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Lionbridge Technologies Private Limited Versus ITO (International Taxation) (TDS) , -4,

2015 (8) TMI 413 - ITAT MUMBAI

Withholding of tax - payment as reimbursement of cost for purchase of standard off the shelf software, a copyrighted article, by the Appellant to its group company, Lionbridge Technologies Inc. USA - whether is not in nature of royalty in the hands of recipient under Income Tax Act read with the Double Taxation Avoidance Agreement between India and USA and therefore the question of withholding doesn’t arise? - assessee in default under section 201/201(1A) - Held that:- Lionbridge USA has entered .....

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agreement along with invoices by the Vendors and allocation key has been placed in the paper book. It has not been disputed that the cost of reimbursement paid to Lionbridge USA is not chargeable to tax in India. If that is so, then assessee was not required to withhold the tax u/s 195 and this proposition is well supported by a decision of Hon’ble Supreme Court in the case of G E India Technology Centre P Ltd (2010 (9) TMI 7 - SUPREME COURT OF INDIA). Secondly, here in this case, it is not a qu .....

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r The Appellant : Shri Ajit Kumar Jain For The Respondent : Shri Vivek A Perampurna PER AMIT SHUKLA, AM: The aforesaid appeal has been filed by the assessee against impugned order dated 03.09.2012, passed by CIT(A)-11, Mumbai in relation to order passed u/s 201(1) & 201(1A) for the assessment year 2007-08. The grounds as raised by the assessee reads as under: 1. The Commissioner of Income Tax (Appeals), (hereinafter referred to as CIT(A) ), has erred in upholding the order of the Income-tax .....

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s of recipient under Income Tax Act read with the Double Taxation Avoidance Agreement between India and USA and therefore the question of withholding doesn t arise. Your appellant therefore prays that tax liability under section 201(1) at ₹ 24,88,039 and interest liability under section 201(1A) at ₹ 12,68,900 be deleted . 2. The brief facts of the case are that Lionbridge Technologies Inc, USA has entered into an agreement with Microsoft inc. USA and Skillsoft (which are referred as .....

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dge US. The assessee being one of the group entity, made the payments to Lionbridge USA as reimbursement of the cost of the software. The assessee s stand was that the acquisition of the software for the use of software does not give rise to royalty or income in the hands of the recipient, because it was purchased off shelf and was merely a reimbursement of cost. The copies of the agreements entered into by the Lionbridge USA and Microsoft Inc. under which the parent company has made the company .....

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ial decisions. However, the Ld. CIT(A) rejected the assessee s contention and confirmed the action of the Assessing Officer. 4. Before us, Ld. Counsel Shri Ajit Kumar Jain, submitted that the assessee would have been liable to withhold the tax u/s 195 on the amount remitted to non-resident, only if the income would have been chargeable to tax in India in the hands of the nonresident. Here in this case, the Lionbridge US has purchased a software from Microsoft Inc. and has allocated the cost of p .....

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amount of cost divided between different group companies including the assessee in India. He thus he submitted that the assessee was not liable to deduct TDS; and it cannot be treated as assessee in default . 5. On the other hand, Ld. DR submitted that the allocation key used by Lionbridge US for allocating the cost amongst various group entities was inappropriate and it is open to verification. Accordingly, cost allocated to assessee in India was inaccurate. On merits, he relied upon the order .....

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r. Lionbridge USA has entered into an agreement with vendors like Microsoft inc. for the purchase of Standard off Shelves Software to be used by Lionbridge group entities across the globe. The cost of the purchase of the softwares has been allocated amongst various group entities based on allocation key of number of desktop in each office. The said allocation was made at cost and no mark-up was charged. Accordingly, all the group entities had reimbursed their share of cost to the Lionbridge USA. .....

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n where Lionbridge US has developed software which has been given for use to the assessee. The software has been purchased from Microsoft, the cost of which has been distributed amongst all the group entities. It is pure case of reimbursement of cost and admittedly, there is no mark-up. Accordingly, there was no liability to deduct TDS on such reimbursement of cost. On first proposition, the Hon ble Supreme Court in the case of G E India Technology Centre P Ltd (supra) the has elaborated this co .....

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esponsible for paying to a nonresident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the I.T. Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the I.T. Act to which the aforestated requirement of tax deducti .....

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uch tax was deductible to the date on which such tax is actually paid. The most important expression in Section 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the I.T. Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out o .....

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The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 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 conside .....

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ion 195(2) of the I.T. Act). The application of Section 195(2) preLionbridge Technologies Private Limited ITA No. 7121/Mum/2012 6 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 .....

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(Calcutta)] that an application for NOC cannot be said to be an application under Section 195(2) of the Act. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. Reference to .....

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ponsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon. 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in Section 195(1). The said expression in Section 195(1) shows that the r .....

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analysis of various 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 deduction of tax in respect of "any amount" referred to in the specified provisions. In none of the provisions we fin .....

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e 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 195widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in Ind .....

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Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. Section 195appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collectio .....

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ome "chargeable under the head salaries". Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a nonresident 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 I.T. Act constitutes one single integral inseparable Code. Hence, the provisions relating to TDS applies only to those sums which are chargeable t .....

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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 requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an a .....

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n 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 the ITO(TDS) of payments made to non-residents. In other words, according to the D .....

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ot the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill 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 abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the I.T. Act. When .....

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