TMI Blog2014 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... uch person who has been treated as assessee in default - Thus both the initiation of proceedings u/s 201(1) as well as the completion of such proceedings by passing order have to be prior to the time-limit within which the tax can be determined in the hands of the payee - It cannot be beyond such period - If the payee has included the amount received from payer in his total income but the tax has not been paid in full or part then the payer can be treated as assessee in default to the extent of the non-payment of tax on the sum paid to him provided the tax is not recovered from the payee. Thus, there remains no difficulty in answering the question that how much time is available with the revenue for treating the payer as assessee in default u/s 201(1) - The obvious answer is that the maximum time-limit available for assessment of the payee is the maximum time-limit within which the payer can be treated as assessee in default - With the expansion of the scope of section 147, also roping in the cases of assessment apart from reassessment, it is clear that the assessment of payee shall also include assessment made under section 147 - Thus the maximum time-limit for initiating and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine Fleming, Salomon Brothers International Ltd. And others for assisting it in all aspects of consultancy for preparing documents connected with bringing out the issue, dealing with various regulatory authorities in India and abroad, Due Diligence Certificate, arranging road shows and all other such connected matters inclusive of managing and under-writing the issue. For these services, the Lead Managers were entitled to a commission not exceeding 2.7% of the aggregate principal amount of the issue in addition to the reimbursement of out of pocket expenses. As agreed between the parties, the Lead Managers were to collect the proceeds of GDR issue on behalf of the assessee and remit the net proceeds to the assessee after deduction of its management fees and out of pocket expenses. After the successful issue of GDRs, total amount of ₹ 43,69,48,526/- was collected/recovered by the Lead Managers from the assessee company on account of under-writing commission, Management commission, selling concession and reimbursement of expenses. No tax at source, however, was deducted by the assessee from the said payment made to the Lead Managers on the ground that the amount paid to the Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second basic issue, the A.O. held that the appellant is not covered under the two exceptions provided in Section 9(1)(vii). As far as the Tax Treaty between India and U.K. is concerned, he held that the provisions of Article-13 are applicable. The definition of fees for technical services as appearing in Article 13(4) of the Tax Treaty is identical to the definition as per Explanation 2 of Section 9(1)(vii) of the Act. He held that the fees for technical, managerial and consultancy services therefore were covered within the purview of Explanation 2 of Section 9(1)(vii) and Article 13(4) of the Tax Treaty between India and the U.K. With regard to the third and fourth issue, the A.O. held that as per the provisions of section 9(1)(vii), it is not really necessary for the services to be rendered in India. He further held that some of the services had been rendered in India also. With regard to the question on the basic issue narrated in Item No. (e), the A.O. held that it is not correct to describe the consideration received for the above mentioned services as selling commission because the services are rendered for technical, managerial and consultancy services and not for trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management commission as also towards reimbursement of expenses. 2.However, all the issues need a fresh look in view of the decision of the I.T.A.T. in the case of RAYMONDS LIMITED (ITA Nos. 1225 and 1226/M/2000 dated April 24, 2002). 3.These submissions are, therefore, made in the light of RAYMOND'S case without prejudice to the Appellant's right to keep the issues alive in so far as the ratio of RAYMOND'S case is adverse to the propositions canvassed by the Appellant in the earlier proceedings. APPLICABILITY OF RAYMONDS CASE 1.So far as applicability of sec. 9(1)(vii) is concerned, the Tribunal has summarised the conclusion in para 64 of the order in terms of which it is held that underwriting commission does not fall within the scope of the said section whereas the commission by way of selling concession and management services are covered within its scope though subject to the applicability of the relevant D.T.A.A. 2.Adverting to the implications arising out of the application of DTAA with UK (same as in Appellant's case), the Tribunal has concluded that the commission by way of selling concession and for management services are not taxable in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is applicable so as to avoid any grossing up in case it is held that payments made to Jardine Fleming towards selling concession or management services are liable to be taxed in India under sec. 9(1)(vii). We are enclosing herewith the approval of the Government of India for payment of aggregate sum of 2.7% which comprises of all the components of the services, namely, underwriting, selling concession and management services. 6. After considering the submissions made on behalf of the assessee as well as the material available on record, the ld. CIT(A) found himself in agreement with the stand of the assessee that the under-writing commission paid to the Lead Managers was not covered within the scope of section 9(1)(vii) of the Act. He held that the management and selling commission paid by the assessee to the Lead Managers, however, was subjected to tax in India. He noted in this context that the concept of make available was there in the relevant Article of India-UK DTAA dealing with fees for technical services and as held by the Tribunal in the case of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.), the management and selling commission paid by the assessee to the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had failed to deduct tax at source while making payments to non residential lead managers in respect of the said services, the AO treated it to be an assessee in default. Accordingly the amount of such tax was demanded by the AO from the assessee u/s 195 by an order 201(1) along with interest charged u/s 201(IA). The CIT(Appeals) upheld the order of the AO. On further appeal, the Special Bench of ITAT held that as per Explanation to section 191, both the conditions viz, failure of' the person responsible to perform his obligation and non-payment of tax by the payee directly should have been cumulatively satisfied so as to treat the person responsible as the assessee in default. It was held that if only one of these two conditions is satisfied, then the person responsible cannot be treated as assessee in default. It was held that if there is no or lower liability of the payee to tax on the income received without deduction of tax at source, the payer cannot be treated as the assessee in default for the whole or that part of the amount, as the case may he. It was held that the question of treating the person responsible for paying the income as an assessee in default thus is, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). He contended that the plea taken by the ld. Counsel for the assessee that the order passed u/s 201(1) of the Act within a period of six years becomes invalid by the mere fact that no order of assessment is passed in case of non-resident payee within such period of six year as per the ratio of Mahindra Mahindra Ltd. (supra) needs to be appreciated on the facts of each case and the Special Bench decision in the case of Mahindra Mahindra Ltd. (supra) cannot be applied ipso-facto to each case in view of the subsequent amendments made in the Income Tax Act as well as the judicial pronouncements of Hon'ble Supreme Court and High Court. He contended that no doubt the decision of Special Bench of ITAT in the case of Mahindra Mahindra Ltd. (supra) has been subsequently followed by the Division Benches of the Tribunal in the cases cited by the ld. Counsel for the assessee, but some important aspects relating to the application of the said decision of the Special Bench apparently were not pointed out on behalf of the department at the time hearing of the said cases. He contended that the question before the Special Bench in the case of Mahindra Mahindra Ltd. (supra) was rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra). He contended that the decision of the Special Bench of ITAT in the case of Mahindra Mahindra Ltd. (supra) holding the orders passed u/s 201(1) of the Act as invalid on such basis is thus negated by the statute by making amendment clarifying that in case of non-resident deductees, there is no time limit for passing order u/s 201(1) of the Act. 11. The ld. D.R. explained the nature of order passed u/s 201(1) of the Act in the case of payer and how the same is distinct and separate from the assessment made in the case of payee. He submitted that the order u/s 201(1) of the Act in case of payer and the assessment in case of payee are two mutually exclusive independent proceedings which operate in different spheres. According to him, section 201 of the Act is a machinery provision for fastening the liability of tax in case of default/mischief of provision of 195 whereas the assessment of non-resident payee is dependent on various factors including the nature of receipt, nature of activity, its status, its presence in India through PE, presence or absence of DTAA etc. He submitted that sometimes filing of return of income has been exempted by Act itself to some non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that assessment of payee is not sine qua non for holding validity of order passed u/s 201(1) within the time. 13. In the rejoinder, the ld. Counsel for the assessee at the outset pointed out that the appeal filed by the Department against the order of the Special Bench in the case of Mahindra Mahindra Ltd. (supra) has been admitted by the Hon'ble Bombay High Court and the issue involved therein is now pending before the Hon'ble Bombay High Court. As regards the contention of the ld. D.R. that a very limited issue was involved in the case of Mahindra Mahindra Ltd. (supra) relating to time limit available for passing order u/s 201(1) of the Act and that the Special Bench has gone beyond this issue, he submitted that the entire appeal in the case of Mahindra Mahindra Ltd. (supra) was disposed of by the Special Bench of the Tribunal and not only a specific issue referred to it. He pointed out that the issue relating to the reasonable time limit for passing order u/s 201(1) of the Act in the absence of any express provision there in the statute was considered and decided by the Special Bench initially and this issue is not involved in the present case. He then refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has relied on the decision of Special Bench of the ITAT in the case of Mahindra Mahindra Ltd. (supra) wherein it was held inter alia that no order u/s 201(1)/201(1A) of the Act can be passed where the Revenue has not taken any action against the payee and further the time limit for taking action against the payee u/s 147 of the Act has also expired. The ld. D.R. has not disputed the fact that no action has been taken by the Revenue against the payees in the present case and that the time limit for taking such action u/s 147 of the Act has already expired. He however has contended that the issue involved for consideration of the Special Bench of the Tribunal in the case of Mahindra Mahindra Ltd. (supra) was different relating to availability of time limit to pass an order u/s 201(1) of the Act in the absence of any express provision in the Act providing for such time limit. He has contended that the observations made by the Special Bench that no order u/s 201(1)/201(1A) of the Act can be passed where the Revenue has not taken any action against the payee within the permissible time limit thus are only passing observations and the same are in the nature of obiter-dicta which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as the assessee in default. It was held that the underlying principle behind the deduction of tax at source is the presumption that there will be some liability of the payee towards tax on the sum paid to him. If there is no such liability then the entire exercise of firstly getting the amount of tax collected/deducted at source and then refunding to the payee will be futile. If there is no tax liability of the payee, then there cannot be any question of treating the person responsible for paying the sum without deducting tax at source as the assessee in default. It was held that the essence of provisions of deduction of tax at source is that there is a presumption of liability of the payee to tax on the income. It was held by the Special Bench precedent that it is thus clear that though the duty of deduction of tax at source was there at the time of making the payment or crediting the account of the payee, but its failure will not lead to adverse consequences by treating the person paying the income as the assessee in default if eventually either the payee is not liable to tax on such sum or he has already paid the tax due on the amount of income so received. It was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present context as the ld. Counsel for the assessee has relied on the proposition propounded by the Special Bench in the case of Mahindra Mahindra Ltd. (supra) on the other issue holding that the order passed u/s 201(1)/201(1A) of the Act treating the assessee as in default for its failure to deduct tax at source cannot be sustained where the Revenue has not taken any action against the payee and the time limit for taking such action has already expired. 17. The ld. D.R. has also raised an argument by making an elaborate submission that the order passed u/s 201(1)/201(1A) of the Act is distinct and separate from the assessment made in the case of the deductee and the liability to deduct tax at source being de hors the eventual liability of the nonresident, the person responsible for paying or crediting any sum can be treated as the assessee in default even without the possibility of fixing the liability to tax on the non-resident. It is observed that a similar argument was raised on behalf of the Revenue even in the case of Mahindra Mahindra Ltd. (supra) but the same was rejected by the Special Bench holding the same to be fallacious. As regards the amendments made in sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR argued that the period of a little more than four years could not be held to be unreasonable. 32. We have heard both the sides. The liability of the person responsible is dependent upon the deductee failing or otherwise to pay such tax directly. Thus the action under section 201(1) is dependent on the outcome of the assessment of the payee and the time-limit for passing order under section 201(1) has to be viewed in the light of the fate of the assessment in the hands of the recipient. Logically the person responsible for paying sum chargeable to tax can be treated as assessee in default at any time prior to the assessment of the payee or the time available for the making of the assessment of the payee. If the persons responsible is deemed to be an assessee in default after the assessment of the payee or the time available for making assessment has expired then such amount of tax will be incapable of adjustment against tax liability of the payee and would require return to such person who has been treated as assessee in default. Thus both the initiation of proceedings under section 201(1) as well as the completion of such proceedings by passing order have to be prior to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration of the Tribunal in the cross objection filed by the assessee. The case of the assessee before the Tribunal was that the order u/s 201/201(1A) of the Act having been passed beyond a reasonable period of say four years, the same was barred by limitation. In this regard, it was held by the Tribunal relying on the decision of Special Bench of ITAT in the case of Mahindra Mahindra Ltd. (supra) that the time limit for passing order u/s 201 of the Act has to be viewed in the light of the fate of the assessment in the hands of the recipient. It was held that logically the person responsible for paying sum chargeable to tax can be treated as assessee in default at any time prior to the assessment of the payee or the time available for making of the assessment of the payee. It was held by the Tribunal that both the initiation of proceedings u/s 201(1) of the Act as well as the completion of such proceedings by passing order have to be prior to the time limit within which the tax can be determined in the hands of the payee and accordingly the order passed by the A.O. u/s 201(1)/201(1A) of the Act within a period of six years was held to be not barred by time by the Tribunal fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003 whereby he dismissed the appeal filed by the assessee against the order passed by the A.O. u/s 195 of the Act holding that the said appeal filed by the assessee against the order u/s 195 is not maintainable u/s 246A of the Act. 25. As already held by us while disposing of the cross appeals being ITA No. 7082/Mum/2003 and 6899/Mum/2003, the order passed by the A.O. u/s 201(1)/201(1A) r.w.s. 195 of the act treating the assessee as in default for non-deduction of tax at source from the payments made to the Lead Managers for the GDR issue is not sustainable. Consequently, this appeal filed by the assessee arising out of the order passed by the A.O. u/s 195 has become infructuous and we do not consider it necessary or expedient to adjudicate upon the same. 26. The appeal filed by the assessee being ITA No. 5564/Mum/2004 is directed against the order of the ld. CIT(A) -XXXI, Mumbai dated 23-3-2004 whereby he confirmed the penalty of ₹ 2,57,53,304/- imposed by the A.O. for the failure of the assessee to deduct tax at source from the payment of ₹ 8,34,75,360/- and ₹ 23,68,988/- made to Jardine Fleming, Hongkong on account of management and selling commission and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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