TMI Blog1984 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Electricity Board without deduction of tax at source. The ITO held that the Electricity Board was under an obligation to deduct tax at source under s. 195. Owing to the failure of the Electricity Board to deduct such tax, the Electricity Board was deemed to be an assessee in default in respect of the tax deductible at source under s. 195. Consequently, the ITO passed orders determining the tax, which, according to him, was deductible at source under s. 195 and required the Electricity Board to pay such amounts. These facts briefly constitute the origin for the subsequent appeals to the AAC and the Income-tax Appellate Tribunal and the present references before this court. R.C. No. 203 of 1978 relates to the payments made by the Electricity Board to M/s. Charmilles Engineering Works Ltd., Geneva, Switzerland. Two separate agreements were entered into with the above non-resident. One was for the purchase of Nos. 95,000 BHP Francis Turbines. Another Was for the purchase of 2 Nos. Butterfly Valves. This equipment was for the Upper Sileru Hydro-Electric Scheme, Visakhapatnam District. There were also two more contracts with the same non-resident for the assembly, erection and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary to set out the details. It is sufficient to state that, in respect of net payments aggregating, to Rs. 14,72,451 made by the Electricity Board during the financial years 1967-68 to 1972-73 (both inclusive), the ITO determined the tax deductible at source under s. 195 at Rs. 58,32,260 and the corresponding interest thereon under s. 201(1A) at Rs. 46,30,034 aggregating to Rs. 1,04,62,294. We shall now briefly refer to the facts in R.C. No. 205 of 1978, as the orders of the ITO in R.C. Nos. 203 and 205 of 1978 follow the same pattern. The Electricity Board entered into an agreement with Oerliken Engineering Co , Zurich, Switzerland, for the purchase of 2 Nos. 60 MW Generators and Indoor Switchgear for the Sileru Hydro Electric Scheme. Another contract was also entered into with the non-resident for the assembly, erection and testing and commissioning of the above equipment at Sileru. It appears that, under the erection contract, the Electricity Board paid the following sums to the non-resident company: Financial year Amount Paid Rs. 1966-67 1,95,877 1967-68 13,70,529 1968-69 1,34,378 Total 17,00,784 On the same basis followed in respect of payments m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t source was determined at Rs. 2,99,111 with reference to such gross figure. It may be mentioned that the order under s. 201 in respect of the payments made to this non-resident was passed by the ITO on May 10, 1976. Against the ITO's orders dated September 22, 1975 and September 24, 1975, respectively in R.C. Nos. 203 and 205 of 1978, the assessee filed appeals before the AAC of Income-tax and urged that the ITO's orders were illegal. A number of contentions were raised before the AAC challenging the correctness of the orders passed by the ITO. It is not necessary to refer to all these contentions. It may, however, be mentioned that the AAC rejected the various contentions raised by the assessee challenging the correctness of the orders passed, but cancelled the orders accepting one basic contention. That contention was to the effect that the provisions of s. 195 of the Act are applicable in cases where the sums paid were " pure income profits ", that is to say, the sums paid represented wholly income. It was urged that the provisions of s. 195 do not come into operation in a case where the non-resident was paid under contracts sums of money, a part of which only may represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al negatived the various contentions urged by the assessee, but upheld the order of the AAC on the same ground on which the AAC cancelled the three orders. Thus, the Income-tax Appellate Tribunal affirmed the order of the AAC cancelling the three orders of the ITO on the ground that the provisions of s. 195 of the Act are not applicable to payment of sums to a non-resident, which are not Id pure income profits ". The Tribunal held that there was no sanction to deduct tax from out of gross sums of money, a moiety of which alone represents the income chargeable under the I.T. Act. In the above view, the Tribunal dismissed all the three appeals filed by the ITO against the order of the AAC. Thereupon, the Commissioner of Income-tax filed reference applications under s. 256(1) of the Act requiring the Tribunal to refer the cases to this court for its opinion. That is how the Tribunal made the three references under consideration. It may perhaps be relevant to refer at this stage to the question of law referred in each reference for the opinion of this court under s. 256(1) of the Act. R. C. No. 203 of 1978: " Whether, on the facts and in the circumstances of the case, the Superin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable under the Act and deduct tax only in respect of that portion. Learned standing counsel urged that the Electricity Board failed to make an application under s. 195(2) to the ITO to determine the proportion of the sum chargeable in respect of sums paid to M/s. Charmilles Engineering Works Ltd., in R. C. No. 203 of 1978 and M/s. Oerliken Engineering Co., in R. C. No. 205 of 1978. In the absence of any application from the Electricity Board, the learned standing counsel contends, the ITO had no option but to enforce deduction of tax at source with reference to the entirety of the sums paid. According to the learned standing counsel, the ITO cannot exercise power to determine the relevant proportion of the sum chargeable unless an application is made by the person responsible for making the payment. If the person responsible for making the payment does not file an application under s. 195(2), the ITO can enforce deduction of tax at source in respect of the entire sum paid to the non-resident and that is what happened in respect of the payments made by the Electricity Board to the above-referred two companies. The learned standing counsel, therefore, supported the orders pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his propositions that : (a) provisions of s. 195 of the I.T. Act are applicable even in respect of sums paid to a non-resident during the course of trading operations, and (b) the sums paid to the non-resident need not represent wholly pure income profits and only a part of such sums paid may represent income chargeable under the Act. Sri M. Chandrasekhara Rao, learned standing counsel for the Electricity Board, reiterated the submissions made before the lower authorities. It is urged that, taking the entire scheme of the Act into account, the provisions of s. 195 apply only to cases where the sums paid to a non-resident represented pure income profits, that is to say, where the entirety of the sum paid represented income. According to the learned counsel, s. 195 can have no application in respect of sums paid during the normal course of trading operations such as payment of purchase price of materials. Learned counsel urged that it is impossible to predicate whether the sum paid consisted of even a small moiety chargeable under the Act because a trading transaction does not always result in income or profit. Learned counsel, therefore, urged that, because of the inherent diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable as income under the Act. The question referred to us deals with only the first aspect mentioned above. The second aspect is an integral part of the first aspect and it is necessary to reframe the question in order to bring the real controversy between the parties, which we shall do, before furnishing the required answers. We shall examine both the aspects as they are the subject-matter of consideration by all the authorities below and the counsel for both sides addressed elaborate arguments on these two aspects. Part B of Chapter XVII of the Act enumerates the provisions relating to deduction of tax at source. Section 192 deals with the obligation of the person responsible for paying income chargeable under the head " Salaries " to deduct tax from the salary. Section 193 deals with the obligation to deduct tax of the person responsible for paying income chargeable under the head " Interest on securities ". Section 194 deals with the obligation of the principal officer of a company to deduct tax at source from " dividends " paid. Section 194A deals with the obligation to deduct tax of any person responsible for paying to any person " interest" other than income chargeable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any interest, not being interest on securities or any other sum, not being dividends chargeable under the provisions of the Act, to deduct tax at source at the rates in force. Sub-section (2) of s. 195 provides that, where the person responsible for paying any such sum chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the ITO to determine, by general or special order, the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-s. (1) only on that proportion of the sum which is so chargeable. It is not necessary to refer to the other provisions contained in s. 195, as they are not relevant for our purpose. We are unable to find, in the language of s. 195, any support for the argument that the expression " any other sum " occurring in the section refers necessarily to sums which represent wholly income or profits. As we have already pointed out, the scheme of tax deduction at source applies not only to amounts paid which wholly bear " income " character, but also to gross sums, the whole of which is not income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is not wholly income so chargeable. Then, the provisions of sub-s. (2) of s. 195 will become fully effective. For the aforesaid reasons, we must prefer the interpretation which renders s. 195(2) effective without making it a dead letter. We do not also find anything inconsistent in the scheme of the Act or in the exigencies requiring deduction of tax at source to protect the interests of the Revenue from out of the sums consisting of only a small moiety of income. The safeguard provided in sub-s. (2) of s. 195 protects the interests of the person receiving such sums because an application can always be made to the ITO to determine the appropriate proportion of the sum chargeable under the Act, so that tax deduction at source can be confined only to such appropriate proportion and not to the gross amount. It should also be borne in mind that whatever tax is deducted at source under s. 195 from out of the gross sum is not irretrievably lost to the recipient. It is only a provisional payment which will be made to the Central Government to the credit of the recipient. The provisions of the Act enable the recipient, whether such recipient is a resident or non-resident, to file a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eniences. We are conscious of the fact that the process of making regular assessments on non-residents, after deduction of tax at source under s. 195, may take time and the non-residents may not be able to get back refund of excess tax deducted at source, if any, till the regular assessment is completed determining the tax payable by the non-residents on the total income chargeable under the provisions of the Act. We can only express the hope that the Central Board of Direct Taxes gives instructions to all the ITOs to expedite regular assessments on non-residents, from whom tax is deducted at source, giving top priority and facilitate smooth course of international trade involving a large magnitude of trading operations. The tax authorities will do well to make an accelerated assessment on non-residents under s. 194 of the Act, should circumstances require such a course in order to ensure that the non-residents get back expeditiously excess amounts of tax, if any, deducted at source under s. 195. We may refer to the decision of the Calcutta High Court in Anglo Indian jute Mills Co. Ltd. v. Dutt [1956] 30 ITR 525. Referring to s. 18(3B) of the 1922 Act, which is analogous to s. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the non-resident during the course of regular trading operations. We now turn to the second aspect of the matter, viz., whether s. 195 requires a person responsible for paying any sum to the non-resident chargeable under the I.T. Act to deduct tax on the gross sum of money. The answer is clearly found in the language of s. 195 itself. The obligation to deduct tax relates only to the appropriate portion of the gross sum, which would be chargeable as income in the hands of the recipient. We have already referred to the provisions of s. 195(2) of the Act, which affirm the above legal position. We have also noticed earlier that, in the orders passed concerning the payment of sums to M/s. Charmilles Engineering works in R.C. 203 and to M/s. Oerlikon Engineering Company in R.C. 205, the ITO required the company to pay tax on the gross sum of money. The reason was simple. The assessee did not make an application requiring the ITO to determine the appropriate proportion of the sum paid to the, non-resident which is chargeable under the I.T. Act. The learned counsel for the Revenue contends that, in the absence of any such application, it is not open to the ITO to himself make an appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the order was passed under s. 201 of the Act. For the purpose of determining the tax in respect of which the person responsible for making the payment could be deemed to be in default, the ITO must determine the tax only on the appropriate proportion of income chargeable under the Act. There is no prohibition in s. 201 of the Act against the ITO so determining the tax. Indeed, the power to determine the appropriate amount of tax deductible at source under s. 195 is implicit in s. 201 of the Act. In the face of the ITO's own acquiescence that, in respect of erection charges paid to the other companies, the net profit could not exceed 25%, it is not possible to uphold the ITO's action in determining the tax with reference to the gross sums of money in R.C. 203 and R.C. 205. As already mentioned, the power to determine the appropriate amount of tax is referable to s. 201 of the Act and the fact that the assessee did not file an application under s. 195(2) for determination of such appropriate proportion is not relevant for the purpose In any event, this is the only way the provisions contained in s. 195 and s. 201 can be harmoniously interpreted. We, therefore, hold that the pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of determining the final amount of tax deductible at source under s. 195. The ITO observed that, in all these cases, the Electricity Board agreed to pay all the tax liabilities to the non-resident companies arising on account of the supply of materials and the execution of the erection and the commissioning of the equipment at Sileru. The ITO, therefore, held that the net payments made had to be grossed up to determine the tax following the decision of the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283. The assessee has questioned the correctness of the grossing-up in principle and the AAC as well as the Income-tax Appellate Tribunal upheld the view that the payments made had to be grossed up. We have perused the orders in all the three cases to find out on what basis the grossing-up has been made. There is no guidance in the orders of the ITO as to how the figure was arrived at. It is not known whether the ITO adopted the system of grossing-up by working out tax on tax until he arrived at a " 0 " figure. If that was the basis followed, we do not think it is proper. The decision of the Orissa High Court in CIT v. American Consulting Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -residents above referred, was under an obligation to deduct tax at source under s. 195 of the Act in respect of the sums paid to them under the contracts entered into. (2) The obligation of the respondent-assessee to deduct tax under s.195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred. (3) While the ITO was correct in the determination of tax under s. 195 in respect of the payments made to M/s. Sacheron Works Ltd. in R.C. No. 204, he was in error in determining the tax deductible under s. 195 in respect of the gross sums of money paid to M/s. Charmilles Engineering Works Ltd. in R.C. No. 203 and M/s. Oerlikon Engineering Company in R.C. No. 205. Based on our above answers, we hold that the Income-tax Appellate Tribunal was in error in cancelling the orders passed by the ITO under s. 201 of the Act. While the order of the If 0 passed in R.C. No. 204 concerning the payments made to M/s. Sacheron Works Ltd., should be upheld in toto, the orders passed by the ITO in respect of payments made to M/s. Charmilles Engineering Works Ltd. (R.C. No. 203) and M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
