TMI Blog2017 (5) TMI 1359X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 We find that on the issue of the expenditure on so called commission and disallowance u/s 40(a)(i) of the Act, the Tribunal considered the decision in G.E. India Technology Centre Pvt. Ltd., CIT vs R.D. Agrawal & Co. (1964 (10) TMI 9 - SUPREME Court), Orient Goa Pvt. Ltd. (2009 (10) TMI 575 - Bombay High Court ), CST vs Indra Industries (2000 (1) TMI 44 - SUPREME Court), etc. and thereafter set-aside the matter to the file of the Assessing Officer for proper factual as well as legal determination. Both the parties before us agreed that on identical lines, the issue may be restored to the file of the ld. Assessing Officer. We may add here that ld. Assessing Officer is directed to consider Circular No.7/2009 (F.No.500/135/2007-FTD-I) dated 22/10/2009, wherein, earlier Circular No.23 dated 23/07/1969, No.163 Dated 29/05/1975 and Circular No.786 dated 07/02/2010 were withdrawn. The assessee be given opportunity to substantiate its claim. Thus, this ground is allowed for statistical purpose. - ITA Nos.3564 & 3565/Mum/2015, An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,41,00,556/- Rs.1,41,56,894/- There was admittedly neither deduction of tax at source by the assessee, nor any certificate toward non-deduction of tax u/s. 195(2) stood obtained by it. Though the ld. CIT(A) approved the Revenue s case in principle, i.e., qua the applicability of section 40(a)(i) of the Act to the said payments in the facts and circumstances of the case, he accepted the assessee s alternate contention of the said provision being applicable only on that part of the expenditure incurred for the year that remained unpaid as at the year-end. This argument, then, constitutes the assessee s alternate plea (vide Ground 5) for A.Y. 2008-09, and also explains the Revenue s appeal for A.Y. 2009-10, i.e., to the extent of disallowance deleted on account of payment during the year. The respective cases 3. The assessee s case qua both the payments is essentially the same. The freight payment, which is on exports, is to the non-resident shipping companies, through their Agents in India. No services are rendered in India, nor do the payees have any Permanent Establishment (PE) in India. The ship owners (or companies), in any case, pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23 dated 19.9.1995 issued by CBDT. As regards the commission income, the Revenue places reliance on the decision in the case of Elkem Technology vs. Dy. CIT [2001] 250 ITR 164 (AP), wherein it stands clarified that the income to accrue or arise in India, it is not necessary that the service should be rendered in India, i.e., in the territorial jurisdiction of India, and it would be sufficient if the services are utilized in India. In fact, the nomenclature commission is misleading, and the services qualify as fees for technical services, as clarified in Wallace Pharmaceutical (P.) Ltd., In RE [2008] 195 CTR AAR 63. In that case, it was held that irrespective of the description as commission , consultancy fees payable to non-resident for developing business with foreign customers falls within the meaning of fee for technical services as defined under Explanation 2 to s. 9(1)(vii). The Board Circulars would not apply in view of the amendment by way of insertion of Explanation below section 9 by Finance Act, 2009 w.r.e.f. 01.04.1976. This sums up the cases of both the parties, who have also relied on case law in support of their respective cases. In addition is the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in the case of CIT vs Oreint (Goa)(P.) Ltd. (supra) and relied upon various other decisions and held as under:- On 8th September, 2015, a Division Bench of this Court hearing Income Tax Appeal No. 989 of 2015 and Income Tax Appeal No. 991 of 2015 was unable to agree with the view taken by another Division Bench of this Court in the case of Commissioner of Income-tax v. Orient (Goa) Private Limited reported in 3 Vol. 325 Income Tax Reporter Pg. 554. It, therefore, came to the conclusion that judicial discipline demands that instead of taking a contrary view it should request that a larger bench be constituted so as to resolve the disagreement. It, therefore, directed the Registry to place the papers and proceedings of the two Appeals before the Hon'ble The Chief Justice so as to obtain suitable directions for placing the following question of law for opinion of a larger bench. Q. Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a nonresident before the provision to section 172 of the Act can be invoked ? 2. The Registry placed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer. On scrutiny, the Assessing Officer passed an assessment order on 26th March, 2002, and allowed deductions under section 80HHC to the extent of ₹ 8,07,35,598/-. A copy of the Assessment Order dated 26th March, 2002, is annexed as Annexure-A to the appeal paperbook. Being aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT (A) by order dated 2nd August, 2008, partly allowed the assessee's appeal. A copy of the order dated 2nd August, 2004, passed by the CIT (Appeals) is annexed as Annexure-B to the appeal paper-book. Being aggrieved by the CIT(A)'s order dated 12th March, 2002, the assessee as well as the Revenue filed appeals before the Income Tax Appellate Tribunal, Panaji. The Tribunal, by an order dated 11th December, 2006, partly allowed both assessee's as well as the Revenue's appeal, directing the Assessing Officer to exclude 90% of the net income eligible for inclusion for the purpose of computing profits of the business for the purpose of determining 80HHC deductions. A copy of the order dated 11th December, 2006, passed by the Income Tax Appellate Tribunal is anne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of vessel' and 'barge freight' has to be excluded for the purpose of computing profits of the business under clause (baa) of Explanation to section 80HHC, is right in law? (VIII) Whether the findings of the ITAT that only 90% of the 'net' income from the 'lease hire charges' received by the assessee apart from depreciation has to be excluded for the purpose of computing profits of the business under clause (baa) of Explanation to Section 80HHC, is right in law ? 7. Out of the above substantial questions, we are concerned with Question No. I. 8. After admission, the present appeal and the other appeals came to be placed for final hearing before a Division Bench of this Court and the Division Bench noted the stand of the assessee in paragraph 4 of its order. In paragraph 5, the Division Bench noted the reference by the Tribunal to its decision in Deputy Commissioner of Income Tax v. Orient (Goa) and following it, the Tribunal allowed the assessee's appeal. The order passed by the Tribunal holds that section 40(a)(i) of the Income Tax Act, 1961 (for short IT Act ) would apply only when there is an obligation to deduct tax at source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of recipient M/s. Mitsui Co. Ltd. it was in the nature of profits of a non-resident from occasional shipping business. Placing reliance upon the CBDT Circular No.723 and Section 172 of the Act, the CIT (A) allowed the appeal. (c) The revenue's appeal to the Tribunal was dismissed. 10. This Court held that Section 172 of the Act is applicable only in respect of non-resident carrying on shipping business while assessee i.e. Orient (Goa) (P) Ltd. is admittedly a resident and therefore Section 172 of the Act cannot be applied. Thus the expenditure of demurrage charges cannot be allowed in the absence of tax being deducted at source. The relevant observations of this Court is found in paragraph 8 as under : 8. Sec. 172 of the Act 1961 is carefully considered by us. Chapter XV titles as Liability in special cases . We have no concern with sections, starting from s. 159, till s. 171 from this Chapter XV. Sec. 172 comes under sub-title H.-Profits of non-residents from occasional shipping business . Title of s. 172 is Shipping business of non-residents . For bringing a case under Chapter XV-H of the Act 1961, one has to establish a case of profits of non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason that the respondentassessee placed reliance upon Section 172 of the Act in respect of payments made by it to a non-resident shipping company by way of demurrage charges. The tax which is deducted at source by the assessee company is on behalf of the recipient of the charges. The issue before the Court was whether demurrage charges which are paid by the respondent-assessee to a nonresident company would be allowed as an expenditure in the absence of deduction of tax at source in view of Section 40(a)(i) of the Act. Although the Court was concerned with the issue in an appeal concerning a resident company. The introduction of section 172 of the Act by the assessee was to determine whether in view thereof, was there any obligation to deduct tax at source by the payee-assessee. Section 172 of the Act has to be examined through the prism of the nonresident shipping company in respect of it's income. It is in the above view that Section 172 of the Act and Circular No.723 issued by the CBDT was relied upon by the respondent-assessee to point out that as Section 172 of the Act provides a complete code in itself for levy and recovery of tax ship wise and journey wise. Thus th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him. 13. The emphasis of Mr. Mistri was that section 172 of the IT Act is a complete code that applies to the non-resident Indians. Inviting our attention to section 40 of the Act, Mr. Mistri would submit that the assessee is not liable to deduct the tax at source. Our attention is also invited to section 195 of the Income Tax Act to urge that the status of the recipient is most relevant. Our attention was also invited to the non obstante clause as emerging from sub-section (1) of section 172. Mr. Mistri has also taken us through Chapter XVI of the IT Act to submit that section 195 is part of recovery provisions. Even with regard to Chapter XVI of the IT Act, its title, according to Mr. Mistri, must be noticed as it is extremely relevant. The title is Collection and Recovery of Tax . Our attention is invited to sections 190, 192, 195 and 199 (1). Mr. Mistri would submit that deduction of tax at source would arise in cases where employees receive salary. To meet the tax liability of the employee the deductions of tax is made. That is at source, meaning while payment. Inviting our attention to sections 202 and 205 of the IT Act it is submitted that such deduction is clearly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 5 computed in the manner laid down in this Act. 17. Chapter II contains the basis of charge and by section 4 subsection (1), it is stated that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates will be charged for that year in accordance with and subject to the provisions including provisions of the levy of additional income tax in respect of the total income of the previous year of every person. The proviso thereto is not relevant for our purpose, but subsection (2) of section 4 states that in respect of income chargeable under sub-section (1), income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. The source of the total income is set out in section 6 and we are not concerned with the apportionment of income contemplated by section 5-A. Residents in India is a matter dealt with by section 6 and that reads as under : 6. For the purposes of this Act, - (1) An individual is said to be resident in India in any previous year, if he (a) is in India in that year for a period or pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and management of his affairs is situated wholly outside India. (5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income. (6) A person is said to be not ordinarily resident in India in any previous year if such person is - (a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of or periods amounting in all to, seven hundred and twenty nine days or less; or (b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less. 18. A perusal of this section would indicate as to how an individual can be said to be a resident of India, a Hindu undivided family, firm or associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the case of a nonresident and the income by way of interest on such securities or bonds as the Central Government may, by Notification in the Official Gazette, specify in this behalf, including income by way of premium on the redemption of such bonds. Section 10(4) (4B) deals with the income by way of interest earned by a non-resident on moneys standing to his credit in a non resident (External) account in any bank in India. Then, we have several clauses in section 10, but we are not concerned with all of them, save and except section 10(6A),(6B), (6BB) and (6C) thereof. After this somewhat longish provision, we have section 10AA which enacts special provision in respect of newly established undertaking in free trade zone etc. By section 10B, there are special provision in respect of newly established 100% export oriented undertakings. Section 10B sets out the meaning of computer programmes in certain cases. Section 10C contains special provision in respect of certain industrial undertakings in North Eastern region. Section 11 deals with income from property held for religious or charitable purposes. Section 12 deals with income of trust or institutions from contributions. By s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with the provisions contained in section 30 to 43D. These provisions enable computation of income after deducting rent, rates, taxes, repairs and insurance for building repairs and insurance of machinery, plant and furniture, depreciation, investment allowance, investment deposit account, investment in new plant or machinery, investment in new plant or machinery in notified backward areas in certain States, development rebate, development allowance, reserves for shipping business, rehabilitation allowance. The conditions for depreciation allowance and development rebate are set out in section 34 and by section 34A, there is a restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies. Section 35 deals with expenditure on scientific research, section 35AB deals with expenditure on know-how and section 35ABB deals with expenditure for obtaining licence to operate telecommunication services. Section 35AC deals with expenditure on eligible projects or schemes and section 35AD deals with deduction in respect of expenditure on specified business. We have several expenditures and provided in sections 35CCA, 35CCB, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.-For the purposes of this sub-clause,- (A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub section (1) of section 9; (ia)[any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], 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 on or before the due date specified in sub-section (1) of section 139 :] [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Explanation .-For the purposes of this sub-clause, wealth-tax means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession;] [(iib) any amount - (A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government. Explanation. - For the purposes of this sub-clause, a State Government undertaking includes - (i) a corporation established by or under any Act of the State Government; (ii) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed does not cover any period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :- (a) on the first ₹ 3,00,000 of the book-profit or in case of a loss ₹ 1,50,000 or at the rate of 90 per cent of the bookprofit, whichever is more; (b) on the balance of the book-profit at the rate of 60 percent :] Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest by the association or body to the member exceeds the payment of interest by the member to the association or body. Explanation 2. - Where an individual is a member of an association or body on behalf, or for the benefit, of any other person (such member and the other person being hereinafter referred to as member in a representative capacity and person so represented , respectively), - (i) interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause. Explanation 3 .- Where an individual is a member of an association or body otherwise than as member in a representative capacity, interest paid by the association or body to such individual shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or other sum chargeable under the Income Tax Act payable outside India or payable in India to a non-resident not being a company or a foreign company on which tax is deductible at source under chapter XVII-B, is covered. 25. Such tax has not been deducted or after deduction has not been paid, then, the deduction shall not be made in computing the total income chargeable. 26. It is for this reason that we have to refer to Chapter XVII- B. Chapter XVII deals with Collection And Recovery of Tax. It contains general provisions with regard to deduction at source and advance payment in section 190 and in section 191 it makes provisions regarding direct payment. It has a separate Chapter under subheading B - Deduction at Source. In the instant case, it is common ground that reference is made to sections 192 to 195. They pertain to salary and, therefore, any person responsible for paying any income chargeable under the head Salaries shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of rates in force for the financial year in which the payment is made, on the estimated income of the assessee under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, any interest not being interest referred to in section 194LB or section 194LC or section LD or any other sum chargeable under the head Salaries shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force; Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation 1. -For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected therewith. (6) The person responsible for paying to a nonresident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed. (7) Notwithstanding anything contained in subsection (1) and subsection (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable. 28. The Explanation thereto would indicate as to how the term or expression non-resident is understood. We are not referring to other sections simply because we have to appreciate the argument that tax deducted at source is a recovery and section 172(1) will prevai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (4) after the expiry of nine months from the end of the financial year in which the return under sub-section (3) is furnished: Provided that where the return under sub-section (3) has been furnished before the 1st day of April, 2007, such order shall be made on or before the 31st day of December, 2008.] (5) For the purpose of determining the tax payable under sub-section (4), the [Assessing] Officer may call for such accounts or documents as he may require. (6) A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duly authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof. (7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever is earlier, deduct income-tax thereon at the rates in force. 34. The question before us is if section 172 deals with shipping business of non-residents and contains a non-obstante clause and applies for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident which carries passengers etc. shipping at a port in India, then, is there any obligation to deduct the tax at source in terms of section 195. 35. It is stated on behalf of the assessee that tax deducted at source is a recovery and, therefore, section 172(1) will prevail over the provisions of the Act. Reliance is also placed upon the Circular in that behalf. That Circular reads as under : 916. Clarification regarding treatment of tax paid under section 172(3)(4) by a nonresident engaged in shipping business 1. The Board had earlier issued Circular No. 730 regarding treatment of tax paid under section 172(3) by a non-resident engaged in the shipping business. Under the provisions of section 172, every time a ship belonging to or chartered by a non-resident makes a voyage from a port in India, carrying passengers, livestock, mail or goods shipp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in case of regular assessment under section 172(7), the nonresident assessee is liable to pay interest under sections 234B and 234C and also entitled to receive interest under section 244A of the Income-tax Act, 1961 as the case may be. Circular No. 9/2001, dated 9-7-2001. 36. It is vehemently contended that the Revenue cannot argue anything contrary to this Circular. This Circular even otherwise states the position in law correctly. It is then urged that the judgment in the case of Orient (Goa)(supra) does not lay down the correct law. 37. A closer look at the judgment is, therefore, necessary. 38. The appeal before this Court raised four questions which are reproduced hereinbelow : (A) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that in view of circular issued by the Central Board of Direct Taxes, disallowance under section 40(a)(i) of the Act was not warranted? (B) Whether on the facts and in the circumstances, the assessee was entitled to claim deduction of the demurrage charges of ₹ 1,08,53,980 paid to foreign company, without deducting tax on it, under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Division Bench noted that the contentions arise in the backdrop of a deduction of tax on a sum payable or paid on account of demurrage. The demurrage is payable to a nonresident company based in Japan. It was not disputed that no tax had been deducted on the amount of demurrage. When the assessee was called upon to explain why no tax had been deducted and, therefore, the claim as a whole should be treated as non deductible and the sum added back, it was urged that tax was not deducted in view of section 40(a)(i) of the Act. A contention was raised that the assessee being allowed such deduction as and when payment was made. The Assessing Officer recorded his agreement in the order that deduction would be admissible on the basis of actual payment of tax on the above demurrage. The First Appellate Authority referred to the relevant provisions and observed that the demurrage debited by the assessee in the hands of the recipient are in the nature of profits of the nonresident from the occasional shipping business under section 44B read with section 172 of the Income-tax Act. The First Appellate Authority referred to sub-section (8) of section 172 and the Circular reproduced above by u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, incorporated under the provisions of Indian Companies Act, 1956, is fairly an admitted position. The assessee cannot be said to be nonresident. We have also taken notice of section 6 i.e. Residence in India . In short, respondent assessee cannot be said to be non-resident. The present appeal pertains to the respondent assessee. In our view, in the facts of the present case, the respondent assessee cannot lay fingers on section 172, since we are not dealing with profits of non-residents. The other aspect is that such profits of non-residents should be from occasional shipping business. It is not the case that the respondent assessee has earned some profit from occasional shipping and is a non-resident. In our view, Section 172 does not have application in relation to the respondent assessee and in the facts and circumstances of the present case. The company from Japan viz. Mitsui Co. Ltd., Japan, recipient of demurrage amount is not before us. In other words, we are not examining the tax liability of the foreign company i.e. Mitsui Co. Ltd., Japan. On our query to the learned Senior Advocate Shri Usgaonkar as to material on record for occasional shipping, part of para 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifying the scope of Sections 172, 194C and 195 of the Act 1961. Advocate on behalf of the Revenue points out from para 4 of the Circular and submit s that Section 172 operates in the area of computation of profits from shipping business of nonresidents and there is no overlapping in the areas of operation of these sections. Learned Senior Advocate Shri Usgaonkar, appearing on behalf of the respondent assessee, also drew our attention to the Judgment of the Hon'ble Supreme Court in the matter of Commissioner of Sales Tax v. Indra Industries, reported in [2001] 248 ITR 338 (SC). It is a three Bench Judgment of the Honourable Supreme Court. It has been held by the Honourable Supreme Court that the circulars issued by Commissioner of Sale Tax not binding on assessee or Court, however, binding on the Department. In the case on hand, in our view, learned Commissioner of Income-tax (Appeals) and the learned appellate Tribunal have wrongly interpreted the Circular dated September 19, 1995, issued by the CBDT. This circular, in our opinion, cannot be considered in the facts and circumstances of the present case, in aid to the respondent assessee. The learned Assessing Officer, in fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble outside India or 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. Section 172 has application to shipping business of non-residents and the provisions of that section have application notwithstanding anything contained in the other provisions of the Act for the purpose of levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped at a port in India. Section 195 falling under Chapter XVII-B Collection and Recovery - Deduction at Source by sub-section (1) deals with any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act, not being income chargeable under the head Salaries and obliges him to deduct income tax thereon at the rates in force. It is evident, therefore, that the responsibility is on any person making payment to a non-resident. It is that person's obligation to deduct the tax at source. If the tax is ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (1) shall be the following, namely :- (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India. Explanation.- For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature. 46. A bare perusal thereof would indicate as to how this provision covers the case of an assessee who is a non-resident and engaged in the business of operation of ships. That stipulates a sum equal to 7 % of the aggregate of the amount specified in sub-section (2) of section 44B as deemed to be profits and gains of such business chargeable to tax under the head Profits and Gains of Business or Profession . It is the explanation which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escape from the levy and recovery of tax. The tax has to be levied and collected. The ship cannot leave the port or if allowed to leave any port in India, it must either pay or make arrangement to pay the tax. Hence, the apprehension of avoidance or evasion both are taken care of by the legislature. That is how advisedly the legislature cast the obligation to deduct tax at source on the person responsible to make payment to a non-resident in shipping business. 48. The resident assessee contended before the Division Bench in Orient (Goa) (supra) as well as the Division Bench which made the referring order that section 172 of the Income Tax Act has a bearing and an important one on the obligation to deduct tax at source. Therefore, it is the recipient's position and the perspective in which the recipient's income would be taxed will have to be borne in mind. The non-resident shipping company in respect of it's income would be in a position to rely upon section 44B and consequently section 172. However, we do not see how there is an obligation to deduct tax at source on the resident assessee/Indian company before us. While computing the income of the non-resident Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the assessable profit. Before the departure of the ship, the master of the ship has to furnish to the Income-tax Officer a returnof the full amount paid or payable to the owner or charter on account of the carriage of passengers, goods etc., shipped at the port in India since the last arrival of the ship at the port. In the event that, to the satisfaction of the Income-tax Officer, the master is unable so to do, he has to make satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf. A port clearance cannot be granted to the ship until the tax assessable under the section is duly paid or satisfactory arrangements have been made for the payment thereof. 4. The assessee in this case is the Aluminium Company of Canada which had time-chartered the ship and on whose behalf its shipping agent, the respondent, had executed the guarantee bond. Since the Company is a non-resident and the ship carried goods which were shipped at a port in India, the conditions specified in sub-section (1) are satisfied and the provisions of Section 172 will apply for the purpose of levy of tax, notwithstanding anything contained in the other pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cises the right conferred on him under section 172(7) of the Act, the Income Tax Officer is bound to make an assessment of the total income of the previous year of the assessee and the tax payable on the basis thereof should be determined in accordance with the other provisions of the Act and any payment made under the section (earlier) shall be treated as a payment in advance of the tax leviable for that assessment year and the difference between the sum so paid and the amount of tax found payable by him on such assessment, shall be paid to the assessee or refunded to him. The ad hoc assessment made under Section 172(4) of the Act is superseded and a regular assessment is made as per the provisions of the Act. In such a case, it is only proper and appropriate to hold that all the provisions of the Act in the determination of the tax liability including the ancillary or incidental or consequential matters pertaining to it are necessarily attracted. 8. Section 172(7) of the Act provides that payment made under the section shall be treated as a payment in advance of the tax leviable for that assessment year. It only means that such payment would be treated as advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment, wherein all the provisions of the Act will apply. It is not a mere provision for adjustment. The High Court was swayed by the title used in the corresponding provision of the predecessor Act (Income Tax Act, 1922 - Section 44-C), wherein there was a heading to the section - Adjustment . Section 172 of the Act contains no such heading. We hold that the Income Tax Appellate Tribunal was justified in holding that since the payment made under Section 172(4) of the Act is, by fiction, treated as advance tax, all the provisions in respect of the advance tax will apply and if on regular assessment made under Section 172(7) of the Act, there is any excess payment made by the assessee, then the assessee would be entitled to it and also interest thereon under Section 214 of the Act. We answer the question referred to the High Court in the affirmative, in favour of the assessees and against the Revenue. .. 52. Lastly, in the case of GE India Technology Centre Private Limited v. Commissioner of Income Tax and Anr.reported in [2010] 10 SCC 29 the Hon'ble Supreme Court of India had an occasion to consider the ambit and scope of section 195 of the IT Act. After reproducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. 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 consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act. ** ** ** 11. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 15. Section 195(2) is not merely a provision to provide information to the ITO(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 nonresident. 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). 16. 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 accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from Section 195(1). While interpreting a Section one has to give weightage to ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sum so chargeable where a proportion of the sum so chargeable is liable to tax. 19. 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 the ITO(TDS) of payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the nonresidents by which the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 53. In the view that we have taken, it is not necessary to refer the judgment of a Division Bench of the Delhi High in the case of Emirates shipping Line, FZE v. Assistant Director of Income Tax reported in [2012] 349 ITR 493. Suffice it to note that the view taken by the Division Bench and particularly in paras 17 and 18 of this judgment accords with the conclusion reached by us. 54. The difficulty is presented only when provisions are not read together and harmoniously so also without bearing in mind the setting and placement thereof in the chapters. These chapters of the Income Tax Act cover several aspects in relation to imposition, levy, assessment, collection and recovery of tax on the income specified above. To the extent contrary to above, we overrule the view in Orient Goa's case (supra). The question referred is answered accordingly. Since the question above is referred to us, having answered it, let the Appeals be now listed for hearing before appropriate Division Bench. 2.3. If the conclusion drawn by Full Bench of the Hon'ble jurisdictional High Court is analyzed it concluded that section 40 deals with amounts not deductible. The amounts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the I.T. Act. In a given case where the payer is an assessee he will definitely claim deduction under the I.T. Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-Section (6) has been inserted in Section 195 which requires the payer to 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 HIGH COURT view, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion that confronts us is if any part of commission income can be said to accrue or arise or deemed to accrue or arise in India. Toward this, the assessee s contention is that no services are rendered in India (the taxable territory). It is on this basis, as a reading of its decision in Toshoku Ltd. (supra) would reveal, that the Hon ble Apex Court held that the non-resident selling agents having acted outside India, their commission earned cannot be deemed to have either accrued or arisen in India. Where the services are rendered in India (taxable territory), the income therefrom, to that extent, would surely accrue or arise in India, so that one may not be required to even travel to the deeming provision of section 9, which in a way seeks to extend and to definition the scope of accrual by and through the concept of business connection . As explained in CIT vs. R. D. Aggarwal Co. [1965] 56 ITR 20 (SC), which stands referred to in Toshoku Ltd. (supra), and continues to govern the field, business connection involves the relationship between the business carried on by a non-resident (outside taxable territories), which yields profits or gains, and some activity in the taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In the facts of the present case, the assessee claims likewise, i.e., of no services having been rendered in India (taxable territory). There has been, however, no examination of the activities carried out by the nonresident agents, even as the Revenue claims the same to involve managerial and consultancy services, so that in nature and by definition the same would be fee for technical services, covered by section 9(1)(vii). The ld. AR, on being questioned in the matter, i.e., as to the nature and scope of the services rendered by selling or, as the case may be, consulting agents, conceded to the same, i.e., a complete absence of any examination in the matter. We consider both the assessee who only states of there being no written agreements between the assessee and the agents, as well as the Revenue, to be responsible for this. The law could not be applied without examining and determining the facts. The law provides the guidelines, the frame work, applying which to the facts as found, the issues as arising are to be decided/adjudicated. That is, the law could only be applied on the terra firma of the facts, which form the building block of any case. Not so doing wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms of the trade, viz. fluctuations in foreign exchange market; the price of some imported or indigenous material, etc. which may require renegotiation. The exchange, thus, would be on a regular basis, across different buyers, each with its own set of requirements and issues. The assessee s view point on each aspect of the matter, and at each stage, has to be put across to the buyers, and vice-versa, constituting an effective dialogue between the two, which is the prime function of the agent as an intermediary. Why, it may also necessitate visits by either side, to another, besides by the Agent/s to India, apart from the regular exchange and flow of information through other modes of communication. How else, we wonder, the business take form and be undertaken? The ld. AR, on being questioned in the matter, i.e., as to the manner in which the business is undertaken, putting across this scenario, would fairly submit that the same is a distinct possibility, though he was not in a position to so affirm or commit in the matter. This is precisely why we stated both the assessee and the Revenue to be responsible for a complete factual indetermination of the matter. Merely stating th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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