TMI Blog2009 (1) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds taken by the assessee are reproduced as under: "1. That on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the disallowance of Rs. 26,09,29,745 being reimbursement of crew salary and other payments made to Alfa Crew. 1.1 That the learned CIT(A) erred in holding that the provisions of s. 40(a)(i) are applicable on the facts and in the circumstances of the case. 1.2 That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the crew deployed with the appellant on secondment, on whose salary taxes were deducted at source under s. 192 of the Act, wherever applicable, were not the employees of the appellant. 1.3 That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the appellant was under statutory obligation to deduct tax at source as per the order under s. 195(2) disregarding the fact that the said order was issued only in the month of March, 2004, i.e., the concluding month of the previous year, and that the appellant had already deducted tax under s. 192, wherever applicable. 1.4 That the learned CIT(A) erred in disregarding the claim of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remarks were given in Col. 10 of Form No. 3CD: "The assessee wishes to offer its income to tax under s. 44BB of the IT Act, 1961 (being special provisions for computing profits and gains in connection with the business of exploration, etc., of mineral oils). As per the requirements stipulated under sub-s. (3) of s. 44BB, the assessee has maintained the necessary books of account and documentation." 5.4. The assessee had also given the following remarks vide para 6 of note of statement of income which reads as under: "In an unlikely scenario wherein the taxable income of DDL under s. 44BB(1) of the Act is lower than the income computed under s. 44BB(3) of the Act, DDL reserves the right to be assessed under s. 44BB(1) of the Act." 5.5 From the said averment made by the assessee in the return of income, it is, thus, clear that the assessee had claimed it to be assessed under s. 44BB(3) with a rider that in an unlikely scenario wherein taxable income of the assessee determined under s. 44BB(1) of the Act comes to a sum lower than the income computed under s. 44BB(3), the assessee reserved its right to be assessed under s. 44BB(1) of the Act. 5.6 After examining and verifying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments of TDS were made to the credit of the Government account as per the following details: "The assessee company has however, deducted tax at source only on payment of Rs. 2,03,73,617. The payment of TDS has been made to the credit of Government account as per following details. ---------------------------------------------------------- Date of payment/ Amount Amount of TDS Date of credit payment ---------------------------------------------------------- March, 2004 1,16,87,912 5,75,045 31-05-2004 ---------------------------------------------------------- March, 2004 86,85,704 4,27,336 27-10-2004" ---------------------------------------------------------- 5.11 The assessee company was, therefore, required by the AO to explain as to why TDS on balance payment of Rs. 26,66,14,049 was not made, and, accordingly, he required the assessee to show cause as to why expenditure on account of crewing fee debited/paid be not disallowed in view of the provisions of s. 40 (a)(i) of the Act. In reply thereto, the assessee submitted, inter alia, before the AO that the payment made on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including salary of crew were to be made to Alfa Crew. The assessee company had applied for determining deemed profit in respect of the payments which were to be made to Alfa Crew in pursuance of above contract lo the then Dy. CIT, Circle-I, Dehradun, and the then AO accordingly, directed the assessee company vide order under s. 195(2) in F. No. Dy. CIT/Circle-1/DDN/195(2)/2003-04/3294, dt. 3rd March, 2004 to deduct tax after applying deemed profit rate of 12 per cent on all the payments. The relevant contents of order under s. 195(2) are reproduced hereunder for the sake of convenience: The services being provided by the non-resident company appear to be covered under s. 44BB, accordingly, DDL is directed to deduct tax after applying deemed profit rate of 12 per cent on all payments including reimbursements to be made to the NRC. It is also directed to withhold last invoice until final NOC is issued by this office.' The assessee company has however, grossly disobeyed the above directions issued vide order under s. 195(2) and released payments to Alfa Crew taking totally different ground that the crew were the deemed employees of the assessee company. The payments against ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) that provision of s. 195 applies to all sums paid to non-residents during the course of regular business operations. As such, s. 195 applies not only to the amounts which wholly bear the income character such as salaries, dividends, interest on securities, etc., but also to gross sums, the whole of which may not be income or profits of the recipient such as payments to contractors, sub-contractors, insurance commission, etc. What was to be considered was whether payment of sum to non-resident is chargeable to tax. The sum may be income or income hidden or otherwise embedded therein so the tax is required to be deducted on such payments. The assessee company has made payments to Alfa Crew on the basis of invoices raised by it to assessee company in terms of contract agreement. No details of expenses on account of salary of crew have been obtained by the assessee at the time of making payments nor have been filed in the course of assessment proceedings. It was therefore, not open to the assessee company to decide whether the salary of crew was just reimbursement or income element was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the stipulated period, such expenditure will not be allowed, remained unsatisfied. In view of above provisions of Act the expenditure of Rs. 26,66,14,049 on account of payments to Alfa Crew is disallowed and added to the income of the assessee company. I may also mention that even if the above expenditure was covered under the head salaries it is liable to be disallowed in view of provisions of cl. (iii) of above section as the payments have been made outside India to a non-resident whereon no tax has been deducted under Chapter XVII-B of IT Act." 6. Being aggrieved with the AO's order in disallowing the expenditure of Rs. 26,66,14,049 on account of payment to Alfa Crew against services of crew, the assessee preferred an appeal before the learned CIT(A). 6.1 In the course of hearing before the learned CIT(A), the assessee made submissions, which are narrated by the learned CIT(A) in his order at pages from 8 to 19. The assessee submitted before the learned CIT(A) that the provisions of s. 40(a)(i) come into operation only in respect of an amount chargeable to tax in India. He further submitted that Alfa Crew had seconded personnel to the assessee company and the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the learned CIT(A) did not accept the various contentions of the assessee company for the reasons given below: (i) From the terms and conditions of the contract, it was clear that the actual employer of the crew members is MI s Alfa Crew and not the assessee company. The payment on account of services of these technicians was being made by the assessee to M/s Alfa Crew after receiving the invoices from M/s Alfa Crew. Thus, no direct payment was made to those technicians by the assessee. From the contract itself, it was clear that the amount paid by the assessee company to M/s Alfa Crew was by way of fees for technical services, which included in its definition supply of personnel, and not on account of any reimbursement. The use of word 'reimbursement' in the agreement between the assessee and Alfa Crew does not imply that the Alfa Crew ceases to be the employer of the technicians employed by it but it is only a measure of the compensation or consideration which Alfa Crew is entitled to receive from the assessee company for providing the services of the technicians. This is also clarified and confirmed in cl. 8.1 of the agreement between the assessee and Alfa Crew. The decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26,09,29,745 ------------ The AO is, therefore, directed to give relief of Rs. 56,84,304 (Rs. 26,66,14,049 - Rs. 26,09,29,745)." 7. Still aggrieved, the assessee is in appeal before us. 7.1 The learned counsel for the assessee had made a reference to the various discussions and observations made by the AO as well as by the learned CIT(A) in their respective orders. The arguments of the assessee were also summarized in a written submission dt. 17th Nov., 2007 filed before us. 7.2 It was submitted by the learned counsel for the assessee that the objections taken by the AO as well as by the learned CIT(A) to the assessee's claim of deduction of salary of the crew are mainly three-fold. First, as the salary was paid to the crew through Alfa Crew, the authorities below hold that the crew were employees of Alfa Crew and not of the appellant company. Secondly, they hold that the payments of crew salary/expenditure made by the appellant to Alfa Crew constituted income receipts of Alfa Crew. Thirdly, the issue stood concluded by Dy. CIT's order under s. 195(2) and on account of non-compliance to the directions given in that order, the appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (f) The assessee company made the payment of salary to the crew so hired and accounted for the same in the books of accounts. (g) The assessee company withheld taxes on such salary payments wherever applicable, keeping in view the provisions of s. 10(6)(viii) of the Act and deposited the same into the Government treasury. (h) Alfa Crew ceased to exercise any supervision or control once they directed the crew to report to the assessee company, and from that point of time onwards the role of M/s Alfa Crew was relegated to being passive employer and for all practical purposes the crew functioned in the employment of the assessee company. 7.5 To support the assessee's case, the learned counsel pointed out certain tests to distinguish between a servant and an agent, and in this connection, he made a reference to the decision of Hon'ble Supreme Court in the case of Piyare Lal Adishwar Lal vs. CIT (1960) 40 ITR 17 (SC) and in the case of Lakshminarayan Ram Gopal Son Ltd. vs. The Government of Hyderabad (1954) 25 ITR 449 (SC). 7.6 With regard to the interpretation given by the learned CIT(A) to the expression "employer tax liability" occurring in cl. 8 of the agreement, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such salaries/expenses as the assessee company may reasonably require. The profit element or remuneration to Alfa Crew was separately provided by mentioning that the Alfa Crew is entitled to a 5 per cent handling fee thereon. He, therefore, submitted that the provisions of cl. 5 are crystal clear that (a) the payment by the assessee company to Alfa Crew of all crew's salary or expenses would be only of the actual crew salaries/expenses incurred by the Alfa Crew and nothing more and (b) the profit element of Alfa Crew in this behalf would be the 5 per cent handling fee that the assessee company would separately pay to the Alfa Crew over and above the reimbursement of actual expenses. He further submitted that the Alfa Crew merely acted as a conduit for disbursement of salaries and other expenses by the assessee company to its crew on the vessel-rig "Belford Dolphin", and Alfa Crew, at best, acted as an agent of the assessee company for the disbursement of salaries and other expenses to the crew. He further contended that the contract between the assessee company and the Alfa Crew was that of supply of manpower and nothing more, and whatever payments were made against services of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties have misunderstood the decision of Hon'ble Supreme Court in the case of Transmission Corporation of AP. Ltd. vs. CIT and also in the case of Aggarwal Chamber of Commerce Ltd. vs. Ganpat Rai Hira Lal (1958) 33 ITR 245 (SC). He submitted that in the case of the Transmission Corporation of AP. Ltd., the Hon'ble Supreme Court has categorically held that while an assessee who makes payments to non-resident under contract entered into is under obligation to deduct tax at source under s. 195 but that obligation is limited only to appropriate proportion of income chargeable under the Act. In the case of the assessee company, the payment to Alfa Crew by way of reimbursement of actual expenditure on crew salary/expenses was not the income of the Alfa Crew chargeable to tax under the provision of the Act. But, it is the income of the crew employed at Belford Dolphin, and therefore, the tax was required to be deducted in accordance with the provisions of the Act at the point where the payment was made to the crew. He, therefore, submitted that in the present case with regard to the payment of salary or other expenses to the crew, the provisions of s. 192 and not the provisions of s. 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of s. 195 were not applicable insofar as the payments by way reimbursement of crew salaries/ expenses are concerned. 7.14 The learned counsel for the assessee further contended that the assumption of the AO that the assessee was liable to deduct tax at source on the very first payment of salary to technicians or crew is erroneous inasmuch as in the light of the scheme of provision relating to the tax deductible at source, the assessee could have withheld tax on the past salary payment as also from the future salary payments. Reference was made to the decision of Tribunal in the case of Vinsons vs. ITO (2004) 83 TTJ (Mumbai) 594 : (2004) 89 ITD 267 (Mumbai). 7.15 He further submitted that as per agreement between assessee company and Alfa Crew, the assessee was contract bound to make three categories of payments as under: "(a) Payment of US $ 869 per day as stipulated in cl. 4 of the agreement. (b) Reimbursement to Alfa Crew of all crew salaries/expenses reasonably incurred by Alfa Crew. (c) Handling fee calculated @ 5 per cent on salaries/expenses as mentioned in (b) above." 7.16 In the light of the nature of aforesaid three categories of payments, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices" would mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel and thus, in the instant case, the consideration paid by assessee to Alfa Crew towards salary or expenses of the crew shall mean the consideration for the provision of services of technical or other personnel, that is, crew members and would in turn come within the ambit of expression "fees for technical services" as defined under Expln. 2 to cl. (vii) of sub-s. (1) of s. 9 of the Act. He, therefore, submitted that the decision of Hon'ble Delhi High Court in the case of Dy. CIT vs. HCL Infosystems Ltd. is not applicable to the present case on its facts. He placed reliance upon following decisions: (1) Clouth Gummiwerke Aktiengeselischaft vs. CIT (1999) 238 ITR 861 (AP); (2) Cochin Refineries Ltd. vs. CIT (1996) 135 CTR (Ker) 193 : (1996) 222 ITR 354 (Ker); (3) Transmission Corporation of A.P. Ltd. vs. CIT; (4) West Asia Maritime Ltd. vs. ITO (2007) 109 TTJ (Chennai) 617 : (2008) 297 ITR 202 (Chennai)(AT); (5) Poompuhar Shipping Corpn. Ltd. vs. ITO (2007) 108 TTJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has engaged Alfa Crew A.S. to provide specific crewing services to the assessee relating to the appropriate crewing the drillship as may from time to time be defined and requested by the assessee company, and the Alfa Crew agreed to provide such services upon the terms and conditions set out in the agreement. Clause 2 of the agreement provides that the agreement shall be commenced on 10th Oct., 2003 and shall continue upto 31st March, 2004, or as terminated by either party giving to the other party not less than 60 days' prior written notice. The cls. (4), (5) and (8) are relevant clauses which have been emphasized by the Revenue authorities. We, therefore, deem it necessary to take note of the aforesaid three clauses. These are being reproduced here as under: "4. Fee 4.1 The client shall pay to Alfa Crew a fee of USD 869 per day inclusive of VAT if applicable, payable upon receipt of monthly invoices thereon, or as otherwise agreed. This fee shall cover Alfa Crew running costs, such as but not limited to, personnel, office and administration costs/expenses. This fee will be subject to an yearly review but will remain fixed unless otherwise agreed by the parties. 5. Cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude any personnel, office and administrative cost or expenses. It also becomes clear that the assessee company shall be liable to reimburse Alfa Crew of crew salaries/expenses reasonably incurred by Alfa Crew, and the Alfa Crew shall provide the assessee company with evidence of such salaries or expenses as the assessee company may reasonably require. In respect of the payment of reimbursement of all crew salaries or expenses reasonably incurred by Alfa Crew, the Alfa Crew was entitled to 5 per cent handling fee thereon. In other words, the 5 per cent handling fee upon the total sum of crew salaries or expenses reasonably incurred by Alfa Crew was separately payable by the assessee company to Alfa Crew. This makes it clear that the assessee company was obliged to reimburse Alfa Crew of crew salaries or expenses reasonably incurred by Alfa Crew while providing crew service to the assessee company and shall also be liable to pay 5 per cent handling fee thereon to Alfa Crew. The assessee company was also entitled to have evidence of all crew salaries or expenses reasonably incurred by Alfa Crew as the assessee company may reasonably require making it clear that the assessee company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt letter given to each crew employee, and the copy thereof has been placed in the paper book filed by the assessee. However, on the other hand, the learned Departmental Representative has submitted that though the assessee has submitted a paper book containing 478 pages, it is not clear as to which document was produced before which authority. The assessee has given a certificate to the index of the paper book that the documents placed in the paper book are drawn from the records of the authorities below and no fresh evidence was furnished. The copies of appointment letters are placed at pp. 302 to 379 of the paper book. We have perused the assessment order, and on perusal thereof, we find that nothing has been mentioned by the AO therein with regard to this factum claimed by the assessee that the assessee had produced copies of appointment letters issued to crew employees employed by the assessee for executing work contract entered into with ONGC. The fact that the assessee had produced copies of aforesaid appointment letters before the AO has nowhere been discussed by the AO in the assessment order. The learned Departmental Representative was also not coming with a categorical s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned that copy of employment letter/agreement entered into by the assessee with its personnel (local as well as expatriates) were enclosed as Annex. 2. It is, thus, clear that the appointment letters issued by the assessee to various employees including crew members were furnished before the AO vide assessee's letter dt. 19th July, 2005. The authorities below have not made any comment or observation or have not discussed anything with regard to these appointment letters issued by the assessee to different employees. No reason has been given as to why the AO as well as learned CIT(A) have failed to take into account the appointment letters issued by the assessee to all its employees including persons provided by Alfa Crew while deciding the issue. Since no adverse or contrary material has been brought by the AO or by the first appellant authority nor any comment upon these appointment letters issued by the assessee to various employees has been made by the authorities below, we are inclined to accept the fact that the assessee had issued appointment letters employing the various employees including crew members provided by Alfa Crew vide the aforesaid appointment letters issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------ 20. Dixon, Robert E British 84 ---------------------------------------------------- 21. Duthie, John A British 79 ---------------------------------------------------- 22. Eccleston, Peter R British 65 ---------------------------------------------------- 23. Elliot, Jason L Australian 70 ---------------------------------------------------- 24. Elsworth, David G British 66 ---------------------------------------------------- 25. Evans, Teifion H British 74 ---------------------------------------------------- 27. Fischer, George A USA 80 ---------------------------------------------------- 28. Gaitens, Gary British 76 ---------------------------------------------------- 29. Gale, Christopher P British 75 ---------------------------------------------------- 30. Goldie, Mark R British 76 ---------------------------------------------------- 31. Gordon, James J British 86 ----------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------- 55. Miller, Damian M New Zealander 37 ---------------------------------------------------- 56. Munro, Philip J British 66 ---------------------------------------------------- 57. Murray, Douglas R British 87 ---------------------------------------------------- 58. Noon, Philip British 65 ---------------------------------------------------- 59. Olah, Steven W Australian 86 ---------------------------------------------------- 60. Perry, Leigh C British 74 ---------------------------------------------------- 6l. Ralph, Bruce G British 74 ---------------------------------------------------- 62. Rennie, Liam D British 73 ---------------------------------------------------- 63. Ritchie, John British 75 ---------------------------------------------------- 64. Rose, Andrew J British 84 ---------------------------------------------------- 65. Sanders, Grant D A Australian 81 -------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointment letters issued to each and every member of the crew. A copy of appointment letter was duly furnished to the learned CIT(A). It is further clear that all the appointment letters issued to each and every member of the crew were also furnished before the AO as it would be clear from the AO's letter dt. 15th Oct., 2008 furnishing therewith the true copies of the appointment letters, assessee's letter dt. 19th July, 2007 together with which were filed by the assessee before the AO during the assessment proceedings. The AO and learned CIT(A) have not made any comment or observation in respect of these appointment letters issued to each and every member of the crew, the copy thereof was furnished before the AO as well as before the learned CIT(A). (v) The assessee company was also responsible for securing work permits and security passes for all the crew members as it would be clear from cls. 4.2 of the agreement entered into with ONGC. (vi) The assessee company was also responsible for providing essential requirements of housing and transportation to the crew members. The payment by way of reimbursement of all crew salaries and expenses was booked or accounted for towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject to a specific approval of the Government of India and the RBI. HP shall not be obligated to provide any personnel persuant to above clause until such approval has been obtained. Thus, as per this agreement, the assessee was to reimburse and pay to HP on a monthly basis the actual amount of the salaries and related employment costs incurred by HP in deputing and maintaining these employees in India. For the convenience of these technicians. HP made the monthly salary in USA for which debit notes were sent to the assessee for reimbursement. Thereupon, the assessee completed all the formalities for remittance of the salary of these technicians as reimbursement to HP. The view taken by the AO and the learned CIT(A) that the technicians continued to be the employees of HP for the payment of salary by way of reimbursement to HP was from part of the fees for technical services rendered by HP was not accepted by the Tribunal in view of the fact that insofar as HP is concerned, the fee for technology transfer and for the transfer of know-how by HP to the assessee company has already been quantified and separately received, and the technicians were deputed and the services were placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration with Hewlett Packard Company, USA (HP) in April, 1991, whereby the respective computer operations of HPI and HCL Ltd. were merged in a scheme of arrangement approved by the Hon'ble Delhi High Court. The name of HCL Ltd. was changed to HCL Hewlett Packard Ltd. (HCLHP) on HP acquiring 26 per cent equity stake. The non-computer business of HCL Ltd. was spun off to a separate company. Thereafter, HCLHP and HP entered into an agreement dt. 10th July, 1992, by which the Licensing and Technical Assistance Agreement (LTAA), dt. 16th April, 1990 entered into between HP and HPI was novated in favour of the assessee. Later, the assessee entered into LTAA with HP on 30th Oct., 1992. The purpose of the agreements being the provision of technical know-how by HP to the assessee to make and sell certain products of HP in India. As per the agreement which was novated on 10th July, 1992, the considerations for the transfer and supply of know-how and rendering of technical assistance were provided for in arts. 12 and 13 of the agreement. The assessee was to pay a lump sum technology transfer fee in consideration of the services and privileges provided by HP and in consideration of the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO that the assessee is as well liable for deduction of tax under s. 195 of the Act. According to him, the reimbursement of salary to HP is part and parcel of the agreement entered into by the assessee with HP and, therefore, the amount paid comes within the mischief of Expln. 2 to s. 9(1)(i) to (vii) of the Act. This view was supported by the learned CIT(A) on the reasoning that the technicians continued to be employees of HP and, therefore, reasoning that the technical services payable to HP and the same is covered by the provisions of s. 9(1)(i) to (vii). 26. From the above facts, there appears to be considerable confusion in the minds of the Department. Firstly, the competent authority informed the assessee vide letter dt. 16th Jan., 1995, that income chargeable under the head 'Salary' is not covered by the provisions of s. 195 of the Act. The assessee, therefore, deducted tax at source under s. 192 of the Act and remitted the reimbursement to HP. According to the assessee, there is no default on its part as the assessee sincerely believed that the assessee was not liable to deduct tax from the said payment under s. 195 of the Act. The learned counsel of the assessee relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned CIT(A) cannot be sustained in view of the fact that insofar as HP is concerned, the fee for technology transfer and for the transfer of know-how by HP to HPI has already been quantified and separately received. The technicians were deputed and the services were placed at the disposal of the assessee during the deputation period. The assessee is not only liable to pay the salary but to pay the tax thereon. In such arrangement, the command and control of the employees and relation of employer and employee remain with the assessee and the technicians and, therefore, the payment has been rightly treated as salary borne by the assessee on which tax had been correctly deducted at source. This view is also directly supported by the circular of the CBDT referred to above. The Asstt. CIT, Special Circle 30(1), Mayur Bhavan, New Delhi also informed the assessee that income chargeable under the head 'Salary' is not covered by the provisions of s. 195 of the Act. In such a case, there is no reason to impute default on the part of the assessee for failure to deduct tax under s. 195 of the Act. 28. Even assuming that the above reimbursement of salary forms part of the fee for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as HP (USA) is concerned, the fee for technology transfer and for the transfer of know-how by HP (USA) to HP (India) has already been quantified and separately received. The technicians were deputed and the services were placed at the disposal of the assessee during the deputation period. The assessee is not only liable to pay the salary but to pay the tax thereon. The Tribunal expressed the opinion on the facts that the payment has rightly been treated as salary borne by the assessee on which tax had been correctly deducted at source under s. 192 of the IT Act, 1961. Reliance is also placed on the letter of the CBDT and a letter addressed by the Asstt. CIT, Special Circle 30(1), New Delhi. Our attention was drawn to various documents at pp. 127, 130, 138, 144, 145, 162, 163, 169 and 175. The Tribunal relying on material evidence, has held that the assessee has rightly considered the payment as salary and has rightly deducted tax at source under s. 192 of the IT Act. Learned counsel for the Revenue relied on the judgment delivered by the Kerala High Court in the case of Cochin Refineries Ltd. vs. CIT (1996) 135 CTR (Ker) 193 : (1996) 222 ITR 354 (Ker) to contend that the remitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it notes from HP, completed all the formalities for remittance of the salary of those technicians as reimbursement to HP. It is, thus clear that in that case also, the payment towards salaries and related employment cost were paid to HP as reimbursement of the expenses of salaries and related costs incurred by towards personnel deputed for assessee's work. Thus, the distinction pointed out by the AO is totally baseless and without application of mind. No any other distinction has been pointed out by the AO between the facts of the case of HCL Infosystems Ltd. and the facts of the present assessee. Thus, the decision of Tribunal in the case of HCL Infosystems Ltd. is applicable to the present case, and it being a decision of Co-ordinate Bench, which has been upheld and approved by the Hon'ble jurisdictional Delhi High Court, is binding upon us and has to be followed. 19. The learned CIT(A) has also not followed the aforesaid decision of Tribunal in the case of HCL Infosystems Ltd. by giving the reason that: (i) as per cl. 8.1 of the agreement entered into between the assessee and Alfa Crew, the Alfa Crew is responsible for the employer tax liabilities; and (ii) moreover HP was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided that the person responsible for making the payment of any income chargeable under the head 'Salaries' or other payment covered by s. 192 of the Act may, at the time of making any deduction, increase or reduce the amount to be deducted under s. 192 for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year. From the aforesaid s. 192(3), it is, thus, clear that the deficiency arising out of assessee's failure to deduct tax at source under s. 192 during the financial year can be made up at the time of making future payment during the relevant financial year. The Tribunal, Mumbai Bench 'H' in the case of Vinsons us. ITO has taken a view that a conjoint reading of ss. 192(1) and 192(3) makes it clear that TDS instalment of each month need not necessarily be accurate, as otherwise the expression "increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year" used under s. 192(3) will have no meaning. The Hon'ble Tribunal further held that on mere short deduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er would be put to undue burden of payment of interest for no fault of him. From this analysis, it is apparent that on mere short deduction of tax at source from the salaries paid to the employees, s. 201 (1A) cannot be invoked unless the total tax deducted by the end of the year is less than the tax deductible on the salary paid to the employee in that year. In the instant case the assessee has reasonably estimated the income and in view of the workers insistence and other circumstances, there was a short deduction of tax at the beginning of the financial year which is adjusted in the later months. 5. Therefore, in our considered opinion, interest is not chargeable for mere short deduction in the initial months. In the result, the appeals filed by the assessee are allowed." 21. In the light of the discussions made above, we, therefore, hold that the assessee's failure to deduct tax at source from the payment of salary to crew in the initial period of employment cannot be viewed adversely unless it is established that the total tax deductible on the salary paid to crew members in the relevant financial year was not ultimately deducted by the assessee by the end of the year. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the matter whether there was any failure on the part of the assessee to deduct tax at source from the payment of salary to crew members assessable under the head 'Salaries' in the relevant year, within the meaning of s. 192 of the Act has not been dealt with by the learned CIT(A) except by holding that the assessee's case is covered by s. 195 of the Act. 23. Now, we proceed to deliberate upon the decision relied upon by the learned Departmental Representative before us, and after making deliberation upon them, we find that these decisions give no assistance to the Revenue's case as discussed hereinafter. 24. The first decision relied upon by the learned Departmental Representative is in the case of Clouth Gummiwerke Aktiengesellschaft vs. CIT. In this case, the assessee was a non-resident company. The assessee agreed to do the job of erection of conveyor belts through their engineers. As per agreement, the assessee was to depute two supervisors for a period of two working days for belt changing and erection of new belts, and the lump sum amount of DM 33,000 was paid towards the charges, and the engineers were provided free boarding, lodging and transport facilities apa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, on the other hand, the facts of the present case are quite identical to the facts of the case in the case of HCL Infosystems (P) Ltd. of the Tribunal Delhi Bench, which has been approved and confirmed by the jurisdictional Delhi High Court reported in (2004) 192 CTR (Del) 108 : (2005) 274 ITR 261 (Del) as discussed above herein. 25. The next case relied upon by the learned Departmental Representative is the case of Cochin Refineries Ltd. vs. CIT (1996) 135 CTR (Ker) 193 : (1996) 222 ITR 354 (Ker). In that case, Cochin Refineries requested a foreign company 'F', to evaluate whether the coke produced from the blend of vacuum bottoms and clarified oil from Bombay High crude was suitable for making anodes for the aluminium industry. The tests were carried out in the USA in regard to which assessee made payment of Rs. 7,69,614. The assessee also paid Rs. 1,19,303 and Rs. 38,271 which were payments in the nature of reimbursement of the payments made to the personnel of the said consultant 'F'. All these payments were assessed under s. 9(1)(vii) of the Act. On a reference, the Hon'ble High Court held that the services rendered by the foreign company F, would be in the nature of tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not entitled to decide unilaterally the taxability of the hire charges in India in the proceeding under s. 195 of the Act. This decision has nothing to do with the issue before us whether reimbursement of crew salary and expenses are covered by s. 192 or otherwise s. 195 for the purpose of s. 40(a)(i) of the Act. The issue before us, as already stated above, is fully covered by the decision of jurisdictional High Court of Delhi confirming the decision of Tribunal in the case of HCL Infosystems Ltd. 28. The next decision cited by the learned Departmental Representative is in the case of Poompuhar Shipping Corpn. Ltd. vs. ITO. This case is related to the issue whether sum chargeable is tax is to be decided by the AO and not by person responsible for payment for the purpose of deducting tax at source. This appeal had arisen from the AO's order treating the assessee in default in respect of tax directed to be deducted at source, within the meaning of s. 201 of the Act and not rendered in the context of AO's right to disallow the expenses by invoking s. 40(a)(i) or otherwise s. 40(a)(iii) of the Act. We are concerned with the disallowance of expenditure within the meaning of s. 40 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable under the Act, the provision of s. 195 would not be applicable. In the present case, in the light of the discussions made above and in the light of the decision of the Tribunal, Delhi Bench in the case of HCL Infosystems (P) Ltd., which has been approved by the Hon'ble jurisdictional High Court, we have taken a view that the payment of crew salaries and expenses is chargeable to tax under the head "Salaries" in the hands of the concerned crew employees and the tax was, thus, deductible at source under s. 192 of the Act, and not under s. 195 of the Act. In this appeal, we are concerned about that the applicability of rigour of s. 40(a)(i) or s. 40 (a)(iii) to decide whether the payment made by the assessee towards crew salary or expenses can be allowed as deduction. In the light of the view we have taken above that the payment by way of reimbursement of crew salary and expenses is chargeable under the head 'Salaries', we may hold that the payments in question are not covered by s. 40(a)(i) of the Act but are covered by s. 40(a)(iii), which is applicable to any payment which is chargeable under the head 'Salaries', payable outside India or to a non-resident. 30. The AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to deduct tax at source in respect of the said payments chargeable under the head "Salary" under s. 192 of the Act. 31. To sum up, in the light of the discussion made and for the reasons given above and respectfully following the decision of jurisdictional High Court of Delhi in the case of Director of IT vs. HCL Infosystems Ltd., affirming the decision of the Tribunal, Delhi 'E' Bench, in the case of HCL Infosystems Ltd. vs. Dy. CIT, we hold that the payments by way of reimbursement of salary or expenses of crew members employed by the assessee are not to be treated as "fee for technical services" but are the remittances by way of "salaries" chargeable to tax under the head "Salaries", in respect of which tax was deductible at source under s. 192 of the Act and not under s. 195 of the Act, and since whatever tax found to be payable in India on "salaries" paid to crew members has been deducted under s. 192 of the Act, we find no reason to impute default on the part of the assessee for failure to deduct tax at source under s. 195 of the Act as the case is covered by s. 4G(a)(iii) of the Act and not s. 40(a)(i) of the Act. We, therefore, hold that no disallowance of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductible, since it is incurred to eliminate future recurring business expenditure. In this connection, reliance has been placed on the following: (i) CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC); (ii) CIT vs. Madras Auto Service (P) Ltd. Etc. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC). Further, DDL has also placed reliance on the judgment of the Supreme Court in CIT vs. Madras Auto Service (P) Ltd., in claiming the entire amount as a deduction in asst. yr. 2004-05. Although, in the financial statement, the amount paid by DDL to Dolphin A.S. has been claimed over the balance period up to which the management agreement is valid, for tax purposes the entire amount of the agreement has been claimed as a deduction in the current year itself. In this connection, reliance has been, inter alia, on the decision of the Bombay High Court in CIT vs. Bhor Industries Ltd. (2003) 180 CTR (Bom) 508 : (2003) 264 ITR 180 (Bom)." 33.1 The assessee was, therefore, required by the AO to show cause as to why the said expenditure be not disallowed as the same is of capital in nature as because the expenditure was expanded for acquiring intan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arterer (assessee company) and in case the charterer fails to do necessary repairs, the owner shall have right of withdrawing vessel from the service of the charterer without nothing any protest and without prejudice to any claim the owners may otherwise have against the charterers under the charter. Had there been in fact the managerial rights with the other company, the owners would have not stipulated such condition of taking back the drillship directly if any of the conditions of the charter hire are not fulfilled as in that condition, the owners were not entitled to withdraw drillship without consent of the manager company because of the managerial rights with that company. The most surprising fact regarding genuineness of agreement for acquiring managerial rights with Dolphin A.S. is that the agreement bears date of 17th Nov., 2004 i.e. after more than one year and two months from the date of mobilization of Drillship. The mobilization of Drillship was started on 9th Aug., 2003 and Drillship had reached in Indian territorial waters in November, 2003 and accordingly, stated operation in the first week of December, 2003. This fact has been confirmed in the affidavit dt. 12th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital expenditure has been debited to the P L a/c. and balance has been taken to the balance sheet. The assessee has however, claimed the entire amount as expenditure i.e. of Rs. 35,72,02,369 to come to loss declared in the return by placing reliance on several Courts' decisions which are distinguishable far the following reasons. The Authorised Representative claimed that the expenditure is of revenue in nature in view of decisions relied upon, the expenditure is hit by s. 40(a)(i) of the IT Act, and is therefore not allowable. 4.5 It has been categorically admitted vide order sheet entry dt. 24th Nov., 2005 that the payment was made in lump sum and outside India to a non-resident associate company. The expenditure has been debited to accounts which are claimed to have been maintained in India for India operations, the expenditure, therefore, enjoyed character of revenue nature, the same is not allowable in view of the provisions of s. 40 (a)(i) which reads as under: '(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the PE; nor shall account be taken in the determination of the profits of a PE of amounts charged (otherwise than towards reimbursement of actual expenses) by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the head office of the enterprise or any of its other offices.' The assessee company claimed to have made payments to Dolphin A.S. an associate company for managerial rights, therefore, in view of above provision of DTAA payment to Dolphin A.S., as associate enterprise against managerial rights is not allowable under DTAA also. 4.7 Keeping in view the above facts and circumstances, the claim of the assessee is rejected and the entire amount of Rs. 35,72,02,369 is disallowed and added back to the income of the assessee company under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Departmental Representative, on the other hand, supported the orders of authorities below and contended that the assessee's claim of expenses for acquiring management rights from Dolphin A.S. is not genuine and is merely a device to reduce the profit which was otherwise chargeable to tax. The learned Departmental Representative submitted that the AO as well as learned CIT(A) were very much justified in taking a view that the assessee's claim of acquiring management rights from Dolphin A.S. is nothing but the managed affairs intelligently engineered by an agreement entered into after the previous year was over and it was just to dodge Revenue, and thus it deserves to be disregarded and disbelieved. He also submitted that the various other agreements referred to in the agreement dt. 17th Sept., 2004 entered into with Dolphin A.S., cannot also be relied upon inasmuch as the copies of these documents are not properly authenticated or certified by the competent authority, and as such, no credence can be given to the aforesaid various agreements. 37. Rival contention of both the authorities have been considered and the orders of the authorities have been carefully perused. We have al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with ONGC. The learned Departmental Representative, on the other hand, reiterated the reasons given by the AO as well as learned CIT(A) raising the doubt about the genuineness of the agreement as well as about the acquiring any separate management rights in Belford Dolphin by the assessee from Dolphin A.S. 37.3 The first objection against the genuineness of the agreement of acquiring management rights over the drillship raised by the Revenue authorities is that the agreement of acquiring management rights over the drillship by the assessee is dt. 17th Sept., 2004, made after more than about one year from the date of mobilization of drillship, which was mobilized on 9th Aug., 2003 and reached the Indian territorial waters in November, 2003 and started drillship operation in the first week of December, 2003. The delay in malting written agreement after about one year from the date of actual operation of drillship created a strong doubt in the minds of Revenue authorities, who have taken a view that the alleged agreement is the assessee's managed affairs or strategy to reduce its tax liability. This very reason of the Revenue authorities, in our considered view, cannot by itself b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managerial rights over drillship were with some other company and the assessee company will have to acquire management rights from any other company for operation of drillship. The AO made a reference to cl. (a) of para 9 of the agreement for charter-hire, which is dealing with the condition of maintenance and operation and where it has been stated that during the charter period the vessel will be in the full possession and at the absolute disposal, for all purposes, of the assessee company and under their complete control in every respect. The AO further stated that if there had been in fact the managerial rights with some other company, the owner of the vessel would not have stipulated a condition of taking back the drillship directly by it in case the conditions of the charter hire are not fulfilled. The learned CIT(A) also highlighted the same reason in holding that the agreement for acquiring management right did not stand to reason and appeared to be an afterthought with a view to inflate the operating cost to the assessee. In this connection, the learned counsel for the assessee drew our attention to the chronology of events about the management rights of the drillship, hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntities was not mentioned in the charter hire agreement. In the light of the facts of the present case, we are of the considered view that a proper or useful enquiry about the history of management rights in the drillship claimed to be vested with different parties from time to time as explained by the assessee with documentary evidence, was required to be made before treating the agreement in question to be sham and bogus. At this stage, it is pertinent to note the fact that the copy of previous agreements between different entities from time to time as so mentioned in the agreement dt. 17th Sept., 2004 entered into between the assessee and Dolphin A.S., was not furnished by the assessee to the AO for his verification nor the event-wise details of transfer of drillship and its management right were given to the AO as so categorically mentioned by the AO in para 4.3 of his order. The assessee furnished only the copy of present agreement entered into by the assessee, before the AO. The complete particulars of past history were later submitted before the learned CIT(A), and then the learned CIT(A) narrated the same in his order. In such circumstances, we are, therefore, inclined to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for verifying whether the assessee and Dolphin A.S. both have made necessary accounting entries in the books about the liability of Rs. 35,72,02,369 paid or payable by the assessee to Dolphin A.S. for acquiring managerial rights in the drillship. 37.8 One more reason given by the learned CIT(A) in taking a view that the assessee has raised this claim of expenses for acquiring management rights in the drillship to avail a chance to get its tax liability reduced is that the assessee has made an alternate claim that the assessment of its total income be made at 10 per cent of the revenue received by it from ONCC under s. 44BB in case the assessed income to be determined by the AO under normal provisions of the Act exceeds the said limit of 10 per cent, and this apprehension of the assessee that assessed income to be determined by the AO would exceed 10 per cent of the receipts indicates a culpable state of mind recognizing the fact that the claim made in its return of income is false and may not be accepted by the AO. After due consideration, we do not find this very stand taken by the learned CIT(A) to be justified. Having regard to the scheme of presumptive taxation based on deem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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