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TMI Blog2012 (3) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to as 'CMS RDC') having its office at Michigan in USA. They were asked to produce the agreement with the said CMS RDC. After making a study of such agreement, Assessing Officer required the assessee to explain why it did not deduct the tax at source from the payments effected. Reply of the assessee could be summarized as under:- (a) The payments were salaries to the persons deputed by CMS RDC, who were given advances by CMS RDC. Therefore, it was only the reimbursement. (b) The amounts were treated by CMS RDC as money recoverable from assessee. (c) Since the income of the recipient was chargeable under the head 'salaries', it did not fall within the term 'fees for technical services' as defined in Explanation 2 to Section 9(1)(vii) of the Act. (d) The amounts paid were reimbursement of advances against salaries and was not a sum chargeable to tax as stipulated u/s.195 of the Act. Hence, assessee was not obliged to deduct any tax at source. 3. However, Assessing Officer was not impressed. According to him, payments made by the assessee to CMS RDC and payments by CMS RDC to deputed persons were two separate, and distinct set of transactions. Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly because these persons were foreigners, and had requested for payment of salary abroad, directly. Further, according to the assessee, the payments did not tantamount to fees for technical services. Without making a proper analysis of the situation, the Assessing Officer had come to a conclusion that CMS RDC was giving technical services to the assessee. 5. Ld. Commissioner of Income Tax (A) was appreciative of the above submissions. According to him, agreement between the assessee and CMS RDC was only a reimbursement agreement and not a supplementary to any agreement for technical know-how. Assessee had only reimbursed the money advanced by CMS RDC to the said persons and this would not result in any income to CMS RDC in India. Ld. Commissioner of Income Tax (A) took a view that the obligation to deduct tax would arise only when the non-residents had income chargeable to tax in India. Relying on the decision of Hon'ble Apex Court in the case of GE India Technology Centre (P) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234, Ld. Commissioner of Income Tax (A) came to the conclusion that there was no violation of Sec.195 of the Act by the assessee and hence, it could not be visited w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. At one place it says that the persons concerned named Mr. Henry Hoffman and Mr. Thomas W. Bowes were its employees, who were paid salaries whereas at another place the assessee has claimed that the payments effected to CMS RDC were only reimbursement of expenditure. 9(a) For Assessment Years 2002-03 & 2003-04, assessee has placed reliance on certain letters given by CMS RDC, USA. The first letter dt.21.03.07 read as under:- "CMS Resource Development Company is engaged primarily in the activities of providing various services in connection with the seconding of certain employees who have been identified from within CMS group of companies world wide as being qualified for the particular needs of certain companies with which CMS is affiliated. It is further certified that CMS Resource Development Company is not earning any net profit out of such activities." 9(b) The second letter dt.10.03.08 read as under:- "We refer to the agreements entered into between CMS Resource Development Company and CMS(India) Operations & Maintenance Co. Pvt. Ltd. entitled "Reimbursement of Cost Agreement" dated May 1, 2001 and "Agreement for Reimbursement of Cost for Deputation of Personnel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Before going into the issue, it will be appropriate to reproduce Sec.40(a)(i) of the Act, which has been relied on by the Assessing Officer for making the disallowance. "Sec.40. Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of any assessee- [(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) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective of the place of business or business connection of the non-resident entity in India such income has to be deemed as accruing or arising to the non-resident entity in India. Definition of the fees for technical services given in Explanation 2 to Clause (vii) of Sec.9(1) of the Act run as under:- "Explanation [2].-For the purposes of this clause, "fees for technical services" means 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) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]" Even if we consider the services rendered by the concerned persons as fees for technical services within the meaning of the above definition, assessee could still fall back on the Sec.90(2) of the Act, and say that Double Taxation Agreement between the two countries should be applied. Definition as per Double Taxation Agreement and that in the Act as to what is a fee for technical services di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment he is making to non-resident. It is to be appreciated that the payer has not to determine the tax liability of the total income of the payee. He has to consider the chargeability only in respect of the payment he is making to the payee. Further, sub-s. (2) states, "where the person responsible for paying any such sum chargeable under this Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient .."(Emphasis, italicized in print, supplied). Consider the words which are underlined by us (italicized in print). They clearly indicate that it is the payer who will first consider whether the payment or any part of it bears income character. Therefore, in our view, it is the payer who is the person to decide whether the payment he is making bears any income character or not. Now, we can visualize various situations that can arise for the applicability of s.195: (a) If the bona fide belief is that no part of the payment has any portion chargeable to tax, s.195 would be totally inapplicable. (b) If the payer believes that whole of the payment is income chargeable to tax, he will be liable to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) that an order passed under s.201(1) is an assessment order and the said decision has been affirmed by the Supreme Court in [2001] 171 CTR (SC) 546: [2001] 252 ITR 772 (SC)(supra). In any case, the liability of the payer cannot exceed that of the payee. And if the payer is dissatisfied with the order under s.201, he will recourse to appeal against the said order. Thus, interests of both the parties are protected. (b) If the payer believes that whole of the payment is income chargeable to tax and if he deducts and pays the tax, no problem arises. (c) If the payer believes that only a part of the payment is chargeable to tax, he can apply under s.195(2) for deduction at appropriate rates and act accordingly. No interest is jeopardized. (d) If the payer believes that a part of the payment is income chargeable to tax, and does not make an application under s.195(2), he will have to deduct tax from the entire payment. This is the mandate of the judgement in the case of Transmission Corporation (supra) and the relevant observation is on p.595 of the Report. Thus, the interest of the Revenue stands protected. (e) If the payer believes that the entire pay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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