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2015 (7) TMI 476 - ITAT DELHI

2015 (7) TMI 476 - ITAT DELHI - [2015] 42 ITR (Trib) 708 (ITAT [Del]) - Consultancy fee paid to Ms Olaf Grandlund OY Finland - whether was not chargeable to tax in India and thus that there was no requirement to withhold to tax on the impugned payments, even though these had been characterized as FTS taxable on source basis? - whether services do not come within the purview of Article 13(4) (c) of the DTAA between India and Finland as technical services - the services rendered cannot be even be .....

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have a PE in India under the provisions of Article 5 of the India-Finland treaty, no portion of the income from services provided to a customer in India are liable to taxation in India.

In the instant case, admittedly Olof Granlund did not have any office/ place of business in India. Further, the services were performed by Olof Granlund primarily from outside India and its employees made intermittent visits to India only for the purpose of attending meetings with the respondent.Accord .....

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ratio laid down In Transmission Corporationís case [1999 (8) TMI 2 - SUPREME Court] we hold that the question of deduction of tax at source on the impugned payments does not arise. The CIT(A) on the same parity of reasoning allowed the appeal. Therefore, we dismiss the grounds of appeal filed by the revenue - Decided in favour of assessee. - ITA No:1941/Del/2012 - Dated:- 8-7-2015 - SHRI I.C. SUDHIR AND SHRI INTURI RAMA RAO, JJ. For The Appellant : Shri Salil Kapoor, Advocate, Shri Vikas Jain, .....

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on the impugned payments, even though these had been characterized as FTS taxable on source basis. 2. Whether on the facts and circumstances of the case, the CIT(A) has erred in ignoring the decision of the Hon'ble Supreme Court in the case of 239 ITR 587 & 327 ITR 456 wherein it was held that it was incumbent upon the deductor to apply and seek a certificate for lower withholding tax order so as not to invite the provisions of section 40(a). 3. Whether on the facts and circumstances of .....

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scope of work" laid down in its agreement with assessee dated 01.02.2005, was not squarely covered in the definition of FTS under Article 13(4)(c) of the India Finland DTAA by relying upon the terms of an agreement entered into with Leighton Contractors (India) P Ltd which agreement does not find any mention in ITO TDS's order and thus constituted fresh evidence under Rule 46A. 5. Without prejudice to the foregoing ground, whether the CIT(A) has erred in accepting ration decidendi of ca .....

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r any grounds of appeal at the time or before the hearing of the appeal. 2. Briefly stated the facts of the case are as under :- The respondent-assessee company i.e Nokia India Private Ltd. is a wholly owned subsidiary of Nokia Corporation. It is a company incorporated under the provisions of the Companies Act, 1956. During the year under consideration, it is in the process of setting up a manufacturing facility at Chennai. For this purpose, the contract for design, manufacturing and completion .....

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ufacturing facility are met. These services are rendered outside India only. 3. In consideration for the services rendered during the year under consideration the respondent-assessee company paid Euro 2,208421 (Rs. 11,869,359 approx) to Olof Granlund . Since the respondent assessee company took a view that the said payments are not liable to taxation in India under the provision of Double Taxation Avoidance Agreement entered between India and Finland. No taxes were withheld by the respondent- as .....

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assessee in default under section 201 (1)and 1(A) of the Act for non deduction of tax u/s 195 of the Act in respect of the above payments made to the Olof Granlund Oy Finland. The respondent- assessee company responded to the show cause notice vide its letter dated 20th December, 2005 wherein the nature of services provided by M/s Olof to Nokia was brought to the notice of TDS Officer. The submissions made by the respondent- assessee company before the TDS Officer are as under : Olof Granlund Qy .....

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section 195 of the Act, taxes are required to be withheld on payments made to non-residents where such payments are chargeable to tax in India. Accordingly, in order to justify why no taxes have been withheld by Nokia India on payments made to Olof Granlund Qy for provision of design control and quality control services. It is pertinent to outline the technical position as regards taxability of Finnish enterprises in India. As per the provisions of section 90(2) of the Act, a foreign comp[nay ha .....

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y, the term fees for technical services ( FTS ) has been defined to include payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. The term make available has not been defined under the India-Finland tax tr .....

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e available to the person purchasing the service, within the meaning of paragraph 4 (b). Similarly, the use of a product, which embodies technology, shall not per se be considered to make the technology available. 5. The main contention of the respondent-assessee company before the Ld. TDS Officer was that the above services do not come within the purview of Article 13(4) (c) of the DTAA between India and Finland as technical services. It was further contended that the services rendered cannot b .....

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ed heavy reliance on the basis of Hon ble Supreme Court in the case of Transmission Corporation of AP Ltd. vs. CIT (1999) (239 ITR 587) and demanded a tax of ₹ 13,34,198/- + interest of ₹ 1,47,263/- u/s 201(IA) of the Act vide his order dated 28.11.2006. 6. Being aggrieved with the above order respondent-assessee filed an appeal before Commissioner of Income Tax -XXIX, New Delhi ,who vide his order dated 28th February, 2012 allowed the appeal. It was contended before the CIT(A) that .....

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mitted that the 7 services were rendered from outside India and the payments are in the nature of business receipts and are not liable to taxable in India in the absence of permanent establishment of Olof Granlund Oy and this fact had not been disputed by the TDS Officer. In view of these, it was submitted that the subject payments are not liable to tax in India and therefore there was no liability for deduction of tax at source under provision of section 195 of the Act. In support of the above .....

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per prescribed rates. Therefore, the trigger for applicability of section 195 is that the sum paid to a non-resident should be chargeable to tax in India as per provisions of IT Act. In the present case, the services provided by non-resident company are technical by nature as per provisions of section 9(l)(vii) of IT Act. Now, we have to see whether these services could be termed as technical services as per Article 13(4) as reproduced above. According to AO, these services are in nature of tech .....

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01-02-2005, which is scope of work. Further, clause C 1 of the agreement entered into by the appellant with Leighton Contractors (India) Private Ltd. is Contractor's obligations. Combined reading of the relevant clauses of these two agreements indicate that designs and technical plans are provided by Leighton Contractors (India) Private Ltd. and design review services are provided by Olof Granlund Oy. Therefore, the nature of services provided by non- resident OlofGranlund Oy do not fall in .....

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of various case laws as relied upon by the appellant and mentioned supra has been clearly laid in case of Rayrnond Ltd Vs DCIT reported in 86 ITD 761 (Mumbai) as below :- ..... mere rendering of services is not roped in unless the person utilizing the service is able to make use of the technical knowledge etc by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc .must remain with the pers .....

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ailable. In present case under consideration, Olof Granlund Oy has provided mainly design review services. The AO has not established that this technical knowledge, experience, skill, know-how or processes has been transmitted to the appellant and the appellant is now equipped to use it in future without resorting to the non-resident service provider. In the absence of this key element, the services provided by the nonresident do not fall within meaning of the first limb of artlcle 13(4)(c). The .....

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in India either as FTS or as business income under relevant articles of India-Finland treaty. Therefore, provisions of section 195 of IT Act, 1965 are not triggered. It is consequently held that the appellant is not liable to deduct any tax on payments made to Olof Granlund Oy and impugned order u/s 201 & 201(A) stand quashed. This dispose off the grounds of appeal no. 1 to 4. 7. Aggrieved by this above order the revenue had come up with the present appeal. Ld. DR had relied upon on the orde .....

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ecord. The undisputed facts of the case are that the nature of services rendered by Olof Granlund Finland to the assessee respondent company are as under :- a) Review of systems description, diagrams, cost estimates, building designs etc. b) Review of preliminary system design and quality control c) Review of equipment list/selections, lay out proposals, conducting inspections etc. 9. Now we are called upon to examine whether the nature of above services fall within the scope of the fees for tec .....

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technical or consultancy services (including 11 the provision of services of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-paragraph (a) of paragraph 3 is received: or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in sub-paragraph (b) of paragraph 3 is received : or (c) make available technical knowledge, experience, .....

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ese services make available any technical knowledge, experience, skill, etc. to the recipient of the service or involves development and transfer of technical plan or design to the recipient of services. The India-Finland tax treaty does not specifically define the term make available . Accordingly, in absence thereof reliance may be placed on the meaning assigned to the said term under the MoU to India-USA Double 12 Taxation Avoidance Agreement (hereinafter referred to as India-US Treaty), whic .....

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India-US Treaty. This equally and expressly follows that the Honorable Tribunal has accepted the concept of parallel treaty interpretation. The ITA T held as under: "The MOU appended to the DTAA with USA and the Singapore DTAA can be looked into as aids to the construction of the UK DTAA. They deal with the same subject (fees for technical services, referred to in the US agreement as ''fees for included services''). As noted earlier, it cannot be said that different meanings .....

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fully support its interpretation. Example (4) given in the MOU also supports it. This is of a US company manufacturing wellboard for the assesee using assessee s raw material but using its own Plant. No technical knowledge, experience, skills, plan or design is held to have been made available in such a case. However, in contrast, example (5) is of a US company rendering certain services in connection with modifying the software used by the Indian company to suit particular purpose. A modified c .....

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interpretation is permissible where language of the two treaties is similarly worded and one treaty clarifies meaning of the terms (or 14 language) used. The above view has been affirmed by the subsequent pronouncements in the following cases: (a) National Organic Chemicals Industries Ltd vs DCIT (96 TTJ 765) (Mumbai IT AT) (b) CESC vs CIT(80 TTJ 806) (Calcutta ITAT). (c) DDIT v Preroy A.G. (2010) 39 SOT 187 (Mum) (d) Intertek Testing Services India (P) Ltd., In re (2008) 307 ITR 418 (AAR) MEANI .....

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aning of paragraph 4(b). Similarly, the use of a product, which embodies technology, shall not per se be considered to make the technology available. In other words, the MoU seeks to clarify that the services are considered to be made available only where the services leads to transfer/ 15 imparting of technical knowledge, experience, ski 11, know-how, or processes to the recipient which enables the recipient to apply the same on his own. Further, on page 790 of Klaus Vogel on Double taxation co .....

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the criterion used to distinguish the provision of knowhow from rendering advisory services is the concept of 'imparting'. An advisor or consultant, rather than imparting his experience, uses it himself (BFH BstBl II 235 (1971),' Ministre des Relations exterieures, Response a M Bockel, 36 Dr. Fisc. Comm. 1956 (1984)). All that he imparts is a conclusion that he draws - inter alia - from his own experience. His obligation to observe secrets, or even his own interest in 16 retaining hi .....

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of Article 13(4)(c) of the DTAA indicates that 'fees for technical services' would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which, inter alia, "makes available" technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. According to the Tribunal this "make available" condition has not been satisfied inasmuch .....

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for technical services' as appearing in article 13(4)(c) of the DTAA read with section 9(1)(vii) of the said Act. While doing so the Tribunal, inter alia, found that the assessee company was an international re insurance intermediary (broker) and was a tax resident of United Kingdom. Further, that it was a recognized broker by the financial service authority of United Kingdom. It was also an admitted position that the assessee did not maintain any office in India and that it had a referral r .....

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age and gems Ltd. (the reinsurance brokers). The terms of the agreement specifies that the assessee in conjunction with J.B. Boda are recognized as intermediary, through whom all communications relating to this agreement shall pass. The terms of the agreement further provides that the assessee will provide all the details of agreed endorsements to the re insurers bye-mail or facsimile and shall submit the slip policy to XIS (Lloyd's processing market) for signing. The assessee will act as a .....

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reinsurance cover for New India Insurance Co. There exists no material or basis on the basis of which, it would be said that the assessee was rendering any kind of technicall consultancy service within the meaning of Article 13 of Indo-UK treaty. The consideration received by the assessee acting as an intermediary in the reinsurance process cannot, by any stretch of imagination, be qualified as a consideration received for rendering any financial analysis related consultancy services, rating ag .....

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rer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for competitive proposals. Based on the various offers or proposals given by the international reinsurance brokers, like the assessee, to J.B. Boda, the latter would present various options to the originating insurer in India, which would take a final decision in the matter. Based on the decision of the originating insurer in India, the policy terms w .....

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e brokers like the assessee and other intermediaries, based on a mutually agreed ratio which accounts for their relative contribution in the reinsurance process. 12. Based on this manner of transacting, the Tribunal came to a conclusion that the payment received by the assessee could not be regarded as 'fees for technical services'. Further, more, the Tribunal also held that such receipts would not amount to fees for technical services as the "make available" clause contained i .....

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ch no substantial question of law arises for our consideration. The appeal is dismissed. There shall be no order as to costs. Even Hon ble Karnataka High Court in the case of CIT vs. De Beers India Minerals (P) Ltd. (2012) 346 ITR 467 (Kar.) had interpreted the term make available as under :- 22. What Is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that It "makes available" to the recipient. Technical knowledge, kno .....

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t the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered made available when the person acquiring the service is enabled to apply the technology. Th .....

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al knowledge available at the same time is satisfied. In view of the above, it can be concluded that rendering of technical services leads to transfer/ imparting of technical knowledge, experience, skill, know-how, or processes to the recipient which enables the recipient to apply the same on his own. In other words, the recipient acquires a means to an end, i.e he acquires the technical knowledge, experience, skills, know-how or processes from the provider which acts as a means and enables him .....

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nterpretation provided in the MoU to India-US tax treaty,services can be said to 'make available' technical knowledge etc, where such technical knowledge is transferred to the person utilizing the service (Le the appellant in the instant case) and such person is able to make use of the technical knowledge etc, by himself in his business or for his own benefit and without recourse to the performer of services (i.e OlofGranlund) in the future. The mere fact that provision of service may re .....

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rovided under the MoU to 21 conclude that payments made by the assessee qualify as FTS under provisions of India- Finland tax treaty. Further, the term 'make available' in the context of consultancy services has been subject matter of consideration before various appellate authorities, which have concurred with the above position. In this regard, the reliance can be made on the following decisions, which are squarely applicable to the case on hand:- • Mckinsey and Co. Inc. and Ors. .....

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king. technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology and various Benches of the Tribunal have consistently taken that view of the matter. " "..... When a patient visits a doctor and doctor advices him to undergo various tests. The patient does so. In the course of performing the scan tests, the scan centre used certain equipment. The scan centre actually provided the service. The patient, is interested in .....

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ESC Ltd Vs DCIT reported in 275 ITR 15 (Cal); • Raymond Ltd Vs DCIT reported in 86 ITD 761 (Mumbai); • Deputy Commissioner of Income Tax vs Boston Consulting Group Pte Limited (93 TTJ 293), Mumbai ITAT; • JCIT vs Essar Oil Limited (7 SOT 216), Mumbai ITAT; and • National Organic Chemical Industries Ltd vs DCIT reported in 96 TT J 765 Additionally, it can be seen that under the provisions of Article 13 of India-Finland tax treaty, provision of services shall qualify as FTS whe .....

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installed at the respondent's factory in Chennai are of the right design and quality. The scope of work performed by Olof Granlund clearly lays down that Olof Granlund shall be responsible for providing following quality and design control services to the appellant: a) Review of systems description, diagrams, cost estimates, building designs etc; b) Review of preliminary system design and quality control; c) Review of equipment list/. selections, layout proposals, conducting inspections etc; .....

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of development and transfer of a technical plan or technical design to the appellant. 24 Given that the term 'make available' envisages a situation where the service recipient (i.e the respondent) is able to make use of the technical knowledge inherent in the services provided to him independently in his business or for his own benefit and without recourse to the service provider (i.e Olof Granlund), payments made by the respondent to Olof Granlund for provision of above services do not .....

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transfer of technical plan or design. Accordingly, we hold that the payments made by the respondent to Olof Granlund do not qualify as FTS under the provisions of India- Finland tax treaty. Further, as per the provisions of India-Finland tax treaty, where the service do not qualify as FTS, Article 13 would not be applicable to the 25 Finnish enterprise and its taxability would need to be examined as per Article 7 (read with Article 5) of the India-Finland tax treaty. As per Article 7( 1) of the .....

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ided to a customer in India are liable to taxation in India. In the instant case, admittedly Olof Granlund did not have any office/ place of business in India. Further, the services were performed by Olof Granlund primarily from outside India and its employees made intermittent visits to India only for the purpose of attending meetings with the respondent. Accordingly, Olof Granlund Oy did not have a PE in India under the provisions of Article 5 of the India-Finland tax treaty during the subject .....

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ether he is still required to deduct the tax at source on such payments. The issue is no more res integra and covered by the decision of Hon ble Supreme Court in the case of GE India Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) wherein the Hon ble Supreme Court held that if payment is not assessable to tax there is no question of tax at source being deducted. The relevant portion of the judgment is reproduced as under :- If the contention of the Department that the moment there .....

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ghted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various 27 provisions of Chapter XVII one finds use of different expressions, however, the expression sum chargeable under the provisions of the Act is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of any sum paid to any resident . Similarly, sections 194EE and 194F, inter alia, provide for .....

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e information to the Income tax Officer (TDS). It is a provision requiring tax to be deducted at 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 section 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 wid .....

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sion sum chargeable under the provisions of the Act from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one can not read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly and Co. (India) (P) Ltd. (2009) 3 .....

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28 at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income chargeable under the head salaries . Similarly section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act . Which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income Tax Act constitutes one single integral insepara .....

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d. Section 237 read with section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. 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 chargeable under the Act. The interpretation of the Department, therefore, not only re .....

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m 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 TAS. It is the case of the Department that section 195(2) , as interpreted by the High Court would plug the loophole as the said interpretation requires the payer to make a declaration before t .....

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eed to give weightage to those words. Further, section 195 uses the word payer and not the word assessee . The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The above-mentioned contention of the Department is based on an apprehension which is illfounded. The payer .....

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ct TAS in respect of payments outside India which are chargeable under the Income-tax Act. This provision ensures effective compliance with section 195 of the Income tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income Tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds .....

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his provision is brought into force only from April 1, 2008. It will only 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. Applicability of the judgment in the case of Transmission Corporation (supra) In Transmission Corporation s case (1999) 239 ITR 587(SC) a nonresident had entered into a composite contract with the resident party 30 making the payments. The said comp .....

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TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (1999) 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the .....

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