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TMI Blog2015 (1) TMI 1168X X X X Extracts X X X X X X X X Extracts X X X X ..... at General Electric group was manufacturing equipment relating to oil and gas, energy, transportation and aviation, for supply to customers in India. After a survey under Section 133A at the premises of General Electric International Operations Company Inc. ("GEIOC"), the liaison office, reassessment proceedings were initiated against several entities of the GE group for assessment years (AYs) 2000- 2001 till AY 2006-07, on 31.3.2008. The respondents in these appeals are 8 such entities ("assessees") i.e. GE Packaged Power Inc., GE Jenbacher Gmbh, Nuovo Pignone Spa, GE Engine Services Inc., GE Energy Parts Inc., GE Aircraft Engine Services Ltd., GE Engine Services Malaysia, and GE Japan Ltd., over various AYs. The assessees filed NIL returns of income and sought reasons for reopening assessment, which were duly provided. Objections to reassessment were disposed of, and notice under Section 143(2) was issued, and final assessment order was issued. The Assessing Officer (AO) found that the assessees had a permanent establishment ("PE") in India. The taxable income of the assessees was computed by attributing some percentage of the sale price/consideration received as profits to the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct tax, the assessee is assumed to have played some role in the non-deduction of tax at source by the payer, and interest under Section 234B is payable by the assessee. 5. Specific reliance was sought to be placed by the revenue, on the Court's emphasis that an assessee claiming its income not to be taxable in India, unlike one that admits its tax liability from the outset, cannot argue that it is the responsibility of the payers to deduct tax, and at the same time benefit from the tax credit under Section 209(1)(d). It was argued that this case was akin to Alcatel Lucent (supra), in that the assessees had denied their tax liability initially (by filing NIL returns after the Section 148 notice), and, therefore, could not take shelter under Jacabs (supra),to now argue that the payer had an absolute liability to deduct tax from the remittance to the non-resident payee. The Indian payer could not possibly have been responsible for deducting tax from the remittances made to the assessees, under such circumstances. 6. The case of the assessees is that they are non-resident companies and the payment received by them should have suffered a tax deduction at source, by the payer, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges deduction of tax at source by "any person responsible for paying" to a foreign company, "any other sum chargeable" under the provisions of the Act, at the time of credit of such income to the account of the payee. The Court, in Jacabs (supra), interpreted this obligation of the payer to deduct tax as absolute, in these terms: "8. ...The scheme of the Act in respect of non residents is clear. Section 195 of the Act puts an obligation on the payer, i.e. any person responsible for paying to a non-resident, to deduct income tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head "Salaries‟. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the non-resident. Section 201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the said payer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable:" 10. The position in law, therefore, was that the assessee was entitled to, in its computation of its advance tax liability, take a tax credit of that amount which was deductible or collectible, regardless of whether the amount was actually deducted or collected. As Jacabs (supra) noted, the reason for this was because, advance tax is to be computed either based on the previous year's assessment, or on an estimate of the income to be earned that year which is to be made much before the final assessment. There is no possible way in which the provision could allow a tax credit of the amount deducted or collected, because the actual deduction takes place at a later point in time i.e. at the point at which the payment is actually made to the assessee. 11. This provision unsurprisingly opened the window for the assessee to take tax credit of an amount tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vied under Section 234B was incorrect, since the whole consideration received by it was liable to tax deduction at source under Section 195, thus precluding any advance tax liability on its part. However, it did not press the first ground in the proceedings. The CIT(A) ultimately deleted the interest under Section 234B, on the ground that while the nonresident assessee was liable to tax, it could not be held to be liable to advance tax, as first, the obligation was absolute upon the payer to deduct tax at source, under Section 195, read with Section 201 (which permitted recovery from the payer, as assessee-in-default, of both the tax as well as interest, for not deducting tax) and second, whether or not any tax was actually deducted, the assessee was allowed a tax credit of that amount of tax that was deductible or collectible at source, by the pre-amended Section 209(1)(d), thus negating the assessee's liability to pay advance tax. The ITAT, on appeal by the Revenue, confirmed the view of the CIT(A). 13. The Division Bench of this Court however, held in favour of the Revenue, reasoning: "20. The other argument on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee did not have any taxable presence in India so as to be liable for tax on its Indian income. If this was the stand of the assessee, it is not impermissible or unreasonable to visualise a situation where, the assessee would have represented to its Indian telecom dealers not to deduct tax from the remittances made to it. On the contrary it would be surprising if the assessee did not make any such representation; such a representation would only be consistent with the assessee's stand regarding its tax liability in India. Moreover, no purpose would have been served by the assessee taking such a categorical stand regarding its tax liability in India and at the same time suffering tax deduction under Section 195(1). Therefore, in our opinion, even though there may not be any positive or direct evidence to show that the assessee did make a representation to its Indian telecom dealers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed. The Tribunal ought to have accorded due weightage to the strong possibility or probability of such a request having been made by the assessee to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently of its tax liability, that was aggravated by its subsequent volte face by way of its admission that it was a PE liable to tax in India. This resulted in the Court's view that the assessee had played a role in influencing the payer's non-deduction of tax at source, and was thus required to compensate for such a volte face, by paying interest under Section 234B. 16. This Court respectfully cannot apply the view taken in Alcatel Lucent (supra) to this case. This is because if the payer deducts tax at source only when the assessee admits tax liability, then deductions would not be made in cases where the assessee either falsely or under a bona fide mistake denies tax liability. Tax obligations cannot be founded on assertions of interested parties. In such cases, the payer's obligation to deduct tax would depend on the payee's opinion of whether it is liable to tax, which may differ from its actual liability to tax as determined by the A.O's final order. This effectively authorizes the assessee and the payer to contract out of the statutory obligation to deduct tax at source, which in this case, is located in Section 195(1). Surely this could not be the Parliamentary intent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Finance Act, 2012. 19. Alcatel Lucent (supra), in any event, can be distinguished on the ground that the Court was persuaded to confirm the levy of interest under Section 234B, only on account of the equities that needed to be balanced in those peculiar facts, in favour of taxability. This is evident from the following words of the Court: "26. It further seems to us inequitable that the assessee, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after leading them to believe that no tax was deductible. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided. After having accepted the liability to tax at the first appellate stage, it is unfair on the part of the assessee to invoke section 201 and point fingers at the Indian payers. The argument advanced by the learned counsel for the assessee that the Indian payers failed to deduct tax at their own risk seems to us to be only an argument of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-assessee." An important decision is that of the Karnataka High Court in Commissioner of Income Tax v Samsung Electronics Co Ltd. 2012 (345) ITR 494 (Kar), which also considered the same issue, i.e. the obligation under Section 195 (1). The High Court in the first instance had rejected the Revenue's appeal; the Supreme Court remitted the matter - for determination as to whether income by way of royalty had been made out in the facts of the case. The High Court decision first set out the order of the Supreme Court inter alia, as to the nature of obligation cast upon the payer under Section 195: "While remanding the matter, Hon'ble Supreme Court has made certain observations while analysing the provisions of Section 195 of the Act as follows: "7. Under Section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the I.T. Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may disentitle the payer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act, In CIT v. Cooper Engineering (MANU/MH/0040/1967 : 68 ITR 457) it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under Section 18(3B) (now Section 195(2) of the I.T. Act). The application of Section 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted as source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und. It must therefore follow, if the Department is right that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum changeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage." The Karnataka High Court first addressed this question and stated that: "17. It is clear from the scrutiny of the material on record and the contentions of the parties viz., revenue and the respective respondent in these cases that the fact that payments have been made by the respondent herein to non-resident for having imported shrink wrapped software/off-the-shelf software is not disputed. There is also no dispute that no tax was deducted at source by the respondent under Section 195(1) of the Act in respect of such payments on the ground that the same were made for the purpose of purchase of shrink wrapped software/off-the-shelf software. It is contended by the respondent that since there is no permanent establishment of the non-resident in India, the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Section 200 of the Act read with rule 30 of the Income Tax Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the Act. In addition, he would also be liable under Section201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Therefore, if the amount is held to be royalty, the other consequences as referred to above would follow." After holding that the transaction in that case amounted to royalty and, therefore, taxable, the Court ruled that the obligation to deduct tax was with the payer: "In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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