9911796707
TMI Blog2006 (3) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... International Co-operation (hereinafter referred to as JBIC) which was formerly known as 'Overseas Economic Cooperation Fund' had signed a loan agreement with President of India on 10th February, 1988. JBIC had agreed to lend the President of India 26101 Million Yen under the loan agreement for the purpose of implementing Srisailam Left Bank Project Power Station. The loan carried a simple interest @ 2.75 per annum. The loan amount was to be utilized for the purposes of procuring goods and services specified in the loan agreement. The loanee was to authorize the then A.P. State Electricity Board to implement the project through the Government of A.P. The project as defined in the loan agreement was Srisailam Left Bank Power Station Project. Under clause 4 of the loan agreement the borrower was to authorize APSEB to implement the project. The borrower was to furnish JBIC with the progress reports for the project on a quarterly basis until the project is completed. Two further agreements were entered into by and between JBIC and the President of India on 28th February, 1995 and 12th December, 1997. Under the second loan agreement JBIC had agreed to lend a sum of 22567 Millio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the generators, turbines and the other equipment. 3.2 The second agreement dated 7th September, 1994 was entered into between APSEB and Sumitomo Corporation with respect to Gas Insulated Switchgear. This agreement provided for contract price of Japanese Yen 4126.30 Million. The obligations of Sumitomo Corporation are specified in the said Agreement. In accordance with this agreement the contract price is for the purposes of supply of 400 KV Gas Insulated Switchgears complete with SF6 Gas Metal annexed double gas bars and the various other items set out in the Agreement. The Agreement also envisaged a payment of 122 Million Yen only for the purposes of supervising the erection. APSEB did not get the Gas Insulated Switchgear installed by Sumitomo Corporation. A separate contract for installation of Gas Insulated Switchgear was given to Larsen and Toubro Limited. The consideration paid for such installation was in the sum of Rs. 27 lakhs. The assessee claimed that it was not a turnkey contract whereby the procurement and installation were both the obligation of Sumitomo Corporation; it was a pure and simple case of supply of equipment. 3.3 The third contract dated 25th April, 1995 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Further paragraph 1 of Article 7 of the DTAA between India and Japan clearly lays down that profits of Japanese enterprise can be taxed in India only if it carries on business in India through a Permanent Establishment. It lays down further that even if a Permanent Establishment is present, only so much of the profit as is directly or indirectly attributable to that Permanent Establishment can be taxable. In the present case, no part of the income of Sumitomo Corporation in regard to sale of equipment under the three contracts was attributable directly or indirectly to the Permanent Establishment in India. The services were rendered by Sumitomo Corporation for which a consideration is mentioned as a part and parcel of the supply contract between Sumitomo Corporation and APGENCO. There was no supervising and erection service at project site, which was independent of supply contract. There were innumerable parts, which were shipped by Sumitomo Corporation all of which had to be assembled at site. This assembly requires the persons with technical expertise. The services being totally incidental to the supply of the machinery and equipment, there was no obligation on the part of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad not been given any credit in the books of account maintained by the appellant. Consequently, there was neither a payment by the appellant nor a credit to Sumitomo Corporation in the books of account of the appellant as would attract the provisions of section 195 of the Act. (v) The ACIT ought to have appreciated that in substance, the payment made by the Sumitomo Corporation was as per the instructions of Government of AP/Government of India and that the Government of India treating it as a loan in favour of Government of AP and Government of AP in its turn treated it as a loan to the appellant APGENCO. (vi) The ACIT ought to have appreciated that the supply of equipment by Sumitomo Corporation did not result in any income chargeable under the provisions of the Income-tax Act and hence the basic condition of the provision as contained in sub-section (1) of section 195 of the Income-tax Act was not satisfied. The title to the equipment was transferred by Sumitomo Corporation to the appellant at the time such equipment was imported into India by the appellant and necessary taxes and duties were paid by the appellant to the tax authorities in relation to such import. In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration of facts of the case held at para 12.6 of his order that the contracts in question were not contracts of works or turnkey but one of sale. He held that the goods were not in deliverable state and hence the goods were sold in India. He applied the judgment of the Hon'ble Supreme Court in Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587 and held that assessee was liable to deduct tax as it had not approached the Assessing Officer. The Commissioner (Appeals) rejected the contention of the assessee that provisions of section 195 of the Act did not apply on the ground that there was constructive payment in favour of Sumitomo Corporation. He then considered the provisions of Double Taxation Avoidance Agreement (hereinafter referred to as DTAA) between India and Japan in para 16 of his order. He held that as per Article 7 of DTAA, the income was taxable in India and that provisions of section 195(1) were attracted. The Commissioner (Appeals) further held that in accordance with judgment of jurisdictional High Court in CIT v. Superintending Engineer, Upper Sileru (APSEB) [1985] 152 ITR 753 (AP), the liability to gross up was implicit. As far as payment to BHEL i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n various parties on terms of payment. Grounds 2, 3, 4 and 5 of the assessee's appeals dealing with the same read as follows: "(2) The learned Commissioner of Income-tax (Appeals)-V, erred in finding that there was an obligation on the part of the appellant to deduct taxes under the provisions of section 195 of the Act. In this behalf the Commissioner of Income-tax (Appeals) did not appreciate in proper perspective the submission of the appellant, that the appellant was not the payer of the amounts to non-residents and consequently there was no liability on the part of the appellant to deduct taxes. (3) The learned Commissioner of Income-tax (Appeals)-V ought to have appreciated that Japan Bank for International Corporation had given a loan to Government of India and that the Government of India in turn had given loan through Government of Andhra Pradesh to APSEB (predecessor of the appellant herein) and that the loan amount was for the purposes of implementation of Srisailam Left Bank Power Project. The payment of money having been made directly by the Bank of India, Japan Branch, against LCs opened in the said Bank by Government of India in favour of Sumitomo Corporation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lapse of several months used to issue Government orders giving clear instructions to the assessee as to the accounting treatment that was to be given in respect of the payments obtained by Sumitomo Corporation from Bank of India. The series of Government orders have been placed in the assessee's paper book from page 172 onwards. The learned counsel for the assessee submitted that the assessee had no control over the time of payment, actual payment, the quantum of payment and other particulars and it was only after long lapse of time that the payments obtained from Bank of India, Tokyo were communicated to the assessee for the purpose of accounting. He submitted that the accounting entries which have been passed in the books of account are by way of journal entries which were passed pursuant to the orders of Government of A.P. He submitted that the entries would show that the amount was paid by Government of India to Sumitomo Corporation though the assessee had credited the account of the Government of A.P. and shown the same as being owed and payable to the Government of A.P. He vehemently contended that it is on record that during the four years in question, there was no cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment to the non-resident and that such payment was to be made as mutually agreed to between the parties. The contract was only arranged in terms of the loan agreement dated 10-2-1988 and the manner of payment to be made in terms of loan agreement was mutually agreed. Thus he submitted that section 195 is clearly applicable to the facts of the case. As per the contracts between the parties, the mode or manner of payment by assessee to Sumitomo Corporation was mutually agreed to be made as prescribed in loan agreement dated 10-2-1988 entered into between the Government and OECF of Japan (now JBC). The assessee alone issued global tenders for execution of the projects and had the sole authority to negotiate and accept the bids of various tenderers and to specify its requirements. Neither the Government of India nor the Government of A.P. was party to any of the contracts between the assessee and M/s. Sumitomo Corporation. Thus he submitted that as far as the assessee and Sumitomo Corporation are concerned, one has to complete the works agreed to and the other has to make payment for the same. For non-payment of contract price by the assessee Sumitomo Corporation can only proceed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per law in force is effected before releasing such payment. If considered necessary, the appellant could have communicated with the agency of the Government of India i.e., Department of Economic Affairs, prior to the release of payment. It must be mentioned in this connection that the appellant had earlier experienced difficulties in interpreting the provisions of TDS in respect of payment to overseas parties and the Hon'ble jurisdictional High Court had already interpreted such provision in its own case as far back as in 1984 as has been reported in 152 ITR 753. Further, the decision of the Hon'ble Apex Court in the case of Transmission Corporation of A.P. Limited, a sister undertaking, has made it absolutely clear that even in case of a trading receipt in the hands of non-resident which mayor may not include pure income attracts deduction of tax at source under section 195(1) of the Act. This is because, the language of section 195(1) for deduction of tax at source by the payer is clear and unambiguous and casts an obligation to deduction appropriate tax at the rates in force. Therefore, I am of the opinion that in the case of the appellant even though the books of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medium of transfer of money. In the present case, the special procedure for payment adopted is slightly different from the conventional procedure. But, it is undoubtedly a case of constructive payment covered within the expression "any other mode" contained in the provisions of section 195(1). Therefore, the provisions of section 195(1) of the Act are squarely attracted." 9. The agreement in question was between the assessee and Sumitomo Corporation. The duties and liabilities between the parties were governed by these agreements. The assessee is the executing agency, which ultimately decides whether the contracting agency has complied with the terms of the agreement. The mode in which the finance has been found does not detract from the terms of the agreement. Coming to the reliance placed by the learned counsel for the assessee on the decision of the, Jodhpur Bench of the ITAT in the case of Hindustan Zinc Ltd. v. Dy. CIT [2002] 74 TTJ (Jodh.) 36, we find that the issue therein is not under section 195 of the Act. In that case payment was actually made to the Government of India and Government of India had made payment to Crown Agent to M/s. DML having received the money from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. It is the executing agency which triggers the payment and while passing a bill direction for deduction of tax as per section 195 while making a payment could be made by the assessee. No payment could have been released without the officers of the assessee-company passing the bills consequent to claim made by the contractor. Delay in passing of the entries in the books of account for whatever reason does not erase the fact that the payments have been made in the impugned assessment years. Once the payment is made section 195 of the Act is attracted. Thus we uphold the finding of the first appellate authority and dismiss this ground of the assessee. 10. The second issue is whether the equipment sold is to be considered as capital equipment and the sale having taken place outside India, for the purpose of ascertaining whether there is any liability on the assessee to deduct tax. Ground No. 6 of the assessee reads as follows: "The learned Commissioner of Income-tax (Appeals)- V, erred in not accepting the contention of the Appellant that insofar as the contracts for supplies of Turbines and Generators, Gas Insulated Switchgear Equipment, and 400 KV XLPE Cables are concerned, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that supervision was incidental to the sale of plant and machinery and, therefore, it must be treated as part of the sale price. Reliance was also placed on the decision of the Kolkata Bench of the Tribunal in the case of Dy. CIT v. ITC Ltd. [2002] 82 ITD 239. The proposition is that ancillary and subsidiary services linked to sale also partakes the character of sale and no part of income is taxable in India. He contended that sale has taken place outside India inasmuch as the contract for sale of Turbines and Generators as well as Switchgear clearly envisage that the title to the goods has passed outside India. His contention is that the contracts are FOB and freights were paid outside India. 12. The learned Standing Counsel for the Revenue, on the other hand controverts this argument and submits that contracts were turnkey contracts and not one of mere sale of equipment. At this juncture it was mentioned that the revenue filed additional ground of appeal in its appeals. He disputed the finding of the first appellate authority that the contracts in question were not turnkey contracts. He pointed out that the contracts were for supply as well as for setting up of the equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Viswanathan v. V.K. Elayawar [2001] 8 SCC 133. (7) C.G. Krishnaswami Naidu v. CIT [1966] 62 ITR 686 (Mad.) (8) CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad.) (9) Standard Triumph Motor Co. Ltd. v. CIT [1993] 201 ITR 391 (SC) He submitted that the following points emerge from a reading of the above decisions: (i) Time of transfer of property in goods depends upon the intention of the parties. (ii) Intention of the parties to be gathered from the terms of the contract. (iii) Bill of lading operates as transfer of goods and in FOB contracts, it passes to seller when goods are put on board unless intended otherwise by the parties or is subject to special agreement. (iv) In the case of ascertained goods in an undeliverable state, property passes only when they are put in a deliverable state. He distinguished the decision relied on by the learned counsel for the assessee and submitted that in the case of Sundwiger EMFG & Co. by stating that it was not a case where the facts or issue involved were similar to those obtaining in the present case. On the reliance placed by the learned counsel for the assessee on the decision of the Apex Court in CIT v. Motor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s certain amount of control over the assets sold even after the sale, it does not mean that the sale has not taken place earlier. He specifically referred to page 423 of the judgment which reads as follows: "But, where however, the seller exercises a right of disposal or where he agrees to deliver the goods at their destination, the carrier is the seller's agent and the delivery is not a final appropriation. The intention of the parties is, therefore, one of the important elements in determining the situs where the property passes to the buyer in pursuance of the contract." He distinguished the case law relied on by the learned Standing Counsel and submitted that these are contracts of sale pure and simple and the same had taken place outside India. 13.1 On the issue whether the contract is work contract or turnkey contract, and on the additional ground raised by the department, he submitted that the ground itself was belatedly raised and the Standing Counsel sought to rely upon the pre-contract documents, tender document, quotations by different parties and correspondence with parties to show that it was a works contract and not a contract for sale. He referred to paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract. In this case there are three contracts. The first relates to pump-turbines, inlet valves, motor generator sets, associated auxiliary control and ancillary equipments. The second contract relates to 400 KV Gas Insulated Switchgear. The last contract relates to 400 KV XLPE Insulated Power Cables. 15. As far as 400 KV XLPE Power Cables are concerned, the question of they being brought to India in knocked down condition does not arise. The question of assembling or erection also does not arise. Section 44BBB of the Act applies only insofar as local service contract for installation of these cables is concerned. M/s. Sumitomo Corporation estimated the income from such activity and has already paid taxes thereof. The contract agreement dated 25-4-1995 is for the production and supply of such goods and the assessee is termed a buyer. In clause 4 of the covenant, the buyer agrees to pay the contractor for providing goods, the term services is conspicuously absent. Coming to the other two contracts, the machinery in question has been put on board at a Japanese port FOB in knocked down condition. It was the assessee-company which brought these goods into India and thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct becomes completely operational on operating the switch. Thus purchasing a plant and machinery in this sense of the term can be called a turnkey job. Definitely it is distinct from the term works contract. The issue of consideration should be whether it is a "contract of work" or a "contract of sale". We do not see any merit in the argument of the learned Standing Counsel on this issue as it is the assessee-company, which has put up the power plant and only certain plant and machinery, were being purchased. Such purchase of plant and machinery just because they have to be handed over in a ready to function manner, does not make a supply contract into a turnkey contract in the sense that turnkey is used to mean that the entire power project from the beginning to the end is constructed and handed over in a ready to use manner. In Black's Law Dictionary, seventh edition, under the head engineering, procurement and construction contract, turnkey contract is termed as: 'a fixed-piece, schedule - intensive construction contract - typically used in the construction of single purpose projects such as energy plants - in which the contractor agrees to a wide variety of respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Srisailam Left Bank Power Station Project. The Retainer Consultant shall perform the services under this contract in accordance with the technical bid and terms of reference set forth as follows: 3.2 Scope of services by the retainer consultant. 3.2.1 The Retainer Consultant shall review the Project Report prepared by APSEB/CEA/CWC and advise the APSEB/CEA/CWC on the layout of water conducting system and underground caverns as well as that of equipments covering pump turbines, motor generators, transformers, processor based control and relaying equipment, EHV cable system. Bus ducts, Gas insulated/AIR insulated/Oil insulated indoor and outdoor switchgear and ancillary and auxiliary equipment for efficient operation of power house etc., or any specific problems which may be referred by APSEB/CEA/CWC. 3.2.2 To advise on any clauses of technical nature of the tender documents prepared by APSEB/CEA/CWC. 3.2.3 To advise and render assistance in technical evaluation of bids, as stipulated in Appendix "D" hereto wherever considered necessary by APSEB/CEA/CWC. 3.2.4 The Retainer Consultant shall assist APSEB/CEA/CWC on the review of vendor drawings and related calculation shee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t technical know-how to CEA/CWC in design and engineering of pumped storage projects in addition to Srisailam Left Bank Power Station, if so desired by these organizations, as supplemental Consultancy Service subject to mutual consent. 3.2.18 The Retainer Consultant shall assist APSEB/CEA/CWC in submitting and reporting various kinds of documents to OECF and in applying for their approval. 3.2.19 To attend the co-ordination meetings and any other meetings at site of work and other places in India by mutual consent." 16.2 We have taken the above extracts as a sample for enabling us to come to a conclusion as to whether the contract in question can be considered as turnkey contract or a supply contract. The nature of services contemplated in these contracts are vital for the decision. In our considered opinion a combined reading of the terms and conditions of these agreements fortify the view of the Assessing Officer as well as the first appellate authority that the contracts in question are not turnkey contracts as being claimed by the learned Standing Counsel but were contracts for supply. The Hon'ble jurisdictional High Court in the case of Sundwiger EMFG & Co. had consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e embedded on the steel plate and delivered at Visakhapatnam. The assembling at the Visakhapatnam Port was to be done at the expense of the Port Trust. The term "erection" used in the contract meant payment of wages to the German supervising engineer and his travel expenses. Under clause 12(a) of the contract, the purchase price for the equipment was payable in German currency in Germany. Part of it was payable on conclusion of the contract and the balance was payable in twenty semi-annual instalments." The Hon'ble High Court further held as follows: "(ii) that the agreement providing for supervision of the installation work did not amount to business connection nor did the agreement with the Poona company amount to business connection between the non-resident and resident within the meaning of section 9 of the Indian I.T. Act. Even assuming that all the profits of the German company were to be deemed to have accrued or that all the profits of the German company were to be deemed to have accrued or arise in India by virtue of section 9 the terms of art. III of the Indo-German Agreement would prevail over section 9; (iii) that there was nothing in the contract between the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amount of the unpaid price cannot be said to be a loan advanced by the non-resident company to the assessee-company nor can the non-resident company be said to be a lender to the assessee-company so far as that amount was concerned. Since the non-resident company cannot be said to have lent the amount of unpaid purchase price to the assessee-company either in cash or in kind, there is no question of interest payable by the assessee-company to the non-resident being deemed to be "income" accruing or arising from any money lent at interest and brought into India in kind. Hence, the alternative argument urged on behalf of the revenue must be rejected since there was no money lent by the non-resident company to the assessee-company though the amount of the unpaid price was undoubtedly a liability which the assessee-company owed to the non-resident company." After extracting several authorities on the point, the Court observed in para 48 thereof, as under: "But when all is said and done, we find that in everyone of these cases the proper law of the contract was applied, that is to say, the law of the country in which its elements were most densely grouped and with which fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be most densely grouped with the country, namely, Italy, where the non-resident company, Messrs Ansaldo is carrying on its business of supplying plant and machinery and hence the debt which the assessee-company owed to the non-resident company was not an asset held by the non-resident company in India. Therefore, the interest which was payable in respect of this debt was not income arising from or through any asset held by the non-resident company in India. Since the non-resident company had no income accruing or arising in India, It cannot be said that there was any liability of the non-resident company to pay income-tax on the amount of interest of the three instalments and, consequently, there cannot be said to be any liability of the assessee-company as the agent of the nonresident company so far as this aspect of income accruing or arising through or from any asset held by the non-resident company in India was concerned." Applying these tests, we have to necessarily conclude that most of the elements of this contract were found to be most densely grouped in Japan, and thus the situs of the contract, though signed in India, has to be held as one which is Japan. 17. Thus in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance tax by Sumitomo Corporation does not come to the rescue of the assessee as the impugned order is one passed under section 201 of the Act and not one which is passed under any regular assessment. 18.1 The judgment of the Hon'ble Gujarat High Court in the case of Rishikesh Apartments Co-operative Housing Society Ltd. is not applicable to the facts of the case as per the learned Standing Counsel as there was no regular assessment in the case of Sumitomo Corporation. It was further submitted that the Hon'ble Gujarat High Court had not considered the judgment of the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. as well as the jurisdictional High Court's decision in the case of Superintending Engineer, Upper Sileru. 19. After hearing both the parties, we are of the considered opinion that the assessee definitely had obligation in this case to deduct tax under section 195 of the Act. This is also not disputed by the assessee. The only claim of the assessee is that there was no question of levying any interest on the assessee under section 201 (1A) as the amounts which were payable to the Revenue have been duly paid directly. The Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s view at page 776 which reads as follows: "It should also be borne in mind that whatever tax is deducted at source under section 195 from out of the gross sum is not irretrievably lost to the recipient. It is only a provisional payment which will be made to the Central Government to the credit of the recipient. The provisions of the Act enable the recipient, whether such recipient is a resident or non-resident, to file a return of income in the regular course and prove to the satisfaction of the ITO the income chargeable under the Act. After such determination, if the tax provisionally deducted at source under any of the provisions contained in Part B of Chapter XVII is in excess of what is required to be paid, the ITO is bound to grant refund of the excess tax deducted at source with interest to the recipient. Thus, the interests of the recipients are fully protected under the scheme of the Act. We do not see any ground for the person responsible for making the payment to object to the deduction of tax at source provisionally either from sums which represent wholly income or from sums which represent only a part of the income chargeable under the provisions of the Act, so long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any person continues to be in default. The proposition that when no portion of the gross sums estimated can be considered as income accrued or arisen in India then liability to deduct tax under section 195 does not arise, is supported by the decision of the ITAT reported in Maharashtra State Electricity Board v. Dy. CIT [2004] 90 ITD 793 (Mum.) as well as in the case of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.). Our view is further supported by the order of the Mumbai Bench 'B' of the Tribunal in the case of Dy. CIT v. Excel Industries [2006] 5 SOT 235 wherein it has been held as follows: "Section 201, read with sections 17(2) and 221 of the Income-tax Act - Deduction of tax at source - Consequence of failure to deduct or pay - Assessment year 1996-97 - Whether levy of interest under section 201(1A) is a posterior action to declaring an assessee-employer as deemed to be in default and where no fault can be found with employer for not deducting tax on some controversial addition or deducting and paying tax on an honest and fair estimation, he cannot be declared as an assessee deemed to be in default, and, therefore, question of levy of interest under section 201(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the regular assessment of an employee had been completed and the amount of tax fully paid by him, the Income-tax Officer (TDS) has no jurisdiction under section 201 of the Income-tax Act, 1961, to demand further tax from the employer in respect of tax short-deducted relating to such employee." 19.4 In case the Revenue feels that during the period of default i.e. the actual date on which the tax is due for deduction and remittance and the date of payment by the deductee, it had lost some interest thus calling for levy of interest for that period under section 201(1A), we find that the Act provides that the deductee pay interest under section 234C and in case the prepaid tax falls short of requirement of advance tax payments. The interest of the Revenue is well taken care of by interest levied under section 234B i.e. interest for default in payment of tax and 234C being interest for deferment of advance tax. The section, i.e. section 201, in our considered opinion, can be enforced if the deductee has not filed his return of income, of if the deductee is an assessee in default for reason of non-payment of taxes. 19.5 On the other hand, if such levy is permitted it would cause p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be a direct payment by the assessee concerned. The word 'paid' does take into its fold the payment made directly by the assessee concerned. The Revenue's contention that it is not possible for it to ascertain the assessment details of the deductee and that the T.D.S. Officer cannot verify whether the deductee offered this turnover/income to tax is not tenable for the reason that, the information can be easily obtained by requisition of the details from the concerned Assessing Officer as he is also from the department, and by directing the assessee to furnish the same. Even otherwise, if the T.D.S. Officer apprehends under assessment, the same may be brought to the notice of the jurisdictional Assessing Officer of the deductee for suitable action. The T.D.S. Officer cannot plead helplessness especially when the entire resources of the Deptt. are available with him and when the statute confers power on him. Thus in our considered opinion, the assessee cannot be held to be an assessee which is deemed to be in default, when the deductee has filed its return of income and the revenue has accepted the same. 19.7 We find that the issue is as to whether the T.D.S. has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods purchased in the course of regular trade, tax should be deducted at source under section 195 of the Act. 19.8 The learned Standing Counsel has rightly pointed out that the very same assessee was party to the judgment in the case before the Hon'ble A.P. High Court as well as the Hon'ble Supreme Court on the issues and despite suffering adverse decision in these cases has been careless in the present issues also. 20. Now we come to ground Nos. 7 & 8 of the assessee, which read as follows: "7. Alternatively without prejudice as directed by the Central Board of Direct Taxes in its Instruction No. 1767, the learned Commissioner of Income-tax (Appeals) V, ought to have estimated the income accruing to Sumitomo Corporation in India on account of the transaction of sale could not exceed 10% of 10% or 1% of the sale consideration, which alone should have been subjected to tax under section 195 of the Act. 8. At any rate and without prejudice the estimation of income from the said contracts at 15% is excessive, arbitrary and unreasonable having regard to the fact that in the case of APTRANSCO from identical activities the income had been estimated at 10% of the contract val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e referred to the correspondence on which Department relied on to show that all the processes of decision making which is key in any managerial function had taken place outside India and application of mind was entirely outside India. The mere act of receiving letters from the appellant and others and transmitting the same to Japan or receiving communication from other places and forwarding the same to the assessee, as per the learned counsel, did not constitute an income generating activity of the permanent establishment. (4) Alternatively, without prejudice to his contention that Sumitomo Corporation had no permanent establishment in India, he submitted that even if it is assumed that there is a permanent establishment, the same did not do any tangible work in India and thus no part of the income which was accrued to Sumitomo Corporation under these contracts in India can be attributable to the permanent establishment. (5) Referring to the EPDC contract, he submitted that though there is a finding by the Commissioner (Appeals) that they have a permanent establishment in India, there is no finding by the Assessing Officer or the Commissioner (Appeals) as to what is the work do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , on the other hand, disputed the contention of the assessee and submitted that the first appellate authority has erred in scaling down the estimation to the rate of 15%. He vehemently contended that the Commissioner (Appeals) has failed to give any basis for restricting and adopting the said rate especially when it is not a case of regular assessment. He contended that the T.D.S. Officer has no jurisdiction to assess the income in its pure, simple and strict sense. Whatever liability raised by the TDS Officer is only temporary in nature and any excess TDS is liable to be adjusted or refunded at the time of final assessment on production of the TDS certificate. 21.1 On the point of Article 5 & Article 7 of the DTAA between India and Japan, the learned Standing Counsel submitted that the definition of "Permanent Establishment" as occurring in Article 5 considered in the light of the documents annexed under the heading "Permanent Establishment in India" in Book-I, II and III, as per the learned counsel, clearly and flinchingly establishes that Sumitomo Corporation has a permanent establishment in India and that the profits earned by the non-resident are attributable to the permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecially: (a) a place of management; (b) a branch; (c) an office; (d) a factory (e) a workshop; (f) a mine, an oil or a gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or other sales outlet; and (j) an installation or structure used for the exploration of natural resources, built only if so used for a period of more than six months. 3. A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months. 4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project, which is being undertaken in that Contracting State. 5. Notwithstanding the provisions of paragraphs 3 and 4 an enterprise sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. 9. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." "Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Subject to the provisions of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plate that each and every work has to have a separate and independent permanent establishment. 'Permanent Establishment' is an inclusive definition and under article 5(4) there is deeming provisions which in our view applies to this case. The deductee had a place of management as well as a building site for more than six months, and it suo motu filed its returns of income. Thus on this sole fact itself, we uphold the contention of the learned standing counsel. Thus the finding of the first appellate authority that the assessee has permanent establishment in India in terms of article 5 of the DTAA is upheld: 23. This brings us to the question whether any part of the transaction should be attributable to the permanent establishment in India. Various correspondences filed by the parties show that the permanent establishment in India was not merely post office but was something more than that. The supervisory personnel of the non-resident company have spent a number of years i.e., beyond the period of six months in this country and this factor goes against the claim made by the assessee. Thus we uphold the findings of the first appellate authority on this issue also. The argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electricity Board to pay tax deductible under section 195 in respect of the entirety of the payments made to M/s. Charmilles Engineering Works Ltd in R.C. 203 and to M/s. Oerlikon Engineering Company in R.C. 205. It must be remembered that the order was passed under section 201 of the Act. For the purpose of determining the tax in respect of which the person responsible for making the payment could be deemed to be in default, the ITO must determine the tax only on the appropriate proportion of income chargeable under the Act. There is no prohibition in section 201 of the Act. In the face of the ITO's own acquiescence that, in respect of erection charges paid to the other companies, the net profit could not exceed 25 per cent, it is not possible to uphold the ITO's action in determining the tax with reference to the gross sums of money in R.C. 203 and R.C. 205. As already mentioned, the power to determine the appropriate amount of tax is referable to section 201 of the Act and the fact that the assessee did not file an application under section 195(2) for determination of such appropriate proportion is not relevant for the purpose. In any event, this is the only way the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments and is not dependent in any way of the sales of the effected by the resident. It can be inferred that the transactions are on the basis of principal to principal." Paras 2 & 3 of the Circular reads as follows: "2. Non-resident company selling goods from aboard to its Indian subsidiary- (i) A question may arise whether the dealings between a non-resident parent company and its Indian subsidiary can at all be regarded as on a principal to principal basis since the former would be in a position to exercise control over the affairs of the later. In such a case, if the transactions are actually on a principal to principal basis and are at arm's length and the subsidiary company functions and carried on business on its own, instead of functioning as an agent of the parent company; the mere fact that the Indian company is a subsidiary of the non-resident will not be considered a valid ground for invoking section 9 for assessing the non-resident. 3. Sale of plant and machinery to an Indian importer on instalment basis - Where the transaction of sale and purchaser is on a principal to principal basis and the exporter and the importer have no other business connection the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answered in favour of the assessee by applying the ratio of the judgment of the jurisdictional High Court. Thus the argument of the learned counsel for the assessee that at best, certain percentage of the amount received towards services which is 2.63% in the case of main generation equipment and 2.91% in the case of 400KV Gas Insulated Switchgear can only be considered as income attributable to permanent establishment and this alone can form the basis for holding that the person is liable in terms of section 195 of the Act is upheld. 26. This leaves us with ground Nos. 9 & 10 which read as under: "(ix) The learned Commissioner of Income-tax (Appeals)-V, erred in holding that the provisions of section 195A of the Act applies to all the contracts, and that therefore grossing up had to be done for deduction of tax. (x) Having regard to the clear provisions in the contract, appellant had no liability to bear tax insofar as the Gas Insulated Switchgear Equipment and 400 KV XLPE Cables are concerned. Even insofar as the Generators and Turbines are concerned, the appellant had declined to accept the liability with respect to payment of Indian taxes. The fact that the parties had ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions as well as the additional ground filed by the assessee, we find that the agreed position is that there is no categorical covenant whereby it is stipulated that either the Government of India or the assessee has undertaken the liability to pay taxes of the deductees on to themselves. On the contrary, the assessee has specifically denied that it would undertake the liability to pay the taxes. When there is no specific agreement then it follows that only the non-resident company is responsible for paying the income-tax on the transaction or the income that accrued to it and none else. Thus the case of grossing up simply does not arise. Reference to section 10(6A) or section 10(6B) does not arise. Thus the issue of grossing up is decided in favour of the assessee. 27.1 As all the issues were argued at length over a period of time and as the written submissions have been filed by both the parties, we have decided to give our findings on each of the issues though the appeals could have been disposed of by just giving a finding on the issue as to whether the contracts in question are simple sale contracts and not works contracts and as to whether any income can be said to have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
