TMI Blog2018 (10) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... unds : 1. Whether on the facts and circumstances of the case, the Ld. CIT (A) has erred in holding that the assessee was not required to make TDS deduction u/s 195 of the Income Tax Act, 1961 on the payment of ₹ 1,06,53,926/- made to M/s Timken and thus deleting the disallowance made by the A.O. u/s 40(a)(i) of the Income Tax Act whereas such payment was chargeable to Income Tax in India. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that the assessee was not required to make TDS deduction u/s 195 of the Income Tax Act, 1961, on the payment made to M/s Timken and thus deleting the disallowance made by the AO u/s 40(a)(i) of the Income Tax Act without giving any findings contrary to the AO that M/s Timken Group has got permanent establishment in India and thus the income on this transaction was chargeable to tax in India on which TDS was to be deducted. 3.That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal. 2. The case was fixed for hearing on 13.9.2017, 21.11.2017 and 24.4.2018 but none appeared on behalf of the assessee. Even on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts had been made to the nonresident which is a foreign company. The sale price includes GP/NP and there is a business connection in India. Therefore the TDS liability arises and he also referred to section 195 (2) and also relied on some case laws. During the course of assessment proceedings AO also observed from the website of www.timken.com that the said company had headquarters at Ohio, US and following plants in India :- Location Office Plant Technical/engineering centre Bangalore 1 - 1 Chennai - 1 - Jamsedpur 1 1 0 Kolkata 1 0 0 New Delhi 1 0 0 Pune 1 0 0 Total 5 2 1 6. From the above table it was observed that there are five ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied on some case laws and disallowed the payment of ₹ 1,06,53,926/-. Feeling aggrieved from the order of the AO the assessee appealed before the Ld. CIT(A) and Ld. CIT(A) after considering the order of the AO and submissions of the assessee deleted the addition of ₹ 1,06,53,926/-. Feeling aggrieved from the order of the Ld. CIT(A) the revenue is in appeal before the ITAT. 8. Ld. DR relied upon the order of the AO and submitted that the Ld. CIT(A) has wrongly deleted the additions of ₹ 1,06,53,926/- because there is a permanent establishment in India of the US based company from which assessee has purchased materials and there is also business connection in India. Therefore the order of the AO should be restored. Reliance is placed on the decision of Hon ble Supreme Court in Transmission Corporation of A.P. Ltd. and Another vs. CIT, (1999) 239 ITR 587 (SC). 8. After hearing Ld. DR and going through the orders of lower authorities we observe that Ld. CIT(A) has rightly deleted the additions made by the AO in regard to the purchase of ₹ 1,06,53,926/- from M/s. Timken Company. The conclusions reached by the Ld. CIT(A) is as under :- 9.5 The contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been paid to the account of central government. 9.7 It has been envisaged that the payments with regard to which a payer is liable to withhold tax at source in case payments are made to a person situated outside India or to a non-resident situated the territories of India. The conditions are envisaged in the section 195 of the Act, the same is reproduced for quick reference: Other sums. 195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest not being interest referred to in section 194L8 or section 194LC) or section 194LO or any other sum chargeable under, the provisions of this Act not being income 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 (230) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assesses and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.} (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.} (7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Boord 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low: The attention of the assessee was also drawn to the decision of the Karnataka High Court in the case of ClT (international taxation) vs. Samsung Electronics Co. Ltd. (2009) 185 Taxman 313 (Kar) wherein it has been held that as per mandate u/s 195(1), every payment made by a resident payer to a non resident recipient in respect of any goods/ services supplied by non-resident, which resident payer is making use of in running of its business or any other activity indulged in as a part of its business, professional activity, prima facie bears character of an income of recipient and, therefore, obligation u/s 195 springs up. As the payment made to the non-resident contained his GP/NP and therefore the income of the non-resident, which is chargeable under the provisions of this Act {Income Tax Act, 1961} as the income was arisen in India, the counsel was asked to show cause as to why the said purchases should not be disallowed u/s 40(a)(ia} of the Act as neither tax has been deducted nor certificate of no-deduction of tax from the A. O. has been obtained. 9.11 However the Counsel of the appellant has drawn by attention to the GE India Technology Centre Pvt Ltd v. CIT [201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded in them. The controversy was different and the Court held that if some part of the payment was taxable} an application u/s 195(2) had to be made. The High Court's interpretation completely loses. sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from sums chargeable under the Act i.e. chargeable u/s 4, 5 and 9 (v) As the High Court had not decided the question whether the payments for supply of software was royalty or not, the matters are remitted to the High Court for a decision on that point. 9.12 Thus based on this decision of the Hon'ble Supreme Court above, the addition made by the AD appears to be bad in law. 9.13 Now we come to the legal sanctity of the second argument of the Appellant i.e. benefit of Article 26 [Non-discrimination clause] of the DTAA as entered between India and USA (reported in 187 ITR 102 and as amended]. The counsel of the appellant after relying upon the nondiscrimination clause has argued that the non-discrimination clause is incorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was argued that the Ld. AO grossly erred in not following the circular which was binding upon him. Reliance in this regard was placed upon the 5 judges bench of Hon'ble Supreme Court in the matter of CIT vs. Ratan Melting and Wire Industries reported in (2008) 14 DTR (SC) 324, where in inter alia the Hon'ble apex court held: I. Once the circular has been issued it is binding on the revenue authorities and even if it runs counter to the decision of this Court, the revenue authorities cannot say that they are not bound by it. II. The circulars issued by the Board are not binding on the assessee but are binding on revenue authorities. It was submitted that once the Board issues a circular, the revenue authorities cannot take advantage of a decision of the Supreme Court. The consequences of issuing a circular are. that the authorities cannot act contrary to the circular. III. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to an taxation or any requirement connected therewith which is other or more burdensome than the taxation connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected. 5. Nothing in this article shall be construed as preventing either Contracting State from imposing the taxes described in Article 14 (Permanent Establishment Tax) or the limitations described in paragraph 3 of Article 7 (Business profits). 9.18 To interpret the Article the best method is to rely on the judgements of higher forum. The relevant extracts of the judgements as cited by the counsel were considered,the relevant extracts are reproduced herein below: Special Bench of ITAT in the matter of Rajeev Sureshbhai Gajwani vs. ACIT reported in 137 TIJ 1 and 8 ITR (Trib) 616, inter alia the Hon'ble Bench Concluded: 8. We have considered the facts of the case and the submissions made before us. Facts, in short, are that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether assessee who is a resident could take benefit under this clause, i.e. art. 26(3). A plain reading of art. 26(3) clearly suggests that the assessee can claim the benefit. In this regard . it would be relevant to refer to the provisions of s. 90(2) of the Act, which reads as follows : Sec. 90. Where the Central Government has entered into an agreement with the Government of any other country outside India under sub-so (1) for granting relief of tax, or as the case may be, avoidance of double taxation then in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee. 24. The payment in question by assessee to M/s HIAI attracts the provisions of the Indo-US DTAA. The payment in question if at all will be taxable in the hands of M/s HIAI in India only if it is a payment for included services within the meaning of art. 12(4) of the said DTAA and not taxable in India otherwise. The sum in question cannot be taxed as business income, since M/s HIAI admittedly does not have a PE in India. If the income is considered as having accrued or arisen to M/s HIAI in India, yet they c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate. [Other portion of art. 24(4) are not repeated as they are not relevant to the present issue). ..... 26. As already observed by us the provisions of s. 40(a)(O as it existed prior to its amendments by Finance Act, 2003, w.e.f. 1st April, 2004 provided for disallowance of payment made to a non-resident only where tax is not deducted at source on such payment at source. A similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus a non- resident left with a choice of dealing with a resident or a nonresident in business would opt to deal with a resident rather than a nonresident owing to the provisions of s. 40(aj(i). To this extent the non-resident is discriminated Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident. Thus this clause in DTAA neutralizes the rigour of the provisions of s. 40(a)(i). By virtue of the provisions of s. 90(2) the law which is beneficial to the assessee to whom the DTAA applies, should be followed. We, therefore, hold that in view of art. 26(3) of Indo-US DTAA, the AO c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer to the provisions of section 90(2) of the IT Act, 1961. It reads thus :- 90(2) Where the Central Government has entered into an agreement with the Government of any other country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee. Hence by virtue of the provisions of section 90(2), the law which is beneficial to the assessee to whom DTAA applies, should be followed. This view is supported by the decision of Hon'ble Supreme Court in the case of Union of India v. Azadi Bacboo Andolan [2003]2631TR 7061. Hon'bteSupreme Court held as under:- No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act, the Agreement may be restored to for negativing or reducing it; and, in case of difference between the provisions of the Act and the agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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