TMI Blog2007 (11) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... ected 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 ITO at the time of regular assessment. We may mention that 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 nonresident. 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 u/s 195(2) from ITO or for non-deduction of tax at source. This is a safeguard provided u/s 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. Now reverting to the facts of the instant case of the assessee, the undisputed position emerges as under:- (a) The payer/assessee has made pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicial Member.- The assessee has filed this appeal against the order of CIT(A) passed in appeal No. 34/2006-07/CIT(A)-XX, dated 30-3-2007 on the following grounds:- 1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in confirming the disallowance made by the Assessing Officer in respect of claim of mobilization and demobilization expenses of Rs. 8,65,57,909, reimbursed by the appellant to Van Oord ACZ Marine Contractors BV, Netherlands (VOAMC), invoking the provisions of section 40(a)(i) of the Act. 2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not holding that the provisions of section 40(a)(i) did not apply, since the aforesaid amount reimbursed by the appellant did not constitute income of VOAMC liable to tax in India and consequently the appellant was not required to deduct tax at source under section 195 of the Act. 2.1 Without prejudice, that the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the disallowance under section 40(a)(i) had to be restricted to only that part of the mobilization and demobilization expenses reimbursed by the appellant which related to activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disallowance of Rs. 8,65,57,909 by the Assessing Officer in respect of reimbursement of mobilization and demobilization charges to Van Oord ACZ Marine Contractors BV, Netherlands (VOAMC) under section 40(a)(i) of the Income-tax Act as involved in the grounds of appeal of the assessee, as borne out from the orders of tax authorities below as well as synopsis filed by both the parties, are that the assessee/appellant is a wholly owned subsidiary of Van Oord ACZ Marine Contractors BV, Netherlands (VOAMC). During the relevant previous year the assessee executed, inter alia, dredging contract at Port Mundra for Gujarat Adani Port Ltd. As the assessee follows completed contract method to account for receipts from execution of dredging contracts and since the aforesaid contract at Port Mundra was completed during the relevant previous year, the assessee in the profit and loss account relating to the relevant previous year debited, inter alia, mobilization and demobilization cost of Rs. 8,92,37,645 reimbursed to VOAMC. Out of the aforesaid amount, Rs. 8,65,57,909 pertained to the aforesaid dredging contract at Port Mundra which was completed during the relevant previous year. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Thereafter, the Assessing Officer by passing a detailed order held the business connection of the assessee with M/s. VOAMC BV Netherlands was established and, therefore, the reimbursement of the expenses in respect of mobilization and demobilization costs to the aforesaid foreign company was to be subjected to payment of tax. The foreign company had rendered services to the Indian company, assessee, in India on which the assessee was required to deduct tax the prescribed rate as envisaged in section 195 of the Act at the time of payment as ordered/determined by DCIT, International Taxation in his order dated 22-11-2002, but since the assessee failed to do so, the learned Assessing Officer disallowed the deduction under section 40(a)(i) of the Act of the entire mobilization and demobilization expenses of Rs. 8,65,57,909 claimed by the assessee. 5. Aggrieved with the order of Assessing Officer the assessee filed an appeal before the CIT(A) and contended before him that:- (i) All the expenses reimbursed were supported by the invoices of third parties and proper contracts. Since all the services were rendered outsideIndia, these payments did not accrue or arise any taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom payment made to VOAMC in terms of order dated 22-11-2002 passed under section 195(2) and the disallowance under section 40(a)(i) of the Act was rightly made by the Assessing Officer as the assessee failed to deduct tax at source from the aforesaid payment by further observing that the real transaction relating to mobilization and demobilization of dredgers was between the assessee and non-resident service providers (and not VOAMC) and that the assessee failed to discharge its obligation of deducting tax at source from the payment made in respect of the aforesaid transaction with non-resident service providers. 7. Before us the ld. AR for the assessee challenging the order of CIT(A) submitted that reimbursement of expenses on actual basis to VOAMC does not give rise to any income in the hands of VOAMC as no income is embedded in the amount reimbursed. In support of his contention he has placed reliance on following cases:- (i) CIT v. Tejaji Farsaram Kharawalla Ltd. [1968] 67 ITR 95 (SC) (ii) CIT v. Industrial Engg. Products (P.) Ltd. [1993] 202 ITR 1014 (Delhi) (iii) Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 (Delhi) (iv) Addl. CIT v. Enr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce even if VOAMC were to have a PE inIndia, no income arose to it in respect of mobilization and demobilization expenses reimbursed to it by the appellant. The decision of the. Delhi Bench of the Tribunal in the case of Enron Oil Gas International Inc., supports the above view. 10. Further, according to him the issue whether VOAMC claimed deduction of the aforesaid amount paid by it to non-resident service providers was irrelevant for determining the obligation of the appellant to deduct tax at source from the aforesaid amount reimbursed by the appellant to VOAMC. Insofar as the appellant was concerned, it only reimbursed to VOAMC the actual cost incurred by VOAMC, which had no element of income embedded on which tax was required to be deducted at source. 11. He also submitted that the CIT(A) has wrongly held that even if the aforesaid reimbursement of expenses to VOAMC does not give rise to income in the hands of VOAMC, the transaction of mobilization and demobilization of dredgers was between the appellant and the non-resident service providers and the appellant was required to deduct tax at source from the payment made to non-resident service providers. It has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indiaand mobilization and demobilization is only for enabling to provide services inIndiaand not the income earning economic activity. He further contended that mere payment of certain amount for services as advance do not alter the character of income and since the entire business activity is carried out in India (dredging in Indian seabed) the income was chargeable to tax under section 9. The assessee had a business connection and also a PE in terms of Indo-Netherlands DTAA as besides other things it also had a branch office inIndia. Further according to him reference to article 24 of Indo-Netherlands DTAA was not valid as the Hon'ble Apex Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 has held that provisions of section 195 did not adversely affect the rights of the parties. The deductibility of expenses is determined under section 37 which do not make a difference between payment to the resident or a non-resident. Section 40(a)(i) and section 195 are machinery provision and permits allowances in the year in which tax is deducted at source and thus provisions of Indo-Netherlands DTAA cannot-be attracted for discrimination. In this regard h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebited by the assessee in the Profit and Loss Account under section 40(a)(i) of the Act. 19.1 The relevant provisions of sub-clause (i) of clause (a) of section 40 after substituted by Finance Act, 1988 tax with effect from 1-4-1989 relevant to assessment year 2003-04, under consideration, is stated as under:- (i) any interest (not being interest on a loan issued for public subscription before 1-4-1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B: Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed a~ a deduction in computing the income of the previous year in which such tax has been paid or deducted: 20. On reading this provision, it is clear that as per sub-clause (i) of clause (a) of section 40 which has been substituted by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payments of such sums. 23. The Apex Court in the case of Transmission Corporation of AP Ltd. 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-residents. Their Lordships while discussing the scheme of section 195 and other relevant provisions of section 197 of Income-tax Act observed as under:- Section 195 deals with deduction of tax at source in case where payment is to be made to a non-resident. The scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves no doubt that the expression 'any other sum chargeable under the provisions of this Act' would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act or not? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum, what would be the income is to be computed on the. basis of various provisions of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction at source. 26. Now, keeping in view these observations of the Apex Court we would like to discuss and deduce the meaning, scope, limitations, rights and duties of payer and the payee under the provisions of sections 195 of the Income-tax Act as under:- (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 ITO for obtaining such certificate. In case no such application is filed before Assessing Officer for obtaining such certificate or such application is rejected by 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 Assessing Officer and in case no such application for obtaining the certificate was filed before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ITO at the time of regular assessment. 29. To sum up, we may mention that 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 nonresident. 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 ITO or for non-deduction of tax at source. This is a safeguard provided under sections 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. 30. 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) of the Income-tax Act. 31. The provision of section 40(a)(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility of the payments in the hands of recipient non-resident as its income in India. That having held so the detailed arguments of both the parties on the question of the nature of the payments made by the payer to the payee nonresident and the taxability of such payment as income in the hands of recipient non-resident is thus beyond the scope of provisions of section 40(a)(i) where we are only required to consider the deduction of such payments claimed by the payer/assessee to the non-resident in case of non-compliance of provisions of section 195 of Income-tax Act i.e., non-deduction of tax at source for the payments made to non-resident. 33.1 Hence for the reasons stated above, we are not considering the arguments of the parties on merits regarding the nature of payments and taxability of the same in the hands of recipient non-resident company as well as the related case laws relied upon by both the parties for deciding the issue under section 40(a)(i) as being not relevant and so we are also not referring to the same in this order. 34. Hence, from our elaborate discussion now the rights and duties of the payer/payee under sections 195 and 197 of the Act as well as the dut ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
