2009 (8) TMI 853 - ITAT BANGALORE

Liability to deduct tax at source u/s 195 - Payment to non-resident - ‘making available’ of technical knowledge - Nature of services in relation to certain administrative, financial, personnel, legal, marketing, insurance support matters ‘fees for technical services’ under Article 12 of the DTAA between India - Singapore - Validity of certificates issued u/s 197 - order passed u/s 201(1) and 201(1A) be quashed or in the alternative - Vicarious liability of payer - meaning of ''Assistance'' - As per Article 3 of the MSA, M/s. LLAH, after providing the services, was required to submit a statement of service charges to M/s. BLL - As per the invoices, the expenditure was debited by BLL under the head “Regional Overhead Charges A/c” and corresponding amounts were credited to the “Outstanding Expenses A/c” - M/s. BLL before remitting payment to M/s. LLAH in respect of the invoices raised by M/s. LLAH made an application to the concerned officer u/s 197 so as to enable the appellant to make the payment without deduction of tax at source - concerned party issued certificate u/s 197 and the payments were remitted - AO, International Taxation, initiated proceedings u/s 201(1) and 201(1A).

The stand of the revenue is that the certificates issued were not valid and were not applicable in case the tax was required to be deducted at source on a date prior to the date of issue of certificates.

HELD THAT:- It is true that the primary responsibility of paying the tax is on the recipient and the TDS is one of the modes of collection of such tax. The payer discharges the liability of the payee and, therefore, liability in the hands of payer is a vicarious liability. In the instant case, M/s. LLAH is having no presence in India though u/s 163, the appellant can be considered as an agent. In order to collect the tax on income of the non-resident, who is having no presence in India, TDS is only and effective source of collecting such tax.

The Hon’ble Gujarat High Court in the case of Sarika Estate & Investments (P.) Ltd. v. Asstt. CIT [1999 (8) TMI 10 - GUJARAT HIGH COURT] had an occasion to consider the issuing of certificate u/s 197 on application made after the amount of interest was credited. In that case, the Hon’ble Gujarat High Court noticed that the revenue has issued certificate u/s 197 in numerous cases when the applications have been made after the amount of interest was credited. It was contended before the Hon’ble High Court by the revenue that this was being done erroneously and in violation of the express provisions of law.

From the CBDT issued Circular No. 774, it is clear that the delay in submitting the application u/s 197 can be condoned by the Board. AO instead of intimating the applicant for submitting an application for condonation of delay issued a certificate and in the certificate, it is clear that the credits were made prior to the date of issue of certificate. Thus, the officer, who has issued the certificate, was fully aware that tax was required to be deducted at the time of credit and the application filed u/s 197 is belated one. It is to be noted that the certificate is issued to the payer while the application is made by the payee. The payer can act upon such certificate issued by the AO. The payer has no authority to review such certificate or to seek clarification from the AO in respect of the certificate. This is so because the certificate has been issued on the application made by the payee.

In the instant case, the revenue has taken no steps to cancel such certificate. If the revenue has taken the proceedings for cancellation of the certificate on the ground that application was made belatedly then the assessee would have got a chance to apply to the Board for condonation of delay. Section 197(2) provides that the person responsible for paying the income has to deduct the tax at source at the rate specified in the certificate. The person responsible for paying the income has to comply with such a certificate until such certificate is cancelled.

In the instant case, the revenue has not taken any proceedings to cancel the certificate. As we had pointed out that certificate u/s 197 is equivalent to the order and the CIT can exercise jurisdiction u/s 263 to cancel such an order. The Kerala High Court in the case of Cochin International Airport Ltd.[2009 (4) TMI 56 - KERALA HIGH COURT] has upheld the order of the CIT to withdraw the certificate.

Whether sections 195(3) and 197 stand on the same pedestal? - During the course of proceedings before us, the learned AR has raised a plea that provisions of sections 195(3) and 197 stand on the same pedestal. Section 195(3) is subject to rule 29B. As per rule 29B, provisions of section 195(3) can be applied in case person concerned is a banking company or a person who carried on business or profession in India through a branch. There is no such restriction u/s 197. In the instant case, section 195(3) is not applicable. Hence, it cannot be said that sections 195(3) and 197 stand on the same pedestal.

In the instant case, section 195(3) is not applicable and the payee could not have moved an application under section 195(3). Hence, to say that the application u/s 197 could have been made before receipt of payment by equating it to section 195(3) is not correct. Normally, an application u/s 197 is to be made before the credit or payment, whichever is earlier. However, by virtue of Circular No. 774, the assessee can make an application and can request for condonation of delay. Hence, an application us 197 can be made belatedly also. In the instant case, the applications have been made belatedly and the certificates have been issued and the appellant-company has acted on the basis of such certificates.

As per section 40A(i), expenditure is not allowable in case the assessee fails to deduct tax at source in a case where such tax deduction at source is required. Proceedings u/s 201 for the assessment years 2004-05 and 2005-06 were initiated vide letter dated 27-4-2006. Similarly for payments made during assessment years 2003-04 and 2004-05, proceedings were initiated vide letter dated 13-10-2006.

Thus, AO, who has completed the assessment has held that no tax was required to be deducted in respect of the payments made to M/s. LLAH. Thus, the revenue while completing the assessment has recorded the finding that no tax was required to be deducted u/s 195. Even no transfer pricing adjustment has been made though the assessee has disclosed in the annexure attached with the return that it is making reimbursement of costs.

It means that the left hand does not know what the right hand is doing and the revenue in assessment proceedings has accepted that no tax was required to be deducted at source and such orders have become final except for the AY 2005-06. On this ground also, the lower authorities are not justified in raising the demand u/s 201.

The agreement provides the basis for ascertaining the amounts to be paid to M/s. LLAH. In case the payments are held as fee for technical services then income in the hands of recipient is to be taxed as per provisions of section 115A. The rate of tax is a percentage of fees for technical services. Hence, if payments are for the technical services then computation of such fees with reference to cost becomes not relevant as one has to ascertain the income in the hands of recipient because income by way of fee for technical services is the amount payable.

Under such circumstances, one has to apply the decision of Hon’ble Apex Court in the case of Transmission Corpn. of A.P. Ltd.[1999 (8) TMI 2 - SUPREME COURT]. Hence, we cannot accept the contention of the learned AR that no tax was required to be deducted on the ground that payments were reimbursement of expenses. However, if the payments were to be assessed in the hands of recipient as business income then one is required to ascertain the income in the hands of recipient and in case the non-resident is getting reimbursement of expenses, then there is no income element and TDS is not required to be deducted.

As per Indo-Singapore Treaty, fee for technical services is taxable in India if such services make available technical knowledge, experience, skill, know-how or processes which enable the person acquiring the services to apply the technology contained therein. For interpreting the word ‘make available’ it has been held by the Calcutta Bench in the case of Dy. CIT v. ITC Ltd. [2001 (12) TMI 196 - ITAT CALCUTTA-A] that interpretation in similar situation under the agreement entered into between the two countries can be followed while interpreting the same word in respect of DTAA between other two countries. The Special Bench, in the case of Mahindra & Mahindra Ltd.[2009 (4) TMI 207 - ITAT BOMBAY-H], had an occasion to consider the meaning of the words ‘make available’ with reference to DTAA between India and UK.

The Bangalore Bench in the case of ITO v. Cepha Imaging (P.) Ltd.[2009 (7) TMI 1277 - ITAT BANGALORE] has held that the meaning of the expression ‘make available’ in MoU between India and USA can be considered to be applicable for the interpretation of the same word as appearing in Indo-UK Treaty.

Following the decision of the Bangalore Bench and other decisions referred, we hold that the interpretation of the words ‘make available’ as given in MoU between India and USA Treaty can be applied in the instant case.

Whether the requirement of ‘make available’ is satisfied - The appellant is receiving various services. In respect of assistance in the operation of the business, it has been made clear that LLAH will provide education and training including the training material for the staff of the appellant-company on or offshore. In respect of majority of services, it has been mentioned that it will provide assistance. Thus, LLAH is providing assistance for various services and as per the agreement, it has to provide education and training to the employees of the appellant-company. The words ‘make available’ only refer to the willingness of the provider of the services and does not refer the acceptance of the receiver of the services.

The dictionary meaning of assistance is to help or support. It does not mean to provide. When one is going to help or support then he is making the other person to do the same in future. The word ‘Assistance’ is defined in Law Lexicon by Venkataramaiya as :

“The word ‘assistance’ as used in the section implies that the party who assists is doing something which in ordinary circumstances the party assisted could do for himself.” - Ramaya Naoka ILR 26 Mad. 419 at p. 421.

From the agreement, it is clear that LLAH was to provide assistance for the services and, hence, it will mean that LLAH is also making available the skill, experience to the recipient.

The dictionary meaning of the words ‘make available’ is ‘able to use or obtain’. It does not mean that the recipient should equally use the technology. In a case like this where group owns a number of companies and certain companies provides services to the companies belonging to the group then it becomes the policy of the group to get services of that company though other group companies might be able to perform the same functions on the basis of the services already provided to them.

Therefore, in the instant case, section 195 will be applicable because reimbursement of expenses relates to fee for technical services. Hence, we hold that the authorities below were justified in holding that tax was not required to be deducted on the ground that the appellant-company reimburse the expenses as the amounts payable were to be taxed in the hands of recipient as fees for technical services as per DTAA.

Since we have given a finding that the appellant was not required to deduct tax at source u/s 195 and, therefore, the assessee cannot be treated as an assessee in default and no interest is leviable u/s 201(1A). However, in case it is finally held that the assessee was required to deduct the tax at source then interest u/s 201(1A) will be leviable from the date of credit till the date of receipt of certificate u/s 197 because after receipt of certificate u/s 197, the assessee could not have been treated as an assessee in default.

In the result, the appeals filed by the assessee are allowed.