IN THE ITAT
VAN OORD ACZ
v.
ADDITIONAL COMMISSIONER OF INCOME-TAX, CIRCLE 17(1), NEW
DELHI
D. R. SINGH, JUDICIAL MEMBER
AND RAJENDRA SINGH, ACCOUNTANT MEMBER
IT APPEAL NO. 2126 (
[ASSESSMENT YEAR 2003-04]
NOVEMBER 30, 2007
Section 195, read with section 40(a)(i), of the Income-tax Act, 1961 -
Deduction of tax at source - Payment to non-resident - Assessment year 2003-04
- Whether payer/ assessee is duty bound to deduct tax at source on payments made to non-residents at appropriate rates as
provided under provisions of section 195 and in case tax is not deducted at
source by payer from payment of sums paid to non-resident as per provisions of
section 195 he would not be eligible for deduction under section 40(a)(i)
on such payments -Held, yes - Whether, however, a payer can escape liability
for deducting tax by obtaining a certificate from Assessing Officer for
deduction of tax either at a rate lower than rate as prescribed or for
non-deduction of tax at source - Held, yes - Whether duty of payer ends there
only and he can not decide taxability of payments made by it in hands of
non-resident recipient - Held, yes - Assessee, an Indian company, was a wholly
owned subsidiary of a non-resident Company VOAMC - During relevant previous
year assessee was to execute, inter-alia, dredging contract at certain
Port in Gujarat - As assessee did not have technical competence or
infrastructure to execute aforesaid contract VOAMC executed said contract on
behalf of assessee through non-resident service providers - Moblisation and
demobilization expenses of Rs. 8,65,57,909 incurred by VOAMC were reimbursed to
it by assessee - Assessee thereafter claimed deduction under section 40(a)(i)
on amount paid to VOAMC for aforementioned services - It had also moved an application under
section 195 for issuing NIL tax withholding certificate but said certificate
was rejected by Assessing Officer - Assessing Officer, thereafter rejected
claim assessee under section40(a)(i) on ground that assessee had not deducted
tax at source on such payments - On appeal, Commissioner (Appeals) upheld order
of Assessing Officer - In instant appeal assessee submitted that it had
deducted tax at source under section 195
in respect of sum of Rs. 6,98,26,456/- included in aforesaid amount of
reimbursement of Rs. 8,65,57,909/- in terms of order dated 22-11- 2002 passed
under section 195 (2) by Deputy Commissioner, international taxation and,
therefore no disallowance under section 40(a)(i) could be made in respect of
said amount of Rs. 6,98,26,456 - Whether
since assessee had not deducted tax at source on payments in question as per
provisions of section 195, Assessing Officer was fully justified in refusing
deduction claimed by assessee for such payments under section 40(a)(i) - Held, yes - Whether, however, since
assessee had claimed to have deducted
tax at source for a sum of Rs. 6,98,26,456/- in terms of order dated 22-11-2002
under section 195 (2) out of total amount of Rs. 8,65,57,909/- under consideration,
Assessing Officer was directed to verify this fact and in case same was found
to be correct Assessing Officer would allow benefit of same to assessee out of
total amount of Rs. 8,65,57,909/- under consideration - Held, yes
The assessee, an Indian Company, was a wholly owned subsidiary of VOAMC, a foreign company. The assessee was to executed inter alia, dredging contract at certain port in Gujrat. As it did not have the technical competence and infrastructure to execute the aforesaid contract the VOAMC executed said contract on behalf of the assessee through non-resident service providers. Moblization and demoblization expenses of Rs. 8,65,57,909 incurred by VOAMC were reimbursed to it by the assessee. The assessee, thereafter, claimed deduction under section 40(a)(i) on the amount paid to VOAMC for the aforementioned services. The assessee had also moved an application before the Assessing Officer under section 195 for issuing NIL tax withholding certificate but said certificate was rejected by Assessing Officer by orders dated 4-3-2001 and 17-4-2002. In the said order it was held that the VOAMC i.e. the non-resident company was having a permanent establishment (PE) in India on the ground that it was executing the dredging contract in India as the assessee did not have the technical competence or the infrastructure to execute the aforesaid contract.
The Assessing Officer, thereafter rejected the claim of the assessee under section 40(a)(i) on ground that assessee had not deducted tax at source on such payments. On appeal the Commissioner (Appeals) upheld the order of the Assessing Officer.
In the instant appeal the assessee submitted that reimbursement of expenses on actual basis to VOAMC did not give rise to any income in the hands of VOAMC as no income was embedded in the amount reimbursed. The assessee further, submitted that it had filed an application with Deputy Commissioner International Taxation, for issuing nil tax withholding certificate in respect of reimbursement of various costs required to be made by it to VOAMC. The Deputy Commissioner vide order dated 22-11-2002, held that the reimbursement of costs to VOAMC were liable to tax in India and determined 11 per cent of the reimbursement amount as the profit arising to VOAMC in India and the assessee in view of said direction had deducted tax at source on the above basis in respect of amount of Rs. 6,98,26,456 out of amount of Rs. 8,65,57,909 and, therefore, no disallowance under section 40(a)(i) could be made in respect of amount of Rs. 6,98,26,456.
On reading provision of section 40(a)(i), it is clear
that as per sub-clause (i) of clause (a) of section 40 which has been
substituted by the Finance Act, 1988 with effect from 1-4-1989 to extend the
applicability of the clause also to the payments made to non-resident of
royalty, fee for technical services or any other payment chargeable under this
Act. Now, the inclusion of the words ‘any another payments’ in the amended
provision has widened the scope of the meaning of the word payment and so the
payments made by the assessee through VOAMC to the non-residents in respect of
mobilization and demobilization charges amounting to Rs. 8,65,57,909 under
consideration was covered within the provision of section 40(a)(i). [
From the existing provisions of sub-clause (i) of clause (a) of section
40, it is further clear that no deduction is allowed in the computation of
income on account of interest, royalty, fee for technical services or any other
sum which is payable outside India, or in India to a non-resident or to a
foreign company, if tax is not deducted at source from payment of these sums or
after deduction of tax at source, payment is not made to the account of the
Central Government before the expiry of the time prescribed under sub-section
(1) of section 200 and in accordance with other provisions of Chapter XVII-B.
Deduction of the sum is, however, allowed where tax has been deducted or after
deduction has been paid in any subsequent year in computing the income of that
previous year. [
The power to deduct tax at source is conferred by section 195(1). On a
combined reading of the provisions of section 40(a)(i) and section 195 or 197,
it is clear that where deduction of tax is required to be made under section
195(1) the same cannot be avoided unless ‘nil’ deduction or deduction at a
lower rate is authorized by the Assessing Officer under section 195(3) or 197.
In case the tax has not been deducted as per provisions of section 195 in the
manner as stated hereinabove, then the Legislature in its wisdom, in order to
ensure effective compliance of provision of section 195 relating to tax
deductions at source in respect of payments outside India, extended the scope
of the above provision to cover payments in respect of royalty, fees for
technical services or other sources chargeable under the Act enacted this
provision of section 40(a)(i) mandating that no deduction for such payments is
allowed to the assessee in computation of income for such payment outside India
or in India to a non-resident or to a foreign company, if tax is not deducted
at source from the payments of such sums. [
The Apex Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 has clearly elucidated the scheme and purpose of deduction of tax at source under section 195 as well as the duty of the tax payer for the payments made to non-residence.
Keeping in view, the decision of the
(a) Section 195 deals with the deduction of tax at source by the payer, i.e., assessee if the payments are to be made to a non-resident.
(b) The payer/assessee is required to deduct income-tax on such payments made to non-resident at the specified rates in force.
(c) If the parties feel that either the deduction of tax at source by the payer is required to be at a rate lower than the prescribed rate or no deduction is required to be made they are required to file an application before the Assessing Officer for obtaining such certificate. In case no such application is filed before the Assessing Officer for obtaining such certificate or such application is rejected by the Assessing Officer and direction is issued by the Assessing Officer to deduct such tax at a particular rate the payer is duty bound to deduct tax as per the directions of the Assessing Officer and in case no such application for obtaining the certificate was filed before the Assessing Officer then the payer is duty bound to deduct tax as per the prescribed rates in force at the relevant time. If the payer still fails to comply with the provisions there is no escape for the payer from suffering the consequences provided under the Act.
Since the deduction of tax under section 195 on such payments to
non-residents is subject to regular assessments the rights of parties are not
adversely affected in any manner whatsoever and is clearly indicative of a fact
that such deductions are tentative. [
From the above discussion, it could be said that rights and duties of the
payer now clearly stand demarcated and limited to the extent as laid down by
the Apex Court in their order (supra) i.e. that the payer/assessee is duty bound
to deduct tax at source for the payments made to non-residents at the
appropriate rates as provided under these provisions the payer cannot escape
the liability for doing so unless a certificate from the Assessing Officer is
obtained for the deduction of the tax either at a rate lower than the rate as
prescribed or for non-deduction of tax at source and that the duty of the payer
ends here only and he is not required to examine and look into other aspects
beyond this like whether the payer received the services from the non-resident
to whom such payments were made or from some other person through the
non-resident; whether such receipt in the hands of the recipient non-resident
would be his income or part of it would be his income on which he is liable to
pay tax. The payer is not expected to step into the shoes of the Assessing
Officer for examining whether the
receipts in the hands of the recipient is income or not whether he is liable to
pay tax thereon or not. [
It is also not material for the payer either to make the whole of the
payment to the recipient/non-resident or to made part of the payment to the
payee after deduction of the tax at source at the prescribed rates because in
either of the conditions the payer/assessee has to part with the whole of the
payment required to be made to the non-resident by him. More so when the
deduction of the tax at source under section 195 is subject to regular
assessment and the right of non-resident is not adversely affected because at
the time of regular assessment if the payee/recipient succeeds in proving
before the Assessing Officer that such receipts, from the payer/assessee, were
not its income and so it was not bound to pay tax thereon then such tax
deducted at source by the payer/assessee and deposited with the Government is
bound to be refunded or adjusted against the payment of tax, if any, to the
recipient non-resident by the Assessing Officer at the time of regular
assessment. [
To sum up, neither it is the duty nor it is desirable from the payer/assessee to examine whether any tax is deductible at source from the payments made to the non-resident. In case it feels that the tax is required to be deducted at source or required to be deducted at a lower rate then it is required to obtain such certificate under section 195(2) from the Assessing Officer or for non-deduction of tax at source. This is a safeguard provided under section 195(2), 195(3) and 197 to payer and payee because before the Assessing Officer while obtaining certificate such facts are required to be established by them.[Para 29]
For non-compliance of the statutory provisions of section 195 by the
payer it would have to suffer the consequences laid down by the Legislature
under section 40(a)(i). [
The provision of section 40(a)(i) has been enacted by the Legislature in
its wisdom to unsure the effective compliance of provisions of section 195
relating to tax deductions at source in respect of payments made to
non-residents outside India. Thus the provision mandates that no deduction for
such payments made to non-residents outside India is to be allowed to the
payer/assessee while computing its income while considering its claim of
deduction for such payments made to non-resident at the time of assessment in
case the tax is not deducted at source from the payment of such sums as per
provisions of section 195. [
With this enactment now the duty is cast upon the Assessing Officer to
not allow the deduction to the payer/assessee for such payments in the cases
where the provisions of section 195 are not complied with by the payer while
computing the income of such payer the assessee during the course of assessment
proceedings. [
Thus, in view of the detailed discussions and applying the ratio of the
decision of the Apex Court in the case of Transmission Corporation of AP Ltd.
(supra), it was to be held that it is not for the assessee/payer to decide the
taxability of payments made by it in the hands of non-resident recipient as the
machinery for this purpose was provided in sub-section (2) of section 195
itself, whereby the concerned Assessing Officer could have been approached to
decide this aspect. That the chargeability of income in the hands of recipient
non-resident to be taxed in
Hence, from the elaborate discussion now the rights and duties of the payer/payee under section 195 and 197 as well as the duty of the Assessing Officer to take action against such payer/assessee under the provisions of section 40(a)(i) in case of non-compliance with the provisions of section 195 at an appropriate stage stand enlisted as above.
Now reverting to the facts of the instant case of the assessee, the undisputed position emerged as under:-
(a) The payer/assessee had
made payments to the non-resident for the services rendered for mobilization
and demobilization of dredgers to the Port in
(b) That reimbursement of
charges/payments to VOAMC were liable to tax in
(c) Though order under section 195 dated 17-4-2002 was agitated in appeal the same was dismissed in limini because the assessee had not deducted and paid the tax as per the order which was the condition precedent for entertaining an appeal under section 248.
(d) The order under section
195(2) dated 4-3-2001, as per assessee was not challenged since the assessee
decided not to pay the general cost amounting to 8 per cent of the turnover to
VOAMC. [
The assessee claimed to have deducted tax at source as per section 195 in
respect of sum of Rs. 6,98,26,456 included in the amount of Rs. 8,65,57,909 in
terms of order dated 22-11-2002 passed under section 195(2). [
It means that the order dated 22-11-2002 under section 195(2) remained
unchallenged by the assessee and the assessee/payer did not fully comply with
the requirement of section 195 except allegedly deducting the tax at source at
Rs. 6,98,26,456 - against Rs. 8,65,57,909 determined in terms of order passed
under section 195(2). [
Hence, in the facts and circumstances since the payer assessee had moved
an application under sub-section (2) of section 195 to the Assessing Officer
for obtaining a certificate for issuing ‘nil’ tax withholding certificate and
the same having been rejected by the Assessing Officer and no appeal having
been filed or the order being reversed the same has become final and for non
compliance with the provisions of section 195 by the payer by not deducting tax
at source the Assessing Officer was fully justified in refusing deduction
claimed by the payer assessee for such payments under section 40(a)(i). Hence,
the impugned order of the Commissioner (Appeals) in this regard was upheld.
Since before the Tribunal the assessee had claimed to have deducted tax at
source for a sum of Rs. 6,98,26,456 in terms of the order dated 22-11-2002,
under section 195(2) out of the total amount Rs. 8,65,57,907, under
consideration, as determined in the order passed under section 195(2) the
Assessing Officer was directed to verify this fact and in case the same, would
be found to be correct the Assessing
Officer would allow the benefit of the same to the assessee out of the total
amount of Rs. 8,65,57,909 under consideration. [
In the result the appeal of the assessee was partly allowed.
CASE REVIEW:
Transmission Corpn. AP Ltd. v. CIT [1999] 239 ITR 587 (105
Taxman 742)(SC) followed. (