Sanofi Pasteur Merieux(formerly Known as Shanh SAS), Secunderabad V. DCIT(International Taxation) -II, Hyderabad

ITA 309/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74638 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 11-07-2011
• Assessment Year: 2009-2010
• Appeal Filed On: 01-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: S RAVI
• Keywords: Double taxation relief; Bonafide belief; Retrospective amendment; Additional evidence
• Section: 133A; 201(1); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NOS. 309 & 310/HYD/2011 ASSESSMENT YEARS: 2009-10 & 2008-09 SANOFI PASTEUR MERIEUX (FORMERLY KNOWN AS SHANH S.A.S.) FRANCE VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(2), HYDERABAD. APPELLANT RESPONDENT ASSESSEE BY: SRI S. RAVI REVENUE BY: SRI D. SUDHAKAR RAO DATE OF HEARING: 20/01/2014 DATE OF PRONOUNCEMENT: 2102/2014 O R D E R PER CHANDRA POOJARI, AM: THESE APPEALS PREFERRED BY THE ASSESSEE ARE DIRECT ED AGAINST SEPARATE ORDERS OF THE CIT(A)-V, HYDERABAD DATED 20 /01/2011 FOR THE ASSESSMENT YEARS 2008-09 AND 2009-10. SINCE THE FACTS AND ISSUES ARE COMMON IN THESE APPEALS, THEY WERE CLUBB ED AND HEARD TOGETHER, THEREFORE, A COMMON ORDER IS PASSED FOR T HE SAKE OF CONVENIENCE. 2. THE ASSESSEE HAS RAISED A COMMON GROUNDS IN THES E APPEALS, WHICH ARE AS FOLLOWS: THE APPELLANT OBJECTS TO THE ORDER DATED 20 TH JANUARY, 2011 PASSED BY THE CIT(A) IN RELATION TO APPEAL AGAINST ORDER DATED 14 DECEMBER 2009 PASSED BY THE DDIT (INTERNATIONAL TAXATION) II, U/S 201(1) OF THE IT ACT, 1961 FOR THE AFORESAID ASSESSMENT YEAR, ON THE FOLLOWING AMONG OTHER GROUN DS: I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 2 1. THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN TREATING THE APPELLANT COMPANY AS AN ASSESSEE IN DEFAULT U/S 201(1) OF THE IT ACT, 196 1 IN RELATION TO CONSIDERATION PAID TO FOREIGN NATIONALS FOR PURC HASE OF SHARES OF AN INDIAN COMPANY, NAMELY, SHANTHA BIOTEC HNICS LTD. 2. THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN APPLYING THE PROVISIONS OF SEC TION 195 OF THE ACT TO THE NON-RESIDENT APPELLANT COMPANY EVEN THOUGH CONSIDERATION WAS PAID TO ANOTHER NON-RESIDENT OUTS IDE INDIA WITHOUT APPRECIATING THE FACT THAT THE SAID PROVISI ONS DO NOT HAVE EXTRA TERRITORIAL JURISDICTION. 3. THE LEARNED CIT(A) ERRED IN UPHOLDING THAT THE A PPELLANT COMPANY IS LIABLE TO WITHHOLD TAX AT SOURCE U/S 195 OF THE ACT ON THE GROSS SALE CONSIDERATION PAID TO FOREIGN NAT IONALS WITHOUT APPRECIATING THE FACT THAT UNDER THE SAID S ECTION THE LIABILITY TO WITHHOLD TAX IS ON THE INCOME COMPONEN T EMBEDDED IN THE CONSIDERATION AND NOT ON THE WHOLE AMOUNT. THE LEARNED CIT(A) ERRED IN NOT CONSIDERING THE RAT IONALE OF THE DECISION OF THE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD. (CIVIL APPEAL NOS. 7541-7 542 OF 2010 AND THE DECISION OF THE SPECIAL BENCH OF MUMBA I TRIBUNAL IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS . DCIT 313 ITR 263) UPHOLDING THE ABOVE POSITION. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT T HERE WAS NO ELEMENT OF INCOME IN PAYMENT MADE TO THE PAYEES AND ALSO ERRED IN IGNORING THE WORKING OF CAPITAL LOSS SUBMITTED DURING THE COURSE OF WITHHOLDING TAX ASSESSMENT PRO CEEDINGS. 4. THE LEARNED CIT(A) ERRED IN UPHOLDING THAT THE A PPELLANT COMPANY UNILATERALLY COULD NOT HAVE DETERMINED THE RESULTANT CAPITAL LOSS FROM TRANSFER OF SHARES BY FOREIGN NAT IONALS AND SHOULD HAVE MADE AN APPLICATION TO THE ASSESSING OF FICER FOR OBTAINING CERTIFICATE U/S 195(2) OF THE ACT WITHOUT APPRECIATING THE FACT THAT AS THERE WAS NO ELEMENT OF INCOME, TH E QUESTION OF MAKING SUCH AN APPLICATION DOES NOT ARISE. 5.THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN APPLYING SURCHARGE @ 10% WHILE DETERMINING THE WITHHOLDING TAX LIABILITY WITHOUT A PPRECIATING THAT THE SAID SURCHARGE IS NOT APPLICABLE UNDER THE FACTS OF THE CASE WHERE THE FOREIGN NATIONALS HAVE INCURRED CAPITAL LOSS AND HENCE THERE IS NO TAXABLE INCOME EXCEEDING RS. 10 LAKHS FOR SURCHARGE TO BE APPLICABLE. I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 3 6. THE LEARNED CIT(A) ERRED IN CONFIRMING LEVY OF I NTEREST U/S 201(1A) OF THE ACT. 7. THE LEARNED CIT(A) ERRED IN OBSERVING THAT THE A PPELLANT COMPANY WOULD BE LIABLE FOR PENAL ACTION FOR NON-DE DUCTION OF TAX AT SOURCE WITHOUT APPRECIATING THAT AS THE FORE IGN NATIONALS HAD INCURRED CAPITAL LOSS, THE APPELLANT COMPANY WAS UNDER A BONAFIDE BELIEF THAT TAX IS NOT REQUIRE D TO BE WITHHELD AT SOURCE U/S 195 OF THE ACT. 3. TO DISPOSE OF THESE APPEALS, WE REFER TO THE FAC TS FROM AY 2008-09 BEING ITA NO. 310/HYD/2010. BRIEFLY THE FAC TS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS A PART OF THE SANO FI AVENTIS GROUP OF FRANCE. SANOFI AVENTIS HAD ENTERED INTO AN AGREEMENT WITH MERIEUX ALLIANCE AND ACQUIRED 80% SHARES OF SH ANTA BIOTECHNICS LTD. THE ASSESSING OFFICER PASSED AN OR DER U/S 201(1) OF THE ACT HOLDING THAT THE ASSESSEE COMPANY WAS LI ABLE FOR DEDUCTING TAX ON THE PAYMENTS OF RS. 16,94,40,000/- MADE TO THE FOREIGN NATIONALS. 3.1. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTUR ING OF VARIOUS PHARMACEUTICAL PRODUCTS. ON 04.08.2009, A SURVEY U/ S 133A WAS CONDUCTED AT THE OFFICE PREMISES OF A HYDERABAD BAS ED PHARMACEUTICAL COMPANY BY THE NAME SHANTA BIOTECHNI CS LTD. (SBL). DURING SURVEY OPERATIONS, IT WAS FOUND THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH ONE OF ITS PAREN T COMPANIES M/S MERIEUX ALLIANCE (MA) FOR THE ACQUISITION OF MA JORITY STAKE IN THE HYDERABAD BASED COMPANY SBL. THE ASSESSEE HAD A CQUIRED 80% SHARES OF SBL IN NOVEMBER, 2006. THESE SHARES W ERE PURCHASED FROM DIFFERENT NON-RESIDENTS (NRIS). ON V ERIFICATION OF THE MEMORANDUM OF SHARE TRANSFER OBTAINED FROM SB L DURING THE COURSE OF SURVEY, IT WAS FOUND THAT THE ASSESSEE HA D MADE PAYMENTS TOTALLING TO RS. 359.87 CRORES, RS. 20.6 C ORES AND RS. 82.12 CORES RESPECTIVELY DURING FYS 2006-07, 2007-0 8 AND 2008-09 TO VARIOUS NRIS FOR PURCHASE OF SHARES OF THE INDIA N COMPANY SBL. I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 4 3.2 ON THE BASIS OF THE ABOVE INFORMATION, THE ASSE SSING OFFICER ISSUED A LETTER TO THE ASSESSEE ON 06/08/2009 ASKIN G FOR THE TERMS AND CONDITIONS UNDER WHICH SHARES WERE ACQUIRED, WH ETHER TAX WAS DEDUCTED U/S 195 OF THE ACT ON THE SALE CONSIDERATI ON PAID TO THE NRIS AND SO ON. THE EXPLANATION OF THE ASSESSEE WAS THAT IT HAD ACQUIRED SHARES FROM NRIS, FOREIGN NATIONALS AND A MAURITIUS RESIDENT COMPANY NAMELY UNITED OVERSEAS INVESTMENTS LTD. (UOIL). THE ASSESSEE RAISED THREE CONTENTIONS I.E. THAT WITHHOLDING TAX OBLIGATION DOES NOT HAVE EXTRA TERRITORIAL JURI SDICTION THAT IT IS THE PRIMARY RESPONSIBILITY OF THE SELLER TO PAY THE TAX ES ON CAPITAL GAINS ACCRUING IN INDIA AND THIRDLY THE SALE OF SHARES BY UOIL IS NOT LIABLE TO TAX IN INDIA. KEEPING IN VIEW THE PROVISIONS OF INDO MAURITIUS DTAA, THE THIRD CONTENTION OF THE ASSESSEE REGARDIN G UOIL WAS ACCEPTED BY THE ASSESSING OFFICER WHEREAS THE FIRST AND SECOND CONTENTIONS WERE NOT ACCEPTED. HE, THEREFORE, HELD THAT ASSESSEE TO BE LIABLE FOR TAX WHICH IT HAD NOT DEDUCTED AND COM PUTED THE ASSESSEES TAX LIABILITY U/S 201(1) ON THE PAYMENT OF RS. 16,94,40,000/- MADE TO THE FOREIGN NATION NALS AT R S. 3,83,95,104/- AND INTEREST U/S 201(1A) ON THE TAX LIABILITY AT RS . 1,11,34,579/-. 4. BEFORE THE CIT(A), THE ASSESSEE MADE VARIOUS SUB MISSIONS AND ALSO GAVE A DETAILED PAPER BOOK WITH ADDITIONAL EVIDENCE. THE ADDITIONAL EVIDENCE WAS IN THE FORM OF INFORMATION REGARDING SOME OF THE NRIS FROM WHOM THE TAX HAD NOT BEEN DEDUCTED AT SOURCE BUT WHO HAD LATER PAID THE TAXES. A DETAILED PAPER BOOK IN 2 VOLUMES WAS ALSO FILED INCORPORATING THE ADDITIONAL EVIDENC E. THIS ADDITIONAL EVIDENCE WAS SENT IN THE 2 PAPER BOOKS TO THE ASSES SING OFFICER FOR HIS REMAND REPORT WHICH WAS RECEIVED BY THE CIT(A) ON 16/12/2010. UPON BEING CONFRONTED WITH A COPY OF THE REMAND REP ORT, THE ASSESSEE GAVE ITS COUNTER COMMENTS ON 20 TH DECEMBER, 2010. 4.1 THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE ALONG WITH ADDITIONAL EVIDENCE, AND REMAND REPORT F ROM THE I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 5 ASSESSING OFFICER AND COUNTER COMMENTS FROM THE ASS ESSEE, ELABORATELY DISCUSSED AND EXAMINED THE ISSUE WITH V ARIOUS CASE LAWS AND HELD AS FOLLOWS: 8.5.1.......IT IS HELD THAT THE TRANSACTIONS IN QUE STION WERE CHARGEABLE TO TAX IN INDIA AND THE APPELLANT HAD A STATUTORY DUTY TO DEDUCT TAX. IN THE ABSENCE OF ANY APPLICATI ONS U/S 195(2) TAX WAS TO BE DEDUCTED AS PER THE SCHEDULE B Y THE APPELLANT. THEREFORE, THE ASSESSING OFFICER CORRECT LY HELD THE APPELLANT TO BE ASSESSEE IN DEFAULT. HOWEVER, SUB SEQUENTLY, SOME NON-RESIDENTS HAVE FILED THEIR RETURNS OF INCO ME AND PAID TAXES. WHERE THE ASSESSMENTS HAVE BEEN COMPLET ED AND TAXES DETERMINED, THE APPELLANT CAN NO LONGER BE HE LD ASSESSEE IN DEFAULT AS THE TAXES CANNOT BE COLLECTE D TWICE. HOWEVER, FOR THE INTERVENING PERIOD THE APPELLANT W ILL BE LIABLE TO INTEREST UNDER THE INCOME TAX ACT. FURTHER, FOR VIOLATION OF TDS PROVISIONS, THE PENAL PROVISIONS WILL APPLY IN THE CASE OF THE APPELLANT, AS THE ORIGINAL DEFAULT OF NON-DEDUC TION OF TAXES CANNOT BE CANCELLED OR WASHED AWAY. THE ASSES SING OFFICER IS MEANWHILE DIRECTED TO COMPLETE THE ASSES SMENTS IN THE CASE OF ALL THE NON-RESIDENTS CONCERNED ON PRIO RITY. 4.2 THEREAFTER, THE ASSESSING OFFICER PASSED CONSEQ UENTIAL ORDER TO THE SAID ORDER OF THE CIT(A). HENCE, THE ASSESSE ES LIABILITY U/S 201(1) WAS WORKED OUT TO RS. 2,66,03,746/- AND INTE REST U/S 201(1A) WAS WORKED OUT TO RS. 1,52,43,048/- FOR AY 2008-09. 5. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 6. BEFORE US, THE LEARNED AR SUBMITTED THAT THE LIA BILITY SOUGHT TO BE CAST ON THE ASSESSEE US UNDER THE PROVISIONS OF SECTION 195 OF THE IT ACT AND THIS SECTION APPLIES TO ANY PERS ON RESPONSIBLE FOR PAYING TO A NON-RESIDENT. THE DUTY CAST IS ON ANY PERSON AND IT WOULD FOLLOW THAT THE SAID PERSON SHOULD COME WITHI N THE AMBIT OF THE INDIA TAX PROVISIONS OR SPECIFICALLY UNDER THE IT ACT, 1961. FURTHER, THE AR SUBMITTED THAT THE ASSESSEE IS A CO MPANY INCORPORATED IN FRANCE AND AT THE TIME OF ACQUISITI ON OF SHARES IT NEITHER HAD ANY PRESENCE IN INDIA NOR WAS IT IN REC EIPT OF ANY INCOME DIRECTLY OR INDIRECTLY FROM INDIA, CONSEQUEN TLY, THE ASSESSEE WAS OUTSIDE THE PURVIEW OF INCOME-TAX ACT, 1961. HE CONTENDED I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 6 THAT UNDER NO STRETCH OF JUDICIAL INTERPRETATION CA N THE INDIAN TAX LAW HAVE EXTRA TERRITORIAL JURISDICTION AND, HENCE, COM PLIANCE WITH THE PROVISIONS OF SECTION 195 WAS NOT EXPECTED FROM A N ON-RESIDENT. 6.1 FURTHER, THE AR SUBMITTED THAT THE ASSESSEE COU LD NOT, IN PRACTICAL TERMS, COMPLY WITH THE SAID PROVISION. FI RSTLY, THE TAXABLE STATUS OF THE SELLERS ALONG WITH THE EXTENT OF THEI R TAX LIABILITIES WAS NOT KNOWN. SECONDLY, EVEN THOUGH THE PAYER IS REQUI RED TO DEDUCT TAX AT SOURCES, IN A CASE WHERE THE SAME HAS NOT BE EN DONE, LOGICALLY, PROCEEDINGS TO RECOVER THE TAX FROM HIM SHOULD BE TAKEN ONLY AFTER THE REVENUE HAS ESTABLISHED THAT THE AMO UNT PAID IS CHARGEABLE TO TAX IN INDIA AND THE PAYEE HAS THEREA FTER FAILED TO PAY THE TAX. THIS IS BECAUSE THERE IS NO MECHANISM AVAI LABLE IN THE ACT TO REFUND SUCH TAX TO THE PAYER IF THE PAYEE SUBSEQ UENTLY DOES PAY THE TAX. THUS, IN THE ABSENCE OF ANY SUCH MECHANISM , AN INTERPRETATION SHOULD BE PLACED ON SECTIONS 191 AND 201 OF THE ACT WHICH MAKE THE PROVISIONS WORKABLE. 6.2 WITHOUT PREJUDICE TO THE ABOVE, THE AR SUBMITTE D THAT IN GOOD FAITH AND WITH THE INTENT OF COOPERATING WITH THE T AX DEPARTMENT, INFORMATION IS BEING COLLECTED FROM NRIS REGARDING THEIR TAX COMPLIANCE AND SOME OF THEM HAVE PAID THEIR TAXES O R WOULD BE FILING THEIR RETURN OF INCOME IN INDIA AND PAYING T AXES ON THE CAPITAL GAINS ACCRUED IN INDIA AS SOON AS THEY RECEIVE THE PAN FOR WHICH THEY HAVE APPLIED. THEREFORE, THE AR SUBMITTED THAT THE IT WOULD BE THE ASSESSEES EARNEST ENDEAVOUR TO SEE THAT ALL TA X LIABILITIES ARE MET. 6.3 THE AR SUBMITTED THAT PAYER CANNOT BE CALLED UP ON TO DEDUCT AND PAY TAX WHERE THE PAYEE HAS PAID TAXES. IN THIS CONNECTION, IT IS SUBMITTED THAT WHERE THE TAXES ARE PAID BY THE P AYEE, THE PAYER CANNOT BE ONCE AGAIN ASKED TO WITHHOLD TAX AT SOURC E U/S 195 AND PAY THE SAME TO THE CREDIT OF THE GOVERNMENT TREASU RY. REFERENCE I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 7 IN THIS CONNECTION WAS MADE TO THE DECISION OF THE SUPREME COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES, 293 I TR 226 WHEREIN IT HAS BEEN HELD THAT IN CASE WHERE THE PAY EE HAS PAID THE TAXES, THE PAYER IS DISCHARGED FROM THE OBLIGATION TO WITHHOLD TAX AT SOURCE. THE AR ALSO RELIED ON THE FOLLOWING CASES: 1. SINGAPORE AIRLINES LTD. VS. ITO, [2006] 7 SOT 8 4 (CHENNAI) 2. AP POWER GENERATION CORPORATION LTD. VS. ACIT [2 007] 11 SOT 221 (HYD.) 3. GOLKONDA ENGINEERING ENTERPRISES LTD. VS. ITO, [ 2008] TIOL 169 ITA HYD. 6.4 THE AR SUBMITTED THAT SALE OF SHARES BY UOIL NO T LIABLE TO TAX IN INDIA AND WITHHOLDING TAX PROVISIONS WILL NO T APPLY. IN THIS CONNECTION, IT IS SUBMITTED THAT IN CASE OF PURCHAS E OF SHARES FROM UOIL, THE COMPANY WAS UNDER NO OBLIGATION TO WITHHO LD TAX AT SOURCE AS THE CAPITAL GAINS WERE NOT LIABLE TO TAX IN INDIA. IT IS SUBMITTED THAT THE FOREIGN NATIONALS LISTED AT ANNE XURE A HAVE SUFFERED CAPITAL LOSS AND THEREFORE THE PROVISIONS OF WITHHOLDING TAX WILL NOT APPLY. THE AR CONTENDED THAT THE PRIMARY O BLIGATION OF PAYING TAXES ON CAPITAL GAINS IS THAT OF THE SELLER AND THAT THE WITHHOLDING TAX PROVISIONS U/S 195 OF THE ACT DO NO T HAVE EXTRA TERRITORIAL JURISDICTION. THE AR THEREFORE PLEADED THAT THE ADDITIONS MADE U/S 201(1) AND 201(1A) MAY BE DELETED. THE AR RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF ASSESSEES CASE: 1. INFOTECH ENTERPRISES LTD. VS. ADDL. CIT, ITA NOS . 115 AND 2184/HYD/2011, DATED 16/01/2014 WHEREIN IT HAS BEEN HELD AS FOLLOWS: 42. THUS, IT IS SEEN CLEARLY THAT AT THE TIME OF TH E PAYMENT IN THE INSTANT CASE ISHIKAWAJIMA-HARIMA (SUPRA) WAS THE LAW OF THE LAND AND THE TWIN CONDIT ION LAID DOWN OF RENDERING AND UTILIZING THE TECHNICAL SERVICE IN INDIA WAS CLEARLY NOT SATISFIED IN THE ASSESSEES CASE AS THE FOREIGN SUBSIDIARIES RENDERE D THE SERVICE WHICH WAS UTILIZE D BY THE CLIENTS (SUC H AS PWC). THUS THE ASSESSEE COULD HAVE BEEN OF THE BONAFIDE BELIEF THAT TDS WAS NOT NECESSARY ON PAYMENTS TO THE FOREIGN SUBSIDIARIES. FURTHERMORE, THE I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 8 ASSES SEE COULD NOT HAVE BEEN EXPECTED TO KNOW THAT TDS SHOULD HAVE BEEN DEDUCTED IN ACCORDANCE WITH A LAW THAT WAS TO BE BROUGHT IN SUBSEQUENTLY. HENCE A NY DISALLOWANCE U/S 40(A)(I) BASED ON THE APPLICATION OF A RETROSPECTIVE AMENDMENT WHICH THE ASSESSEE COULD NO T HAVE FORESEEN IS WHOLLY ERRONEOUS. THIS RATIONALE I S UPHELD BY VARIOUS DECISIONS OF THE TRIBUNALS WHICH WE RELY ON SUCH AS CHANNEL GUIDE (139 ITD 49)& STERLI NG ABRASIVES (IT NO.2243, 2244/AHD/ 2008 DATED 23-12- 2010) AND METRO & METRO VS. ACIT (ITA NO.393/AGRA/2012 DATED 1-11-2013). HENCE UNDER THE ACT THE DISALLOWANCE U/S 40(A)(I)FOR FTS PAYMENTS CANNOT BE UPHELD. 2. GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT AND A NR., [2010] 327 ITR 456 (SC) 3. M/S NEW BOMBAY PARK HOTEL PVT. LTD. VS. ITO, ITA NO. 7641/MUM/2011, ORDER DATED 01/10/2013. 4. STERLING ABRASIVES LTD. VS. ITO, ITA NOS. 2243 & 2244/AHD/2008, ORDER DATED 23/12/2010. 5. CHANNEL GUIDE INDIA LTD. VS. ACIT, [2012] 25 TAXMANN.COM 25 (MUM.) 6. MAHINDRA AND MAHINDRA LTD. VS. DCIT, [2009] 313 ITR (AT) 263 (MUM) (SB). 7. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT THE ASSESSEE HAD NOT DEDUCTED AT SOURCE ON THE SALE CON SIDERATION PAID TO THE FOREIGN NATIONALS AS THE SAME WAS STATU TORILY REQUIRED U/S 195(1) OF THE ACT AND THE ASSESSEE HAD ALSO NOT EXERCISED THE OPTION AVAILABLE U/S 195(2) NOR ANY OF THE PAYEES H AD EXERCISED THE OPTION AVAILABLE U/S 195(3) OR 197. THE DR, THEREFO RE, CONTENDED THAT SINCE THE ASSESSEE FAILED IN FULFILLING THE OB LIGATION U/S 195(1) OF THE ACT, THE ASSESSING OFFICER HAS RIGHTLY TREAT ED THE ASSESSEE AS THE ASSESSEE IN DEFAULT AND ACCORDINGLY COMPUTED THE TAX LIABILITY U/S 201(1) AND INTEREST U/S 201(1A). I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 9 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES, PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. ACCORDING TO THE LEARNED AR, THE AMOUNT PAYA BLE TO THE NON- RESIDENT IS NOT EMBEDDED WITH ANY ELEMENT OF INCOME SO AS TO DEDUCT TDS ON IT. FURTHER, HE SUBMITTED THAT EVEN O BLIGATION U/S 195(2) PRE-SUPPOSES THAT PERSON RESPONSIBLE FOR MAK ING PAYMENT TO THE NON-RESIDENT IS TO COMPLY U/S 195(2) ONLY WHEN THERE IS SOME PORTION OF INCOME IS EMBEDDED WITH THE PAYMENT MADE TO THE NON- RESIDENT. ACCORDING TO HIM, IN THE PRESENT CASE THE RE IS NO ELEMENT OF INCOME, WHICH CHARGEABLE TO TAX SO AS TO DEDUCT TDS, BEING SO, THE ASSESSEE IS NOT LIABLE TO DEDUCT TDS AS THE SAM E IS NOT CHARGEABLE TO TAX IN INDIA AND THE PROVISIONS OF SE CTION 195(2) IS ALSO NOT APPLICABLE AND, THEREFORE, THE ASSESSEE CA NNOT BE HELD AS THE ASSESSEE IS IN DEFAULT U/S 201(1) AND ALSO THE ASSESSEE CANNOT BE FASTENED WITH INTEREST LIABILITY U/S 201(1A) OF THE IT ACT. IT WAS ARGUED THAT IN THE CASE UNDER CONSIDERATION PAYMENT TO THE NON- RESIDENT IS RELATING TO THE PURCHASE PRICE OF THE S HARES AND IF WE CONSIDER THE COST PRICE INCURRED BY THE NON-RESIDEN T, THERE IS CAPITAL LOSS RATHER THAN CAPITAL GAIN AND THERE IS NO QUEST ION OF ANY AMOUNT TO CHARGEABLE TO TAX IN INDIA, BEING SO, THERE IS N O NECESSITY TO DEDUCT TDS AS THE ENTIRE PAYMENT MADE TO NON-RESIDE NT ATTRIBUTABLE TO THE PAYMENTS NOT CHARGEABLE TO TAX IN INDIA AND, THEREFORE, PROVISIONS OF SECTION 195 ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE. FOR THIS PROPOSITION HE HAS RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHN OLOGY CENTRE P. LTD. VS. CIT & ANR., [2010] 327 ITR 456 (SC), WH EREIN THE APEX COURT HELD AS FOLLOWS: THE MOST IMPORTANT EXPRESSION IN SECTION 195(1) OF THE INCOME-TAX ACT, 1961, DEALING WITH DEDUCTION OF TAX AT SOURCE CONSISTS OF THE WORDS CHARGEABLE UNDER THE PROVISI ONS OF THE ACT. A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON- RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 10 CHARGEABLE TO TAX UNDER THE ACT. SECTION 195 CONTEM PLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INC OME PAYMENTS; IT ALSO COVERS COMPOSITE PAYMENTS WHICH H AVE AN ELEMENT OF INCOME IMBEDDED OR INCORPORATED IN THEM. THE OBLIGATION TO DEDUCT TAX AT SOURCE IS, HOWEVER, LIM ITED TO APPROPRIATE PROPORTION OF INCOME CHARGEABLE UNDER T HE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO T HE NON- RESIDENT. IT IS FOR THIS REASON THAT THE CBDT HAS C LARIFIED IN CIRCULAR NO. 728 DATED OCTOBER 31, 1995, THAT THE T AX DEDUCTION CAN TAKE INTO CONSIDERATION THE EFFECT OF THE DTAA IN RESPECT OF PAYMENTS OF ROYALTIES AND TECHNICAL F EE WHILE DEDUCTING TAX AT SOURCE. THE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE PART OF WHICH IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUE STION OF TAX AT SOURCE BEING DEDUCTED. 8.1 IT WAS CONTENDED BY THE LEARNED AR THAT THERE I S NO OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUCT ANY AMOUNT FR OM THE PAYMENTS AS THEY WERE FULLY AND BONAFIDELY SATISFIE D THAT THE AMOUNT WAS NOT TAXABLE IN THE HANDS OF THE NON-RESI DENT IN INDIA AND BEING SO, IT WAS CHOSEN NOT TO DEDUCT TDS AND A LSO NOT MADE APPLICATION U/S 195(2)/195(3). IT WAS ARGUED THAT U /S 195 THE WORD USED IN ARE CHARGEABLE TO TAX AND HENCE, A PERSON DEDUCTS ANY TAX U/S 195 WOULD HAVE NECESSARILY HAS TO SEEN WHETHER THE SUM SHALL BE CHARGEABLE TO TAX AND THEN ONLY, IF IT WAS SO CH ARGEABLE, HE HAS TO DEDUCT TAX. IT WAS CONTENDED THAT IF A PERSON WA S NOT LIABLE TO BE CHARGED TO TAX, THEN, THE PAYER COULD NOT BE HELD T O BE A PERSON IN DEFAULT U/S 201(1). ACCORDING TO LEARNED AR, CHARGE ABLE TO TAX MEANS, ACTUALLY LIABLE TO BE ASSESSED TO TAX, IN OT HER WORDS, IF THE SUM CONTEMPLATED WAS TAXABLE INCOME, A DIFFICULTY I S UNDOUBTEDLY CREATED AS TO COMPLY WITH THE PROVISIONS OF SECTION . 8.2 ACCORDING TO THE LEARNED DR, WHAT WAS CONTEMPLA TED WAS NOT MERELY AMOUNT, THE WHOLE OF WHICH WERE TAXABLE WITH OUT DEDUCTION, BUT, AMOUNT OF MIXED COMPOSITION, A PART OF WHICH O NLY MIGHT TURN OUT TO BE TAXABLE INCOME AS WELL. THE DISBURSEMENT S WHICH ARE OF NATURE OF GROSS REVENUE RECEIPTS, WHERE YET SUMS CH ARGEABLE UNDER I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 11 THE PROVISIONS OF INCOME-TAX ACT, CAME WITH THE AMB IT OF SECTION. FOR THIS PROPOSITION, THE LEARNED DR RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRANSMISSION C ORPORATION OF AP LTD., [1999] 239 ITR 587. 8.3 CONTRARY TO THIS, THE LEARNED AR CONTENDED THAT OBLIGATION TO DEDUCT TAX AT SOURCE U/S 195 WAS PREDICATED ON THE CONDITION THAT TAX WAS PAYABLE BY NON-RESIDENT ON THE PAYMENTS REC EIVED BY IT AND ONCE IT WAS ESTABLISHED THAT NO SUCH TAX WAS PAYABL E BY THE NON- RESIDENT, THE ASSESSEE COULD NOT BE TREATED TO BE B REACHED OF ITS OBLIGATION. 8.4 IN OUR OPINION, THE REASON FOR FASTENING THE OB LIGATION TO DEDUCT TAX AT SOURCE OF THE PAYMENT TO NON-RESIDENT IS ONLY IN A SITUATION WHERE SUCH PAYMENT WAS CHARGEABLE TO TAX IN INDIA WAS THAT IT WAS NOT THE INTENTION OF LAW TO FASTEN AN A BSOLUTE LIABILITY ON THE REMITTER TO DEDUCT TAX AT SOURCE FROM THE PAYME NTS OF NON- RESIDENT, THEN, SUBJECTED TO THE NON-RESIDENT TO TH E RIGOUR PROCESS OF FILING OF RETURN AND SEEKING REFUND AND ASSESSM ENTS ON THE BASIS OF SUCH RETURN WHERE REMITTER WAS OF THE OPINION TH AT SOME PART OF THE INCOME MAY BE CHARGEABLE TO TAX IN INDIA. THE R EMITTER CAN APPROACH THE ITO TO DEMAND PROPER PORTION OF THE IN COME THAT WOULD BE CHARGEABLE TO TAX IN INDIA AND HOW ON WHIC H TAX WAS TO BE DEDUCTED AT SOURCE. IN OUR OPINION, WHEN THE PAYMEN T TO BE MADE TO THE NON-RESIDENT, WHICH CHARGEABLE TO TAX IN THE HANDS OF THE RESIDENT RECIPIENT TDS TO BE DEDUCTED. 8.5 AT THIS JUNCTURE, IT IS PERTINENT TO TAKE THE S UPPORT OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF G E INDIA TECHNOLOGY CENTRE P. LTD. (SUPRA) WHEREIN IT WAS OB SERVED THAT A PERSON PAYING ANY SUM TO THE NON-RESIDENT IS LIABLE TO DEDUCT TAX U/S 195 ONLY IF SUCH SUM IS CHARGEABLE TO TAX IN IN DIA AND NOT OTHERWISE. I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 12 8.6 SO CONSIDERING THE FACTS AND CIRCUMSTANCES OF T HE PRESENT CASE, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE NOT DEDUCTED THE TDS AS REQUIRED U/S 195 AND, THEREFORE, HE TREA TED THE ASSESSEE AS THE ASSESSEE IN DEFAULT. HOWEVER, LOW ER AUTHORITIES DID NOT GO INTO THE MERITS OF THE CASE ON A QUESTIO N OF CHARGEABILITY OF INCOME TAX. THEREFORE, IT IS APPROPRIATE TO SE T ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMIT BACK THE ISSUE I N DISPUTE FOR DE- NOVO CONSIDERATION TO DETERMINE THE INCOME CHARGEAB LE TO TAX. ACCORDINGLY, IN THE LIGHT OF THE JUDGMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD., WE ARE INCLINED TO REMIT THE ENTIRE ISSUE TO THE FILE OF T HE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AND DECIDE THE SAME IN ACCORDANCE WITH LAW. 8.7. AS WE HAVE REMITTED THE ISSUE OF TREATING THE ASSESSEE BY THE REVENUE AUTHORITIES AS THE ASSESSEE IN DEFAULT U/ S 201(1) OF THE ACT, THE OTHER GROUNDS RAISED BY THE ASSESSEE BECOM E IRRELEVANT AT THIS STAGE AND, THEREFORE, THE SAME ARE NOT REQUIRE D TO BE ADJUDICATED BY US. 9. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 21/02/2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 21/02/2014. KV I.T.A. NOS. 309 & 310/HYD/2011 SANOFI PASTEUR MERIEUX 13 COPY FORWARDED TO: 1. SANOFI PASTEUR MERIEUX (FORMERLY KNOWN AS SHANH SAS), FRANCE, C/O DELOITTE HASKINS AND SELLS, 1-8-384 & 3 85, 3 RD FLOOR, GOWRA GRAND, SP ROAD, SECUNDERABAD 500 003. 2. DDIT (INTERNATIONAL TAXATION)-II, HYDERABAD 3. DIT(IT)- HYDERABAD 4. THE DR, ITAT, HYDERABAD