDIA', THEN IT WAS NECESSARY FOR HIM TO MAKE AN AP PLICATION UNDER S. 195(2) OF THE ACT TO THE ITO(TDS) AND OBTAIN HIS PE RMISSION FOR DEDUCTING TAS AT LESSER AMOUNT. THUS, IT WAS HELD B Y THIS COURT THAT IF THE PAYER HAD A DOUBT AS TO THE AMOUNT TO BE DEDUCT ED AS TAS HE COULD APPROACH THE ITO (TDS) TO COMPUTE THE AMOUNT WHICH WAS LIABLE TO BE DEDUCTED AT SOURCE. IN OUR VIEW, S. 195(2) IS BASED ON THE 'PRINCIPLE OF PROPORTIONALITY'. THE SAID SUB-SECTIO N GETS ATTRACTED ONLY IN CASES WHERE THE PAYMENT MADE IS A COMPOSITE PAYM ENT IN WHICH A CERTAIN PROPORTION OF PAYMENT HAS AN ELEMENT OF 'IN COME' CHARGEABLE TO TAX IN INDIA. IT IS IN THIS CONTEXT THAT THE SUP REME COURT STATED, 'IF NO SUCH APPLICATION IS FILED, INCOME-TAX ON SUCH SU M IS TO BE DEDUCTED AND IT IS THE STATUTORY OBLIGATION OF THE PERSON RE SPONSIBLE FOR PAYING SUCH 'SUM' TO DEDUCT TAX THEREON BEFORE MAKING PAYM ENT. HE HAS TO DISCHARGE THE OBLIGATION TO TDS'. IF ONE READS THE OBSERVATION OF THE SUPREME COURT, THE WORDS 'SUCH SUM' CLEARLY INDICAT E THAT THE OBSERVATION REFERS TO A CASE OF COMPOSITE PAYMENT W HERE THE PAYER HAS A DOUBT REGARDING THE INCLUSION OF AN AMOUNT IN SUCH PAYMENT WHICH IS EXIGIBLE TO TAX IN INDIA. IN OUR VIEW, THE ABOVE OBSERVATIONS OF THIS COURT IN TRANSMISSION CORPORATION CASE (SUPRA) WHICH IS PUT IN ITALICS HAS BEEN COMPLETELY, WITH RESPECT, MISUNDER STOOD BY THE KARNATAKA HIGH COURT TO MEAN THAT IT IS NOT OPEN FO R THE PAYER TO CONTEND THAT IF THE AMOUNT PAID BY HIM TO THE NON-R ESIDENT IS NOT AT ALL 'CHARGEABLE TO TAX IN INDIA', THEN NO TAS IS REQUIR ED TO BE DEDUCTED FROM SUCH PAYMENT. THIS INTERPRETATION OF THE HIGH COURT COMPLETELY K P M G 21 LOSES SIGHT OF THE PLAIN WORDS OF S. 195(1) WHICH I N CLEAR TERMS LAYS DOWN THAT TAX AT SOURCE IS DEDUCTIBLE ONLY FROM 'SU MS CHARGEABLE' UNDER THE PROVISIONS OF THE IT ACT, I.E., CHARGEABL E UNDER SS. 4, 5 AND 9 OF THE IT ACT. BEFORE CONCLUDING WE MAY CLARIFY T HAT IN THE PRESENT CASE ON FACTS THE ITO(TDS) HAD TAKEN THE VIEW THAT SINCE THE SALE OF THE CONCERNED SOFTWARE, INCLUDED A LICENSE TO USE T HE SAME, THE PAYMENT MADE BY APPELLANT(S) TO FOREIGN SUPPLIERS C ONSTITUTED 'ROYALTY' WHICH WAS DEEMED TO ACCRUE OR ARISE IN IN DIA AND, THEREFORE, TAS WAS LIABLE TO BE DEDUCTED UNDER S. 195(1) OF TH E ACT. THE SAID FINDING OF THE ITO(TDS) WAS UPHELD BY THE CIT(A). H OWEVER, IN SECOND APPEAL, THE TRIBUNAL HELD THAT SUCH SUM PAID BY THE APPELLANT(S) TO THE FOREIGN SOFTWARE SUPPLIER WAS NOT A 'ROYALTY' AND T HAT THE SAME DID NOT GIVE RISE TO ANY 'INCOME' TAXABLE IN INDIA AND, THE REFORE, THE APPELLANT(S) WAS NOT LIABLE TO DEDUCT TAS. HOWEVER, THE HIGH COURT DID NOT GO INTO THE MERITS OF THE CASE AND IT WENT STRA IGHT TO CONCLUDE THAT THE MOMENT THERE IS REMITTANCE AN OBLIGATION TO DED UCT TAS ARISES, WHICH VIEW STANDS HEREBY OVERRULED. SINCE THE HIGH COURT DID NOT GO INTO THE MERITS OF THE CASE ON THE QUESTION OF PAYM ENT OF ROYALTY, WE HEREBY SET ASIDE THE IMPUGNED JUDGMENTS OF THE HIGH COURT AND REMIT THESE CASES TO THE HIGH COURT FOR DE NOVO CONSIDERA TION OF THE CASES ON MERITS. THE QUESTION WHICH THE HIGH COURT WILL A NSWER ISWHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE AMOUNT(S) PAID BY THE APPELLANT(S) TO THE FOREIGN SOFTWARE SUPPLIERS WAS NOT 'ROYALTY' AND THAT THE S AME DID NOT GIVE RISE TO ANY 'INCOME' TAXABLE IN INDIA AND, THEREFOR E, THE APPELLANT(S) WAS NOT LIABLE TO DEDUCT ANY TAX AT SOURCE? SUBJECT TO WHAT IS STATED HEREINABOVE, WE SET ASIDE THE IMPUGNED JUDGMENT(S) AND REMIT THESE CASES TO THE HIGH COURT TO ANSWER THE QUESTION FRAM ED HEREINABOVE. ACCORDINGLY, THE APPEAL(S) FILED BY THE APPELLANT(S ) STANDS ALLOWED WITH NO ORDER AS TO COSTS. 27. IN VIEW OF THE AFORESAID PROPOSITION OF LAW, WE HOL D THAT NONE OF THESE PAYMENTS WHICH WERE NOT LIABLE OR CHARGEABLE TO BE TAXED IN INDIA, NO TDS WAS REQUIRED TO BE DEDUCTED UNDER SECTION 195, THER EFORE, THE FINDINGS GIVEN BY THE COMMISSIONER (APPEALS) IS FACTUALLY AND LEGA LLY CORRECT AND, ACCORDINGLY, THE SAME IS HEREBY AFFIRMED. GROUND NO .2, RAISED BY THE REVENUE IS, THUS, DISMISSED. 28. 1 #7 4 ! 2 82 9:; ' '$ ! # < ) 4# =>? 28. IN THE RESULT, REVENUES APPEAL IS TREATED AS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. K P M G 22 29. &) *@ $ !A , 4 ! 2 ! &) *1# 2 82 9:; ' '$ !# < ) 4# =>? 29. TO SUM UP, ASSESSEES APPEAL AND REVENUES APPE AL ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. $ 2 + B C)7 22 ND FEBRUARY 2013 2 D ? ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND FEBRUARY 2013 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, C) C) C) C) DATED: 22 ND FEBRUARY 2013 $ 2 .&#'E FE+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4 ! / THE REVENUE; (3) G () / THE CIT(A); (4) G / THE CIT, MUMBAI CITY CONCERNED; (5) E!JD .&#&) , , / THE DR, ITAT, MUMBAI; (6) DK* L / GUARD FILE. /E# .&# / TRUE COPY $) / BY ORDER . 4. MN / PRADEEP J. CHOWDHURY !1O &)4 M! / SR. PRIVATE SECRETARY 9 / = 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI