TMI Blog2010 (3) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the assessee also, to treat the assessee in default . However, as of today, the position is that VOAMC is not treated as liable to pay any tax. We, thus, answer the question No. 1 in favour of the appellant/assessee holding that the assessee was not liable to deduct tax at source under Section 195(1) of the Act in respect of the mobilization and demobilization costs reimbursed by the appellant to VOAMC. The assessment proceedings in VOAMC are reopened and the final view taken is that the VOAMC is assessable to tax, the assessee herein would also be treated as assessee in default , which would attract the consequences provided under Section 40(a)(i). - 439 of 2008. - - - Dated:- 15-3-2010 - A.K. SIKRI and SIDDHARTH MRIDUL JJ. Ajay Vohra with Ms. Kavita Jha and Ms. Akansha Aggarwal for the appellant. Ms. Sonia Mathur for the respondent. JUDGMENT 1. A .K. SIKRI, J. - 1. This appeal was admitted on the following substantial questions of law: (i) Whether on the facts and in the circumstances of the case the Tribunal erred in holding that the appellant was liable to deduct tax at source under Section 195(1) of the Act in respect of the mobilizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on incurred by VOAMC on the basis of invoices received by VOAMC from the non-resident service providers. 4. The appellant had filed an application with DCIT, Circle 2(2), International Taxation, New Delhi (DCIT) for issuing NIL tax withholding certificate in respect of reimbursement of various costs required to be made by the appellant to VOAMC, on the ground that the amount represented pure reimbursement of expenses and thus, there was no income liable to tax in India in the hands of VOAMC. The DCIT held that the reimbursement of costs to VOAMC were liable to tax in India and determined 11% of the reimbursement amount as the profit arising to VOAMC in India and directed the appellant to deduct tax at source on the above basis. The appellant, in accordance with the aforesaid order, had deducted tax at source in respect of mobilization and demobilization charges of Rs.6,985,26,456/- reimbursed to VOAMC. 5. In the return filed by the appellant, it declared loss of Rs.1,94,87,912/- after claiming certain deductions. It included the deduction for the aforesaid mobilization and demobilization cost of Rs.8,65,57,909/-. The Assessing Officer (AO) in the assessment order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anpower for the execution of the contract has been provided by Van Oord ACB BV. Technical details and know-how are also provided by them. (v) The Tribunal thus recorded the finding of fact to the effect that the assessee company was a dependent agent Permanent Establishment of the foreign company. Therefore, the reassessment of expenses in respect of Mob cost to the above said foreign company was to be subjected to payment of tax. 8. From the reading of the orders of the Tribunal, following discussion emerges: The Tribunal was of the opinion that for resolving the issue, it was to be determined as to whether the tax authorities below were justified in disallowing a sum of Rs.8,65,57,909/- claimed by the assessee as mobilization and demobilization cost debited by the assessee under Profit Loss account under Section 40(a)(i) of the Act. It then took note of the fact that the said provision of Section 40(a)(i) of the Act is substituted by the Finance Act 1988 with effect from 01.04.1989, which was relevant to the Assessment Year 2003-04 and concluded that the payment made by the assessee to VOAMC in respect of mobilization and demobilization charges was covered within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd limited to the extent as laid down by the Apex Court in their order (Supra) i.e. that the payer/assessee is duty bound to deduct tax at source for the payments made to non-residents at the appropriate rates as provided under these provisions. The payer cannot escape the liability for doing so unless a certificate from ITO is obtained for the deduction of the tax either at a rate lower than the rate as prescribed or for non-deduction of tax at source and that the duty of the payer ends here only and he is not required to examine and look into other aspects beyond this like whether the payer received the services from the non-resident to whom such payments were made or from some other person through the non-resident; whether such receipt in the hands of the recipient non-resident would be his income or part of it would be his income on which he is liable to pay tax. The payer is not expected to step into the shoes of the Assessing Officer for examining whether the receipts in the hands of the recipient is income or not whether he is liable to pay thereon or not. . 33. Thus, in view of our detailed discussions and applying the ratio of the decision of the Apex Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 195 of the Act, is that under this provision the assessee is under obligation to deduct the income tax at source if the payments are to be made to a non-resident. In case the assessee feels that no such deduction is required or deduction is required at a rate lower than the prescribed rate, he is under obligation to move an application before the Assessing Officer for obtaining a certificate to this effect. In case such application is rejected or the assessee does not make any such application, he is duty bound to deduct the tax as per the prescribed rates in force at the relevant time. It is not for the assessee to decide the taxability of payments made by it in the hand of the non-resident recipient and that is a separate issue and in the absence of any certificate obtained from the concerned Assessing Officer under Section 195(2), it is obligatory on the part of the assessee to deduct tax at source from the payments made to the concerned non-resident. If this is not done, the consequence enlisted under Section 40(a)(i) of the Act shall follow. The authorities would not even be required to look into whether such payments are income or part of income in the hands of the recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Act. The various sections in Chapter XVII-B, viz., Sections 192 to 194LA required deduction of tax at source by the payer at the time of making payment to the recipient or at the time of credit of income, whichever is earlier. According to him, the reason for fastening the obligation to deduct tax at source out of payment to non-resident only in a situation where such payment is chargeable to tax in India, is not far to seek. The deduction of tax at source is not an idle formality. It is not the intention of the law to fasten an absolute liability on the remitter to deduct tax at source from the payment made to the non-resident, notwithstanding that the payment is not chargeable to tax in India and then subject the non-resident to the rigorous process of (a) filing return of income in India to seek refund of tax deducted at source and (b) assessment on the basis of such return. Where the remitter/non-resident is of the opinion that some part of the income may be chargeable to tax in India, the remitter/non-resident can approach the AO in terms of Section 195/197 of the Act to determine the appropriate proportion of the income that would be subject to tax in India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. Learned counsel for the respondent, on the other hand, reiterated and relied upon the reasons given by the Tribunal. She further pointed out the following points during the proceedings under Section 195(2): a) The assessee was asked to produce certain documents, which were absolutely necessary to determine as to whether or not any profit element is embedded in the remittance of the expenses. The DCIT, in absence of any documents proceeded to estimate the profit element on the basis of industry trend in general at 11% of the total receipt. In this view of the matter, the statutory obligation of the assessee with regard to deduction of tax at source was fully crystallized and, therefore, there was no justification on the part of the assessee not to deduct tax at source particularly when the order passed under Section 195(2) had attained finality. b) The assessee itself has added block expenditure in respect of payments made and holding company on sister concerns as equipment rent as disallowable under Section 40a(i), as no TDS was deducted therefrom. c) The assessee deducted tax at source in respect of payment made to Van Oord ACZ Equipments BV at 40.72% on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t judgment itself, would clearly depict the mind of the Court that liability to deduct at source arises only when the sum paid to the non-recipient is chargeable to tax. Once that is chargeable to tax, it is not for the assessee to find out how much amount of the receipts is chargeable to tax, but it is the obligation of the assessee to deduct the tax at source on the entire sum paid by the assessee to the recipient. This observation of ours is based on the following extracts from the said judgment: The scheme of Sub-sections (1), (2) and (3) of Section 195 and Section 197 leaves no doubt that the expression any other sum chargeable under the provisions of this Act would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. Consideration would be - whether payment of sum to non-resident is chargeable to tax under the provisions of the Act or not? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum. What would be the income is to be computed on the basis of various provisions of the Act including provisions f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proportion of the sum which is so chargeable. 21. One can, therefore, reasonably say that the obligation to deduct tax at source is attracted only when the payment is chargeable to tax in India. This position in law further gets strengthened from the reading of some other judgments relied upon by the learned counsel for the assessee. In the case of Commissioner of Income Tax Vs. Estel Communications (P) Ltd. [2009] 318 ITR 185 (Del.); 217 CTR 102, this Court, while dismissing the appeal of the Revenue, held that the Tribunal had rightly come to the conclusion that there was no income of the non-resident liable to tax in India, the obligation to deduction of tax at source did not arise. Likewise, the Karnataka High Court in the case of Jindal Thermal Power Company Limited (Earlier Known as Jindal Tranctebel Power Company Ltd.) Vs. Dy.Commissioner of Income Tax [2009] 182 Taxmann 252 Karn; [2010] 321 ITR 31 (Karn) made the following pertinent observations: The decision however does not lay down that the person is obliged to effect TDS u/s 195 has no right to question the assessment of tax liability. Since in law, if TDS is not effected by the payer (Jindal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident and secondly the person responsible should consider that the whole of such sum would not be chargeable to income-tax in the case of the recipient. To put it in simple words if a sum of Rs. 100 is to be paid to the non-resident which is otherwise chargeable to tax, but the person responsible for paying it considers that the entire Rs. 100 would not be taxable in the hands of the recipient but only a sum of, say Rs. 40, will be chargeable to tax because of the availability of certain deductions against such income substantially reducing the amount of chargeable income in the hands of the non-resident, then such person responsible for paying shall apply to the Assessing Officer to make a general or special order to the effect that only a sum of Rs. 40 shall be chargeable to tax. On the determination by the Assessing Officer of such amount chargeable to tax at Rs. 40 or whatever amount, the person responsible shall deduct tax only on the amount so determined and not on Rs. 100. From the detailed discussion under the succeeding main head, we will also notice that Where the payee is not liable to pay tax on the amount of income received by him without deduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a presumption of liability of the payee to tax on the income. As discussed in an earlier para that if there is no or lower liability of the payee to tax on the income so received without deduction of tax at source, then the payer cannot be treated as assessee in default for the whole or that part of the amount, as the case may be. It is therefore clear that though the duty of deduction of tax at source was there at the time of making the payment or crediting the account of the payee, but its failure will not lead to adverse consequence by treating the person paying the income as assessee in default if eventually either the payee is not liable to tax on such sum or he has already paid the tax due on the amount of income so received. Thus the question of treating the person responsible for paying the income as assessee in default by way of passing the order under Section 201(1) is inter alia, tied with the tax liability of the payee on such sum. In the like manner where the payee has not offered such income for taxation and there is no remedy available with the AO for taxing such income in the hands of the payee, i.e., the time-limit for taking action against the payee under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side. 23. In this scenario, what would be the impact of Section 195(2) of the Act? No doubt, sub-Section (2) of Section 195 enables a person responsible for paying any such sum chargeable under the Act to a non-resident to seek determination as to whether tax shall be deducted under sub-Section (1) or not. However, indubitably, this is only a tentative determination. At that stage, the final view is not taken as to whether the recipients of the payments is liable to pay income tax in India or not. We, thus, feel that the scheme of the Act, insofar as it relates to deduction of tax at source is concerned, particularly under Section 195 of the Act, provides that liability of the payee, i.e. the assessee, to deduct tax at source would arise when the payment is made to non-resident, not being a company, or to a foreign company and such payment is chargeable under the provisions of the Act. However, if the payee considers that whole of the said sum would not be income chargeable in the case of the recipient, he may move an application to the Assessing Officer to determine this aspect. Once such an application is moved and it is determined that the payment is income chargeable at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is rejected by Assessing Officer and direction is issued by the Assessing Officer to deduct such tax at a particular rate the payer is duty bound to deduct tax as per the directions of Assessing Officer and in case no such application for obtaining the certificate was filed before the Assessing Officer then the payer is duty bound to deduct tax as per the prescribed rates in force at the relevant time. (e) The order of the Assessing Officer under Section 195(2) of the Act is tentative in nature. (f) In the assessment proceedings relating to the assessee when it is found that the assessee was required to deduct the tax at source in the eventuality contemplated in (d) above, the assessee would not be permitted to argue that the amount paid to the recipient is not chargeable under the provisions of the Act. The assessee may be treated as in default and would suffer the consequences provided under the Income Tax Act. However, in case in the assessment proceedings relating to the recipient, it is ultimately held that the sum received by the recipient was not chargeable to tax, the effect of that would be that it was no obligation on the assessee to deduct tax at source on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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