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TMI Blog2020 (3) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... penses made to non-residents including group entities of the Appellant under section 40(a)(i) of the Act on account of alleged non-deduction of taxes at source under section 195 of the Act. 2. Reimbursement of demurrage expenses of INR 2,07,31,596 Based on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in facts and in law: 2.1. in upholding the disallowance of reimbursement of demurrage charges amounting to INR 2,07,31,596 made to non-residents including group entities pertaining to AY 2013-14 of the Appellant under section 40(a)(i) on account of non-deduction of taxes at source under section 195 of the Act. 2.2. in upholding the action of the learned AO in characterising such reimbursement of demurrage charges as fees for technical services taxable under section 9(1)(vii) of the Act. 2.3. in not appreciating the fact that the payments to the non-residents including group entities are pure cost reimbursements and do not contain any service element. 2.4. in disregarding the order of the Commissioner of Income tax (Appeals) dated 18 March 2013 for AY 2008-09 in Appellant's own case wherein the issue in respect of allowability o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5/-. The said amount was disallowed u/s 40(a)(ia) of the Act. The said amount was disallowed u/s 40(ia) of the Act on account of non-deduction tax at source u/s 195 of the Act. The AO characterizing such reimbursement of demurrage repayment costs as fee for technical services taxable u/s 9(1)(vii) of the Act. It is argued by the Ld. Representative of the assessee that the assessee company nowhere indulge in any service element and the said amount was purely reimbursement and the said issue has been covered in the assessee's favour by the decision of the Bombay High Court in the case of CIT Vs. Dempo and Co. P. Ltd. (381 ITR 303) and also by the decision of the Hon'ble ITAT Mumbai Bench in the case of Kuloday Technopack (P) Ltd. Vs. ITO (86 Taxmann.com 74). Therefore, the claim of the Assessee is liable to be allowed. On the other hand, the Ld. Representative of the revenue has refuted the said contention. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.: - "8.2 The submission made by the appellant has been examined. It is noticed that the entire submission made by the appellant is under the presumption that the amount represents pure re- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant has merely harped on the character of payment made by it to its associate without discussing whether the amount, with reference to the actual beneficiary represented a sum having income component in it. 8.2.3 Demurrage is paid to the ship owner on account of delay caused to his ship due to delay in loading or unloading for which his ship has to berth in die harbour for a longer period. Demurrage may also be charged by pod authorities to the ship owner or the party whose goods are being unloaded. Generally, demurrage partakes the character of freight and is liable to tax in the country where the port, where demoage has been levied, is situated. It has been ascertained that the demurrage above has been paid in respect of Indian ports and the shipping lines involved are foreign ship owners. Freight income generated in India is a taxable income under Income Tax Act and hence, any payment of freight to a non-resident will invite TDS u/s 195. Generally, freight income of non-residents visiting Indian ports is governed by section 172 and hence, if the ship owner has paid taxes u/s 172, then the provisions of section 195 will not apply. However, most of the time, while t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax (Appeals) dated 28- 8-2002 and the Order passed by the Income-tax Appellate Tribunal, Panaji dated 2-12-2004. The same are, accordingly, quashed and set aside and the Order passed by the Assessing Officer stands upheld. Appeal is, accordingly, allowed and disposed of with no order as to costs." 8.6 In light of the fads narrated above, the action of the AO in disallowing the expenditure u/s 40(a)(i) is upheld and the ground raised by the appellant is dismissed." 8. On appraisal of the above said finding, we noticed that the matter of controversy has been decided by the CIT(A) on the basis of decision of Bombay High Court in the case of Orient (Goa) (P) ltd., [20091 185 TaX 111311 131 Bombay. But the situation has been changed now specifically in view of the decision of Bombay High Court in the case of CIT Vs. Dempo and Co. P. Ltd. (381 ITR 303). The relevant finding has been given in para no. 46 to 54 which is hereby reproduced as under.: - "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 7½% of the aggrega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 47. To our mind, the Division Bench judgment in Commissioner of Income-tax vs. Orient (Goa) Pvt. Ltd. seen in this light does not, with greatest respect, take into account the scheme and setting as understood above. There need not be apprehension because there is no 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 SRP 64/79 ITXA989.15.doc 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il or goods shipped at a port in India. The object of the section is to ensure the levy and recovery of tax in the case of ships belonging to or chartered by nonresidents. The section brings to tax the profits made by them from occasional shipping, by means of summary assessment in which one-sixth of the gross amount received by them is deemed to be the assessable profit. Before the departure of the ship, the master of the ship has to furnish to the Income-tax Officer a return of 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 shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parture of the ship from the Indian port falls, that an assessment, according to the provisions of the Act, in a regular manner be made. Thus, a right is given to the assessee to opt for a regular assessment although a "rough and ready" or a "summary assessment" has already been made under Section 172(4) of the Act. It is a valuable right. If the assessee exercises 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 determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not a payment of advance tax under the Act. We are afraid that the High Court has failed to give due effect to the language employed in Section 172(7) of the Act and the scope of the legal fiction enshrined therein. The reasoning of the High Court is rather strained as the distinction drawn is without any substance or difference. Section 172(7) of the Act provides for a regular 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 que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the I.T. Act. contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income 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 nonresident. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. 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 non-resident. Therefore, Section 195 SRP 74/79 ITXA989.15.doc 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted 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 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 SRP 76/79ITXA989.15.doc case of the Department that Section 195(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted 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 our view, there are adequate safeguards in the Act which would prevent revenue leakage." 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 vs. 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 SRP 78/79 ITXA989.15.doc to imposition, levy, assessment, collection and recovery of tax on the income specified above. To the extent contrary to above, we ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (ARR No. 856/2010) and AT & S India P. Ltd. (2006) 287 ITR 421 wherein it was held that the reimbursement is in nature of FTS and the fact that taxes are paid under the head 'Salaries' is of no consequence. 3. The appellant prays that the order of the Ld.CIT(A) on the above grounds be set-aside and that of the A.O be restored." 12. Ground Nos. 1 & 2 of grounds of appeal, Ld. Counsel for the assessee submitted that these grounds are relating to reimbursement of salary cost which was on account of availing personnel services from its AE's who were sent to India at secondment. 13. At the outset, it is submitted that identical issue has been decided in favour of the assessee by the Coordinate Bench of the Tribunal for the A.Y.2010-11 in ITA No. 4300/MUM/2016 dated 09.07.2019 wherein the Coordinate Bench rejected the revenue's appeal and sustained the order of the Ld.CIT(A) in deleting the disallowance. 14. Ld. DR vehemently supported the orders of the Assessing Officer. 15. On hearing both the sides, perusing the orders of the authorities below and the decision of the Coordinate Bench in assessee's own case for the A.Y. 2010-11 in ITA No. 4300/MUM/2016 dated 09.07.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l over the employees as employers amounts to reimbursement of salaries paid for services rendered in India on which TDS is applicable lids 192. Re AO has claimed that this is a case of dual employment where the appellant is the economic employer and the AEs are legal employer. By sending their employees to India, the AEs arc actually rendering services to the assessee company in India and accordingly, the payments made by the assessee company are in the nature of Fee for Technical Service (FTS). Accordingly, the AO has concluded that TUS ought to have been deducted u/s 195 by the appellant. 9.2 The AO has relied on the decision of AAR in the case of Verizon Data Services India Pvt I.td (AAR No. 865 of 2010), Centrica Offshore Pvt Ltd (AAR No. 856 of 2010) and AT&S India Pvt Ltd [2006) 287 ITR 421 wherein it has been held that reimbursement is in the nature of FTS and the fact that taxes are paid under head 'Salaries' is of no consequence. 9.3 The submission made by the appellant on this issue is summarized as below; 9.3.1 The Appellant had availed services of personnel/employees who were oil payrolls of its Associated Enterprises ('AE'), and in lieu of the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f reimbursement and other costs related to the Indian assignment incurred by Total SA in respect of said expatriates during the period of their secondment to India. The said reimbursement/ repayment shall be without any markup/ profit" 9.3.4 The appellant has relied on a number of judicial pronouncements. Some of them are: DDIT vs Tekmark Global Solutions LLC (38 SOT 7)(Mum), wherein the Mumbai Tribunal held that personnel deputed to the Indian company worked under the control and supervision of the Indian company and carried out work allotted to them by the Indian company. IDS Software Solutions India (P) Ltd vs l'I'0 (122 TTJ 410) (Bang), wherein it was held that Indian Company exercising control and supervision over a seconded employee and bearing the salary cost should be considered as an economic employer and not liable to withhold tax on the reimbursement of the salary to the overseas company. CIT vs 003 Engineers (32 Taxmann.com 271)(Bom) wherein it has been that reimbursement to sister concerns for payment of salaries to their employees as they were deputed to the respondent assessee on an actual basis is not liable to tax in India hence not subject to TDS. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UBRICANTS India Ltd You will work wholly and exclusively for TOTAL LUBRICANTS India Ltd. During your assignment, you will perform such duties as TOTAL LUBRICANTS Ltd directs you to perform from time to time. TOTAL LUBRICANTS India Ltd. shall assume complete responsibility or the work carried out during your Indian assignment. 4. While assigned to TOTAL LUBRICANTS India Ltd you will be required to comply with any local employment regulations established by TOTAL LUBRICANTS India Ltd. at the assignment location. 5. Your performance evaluation will be done by TOTAL LUBRICANTS India Ltd. based on the performance objectives set by your supervisor and the actual results achieved during your assignment. Terms and conditions The remuneration and other benefits that you be authorized during this assignment are specified in your addendum issued to you by TOTAL raffinage MARKETING dated I" September 2006. We wish you good luck on your India assignment 9.6 The secondment letter as reproduced above indicates that during the period of deputation with the appellant company, the AE does not have any control over the non-resident employee who is functioning under the control and man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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