TMI Blog2022 (6) TMI 1251X X X X Extracts X X X X X X X X Extracts X X X X ..... d consequences of non-deduction as enumerated above. It cannot be stated that the assessee is debarred from invoking such a provision if he were of the view that the payment being made was not chargeable under the provisions of the I.T. Act. To place such a heavy burden of adjudication upon the assessee before invoking the tentative determination under Section 195(2), considering the nature of proceedings, may not be called for. Accordingly, the recourse to Section 195(2) is perfectly in consonance with the object of Section 195 and cannot be faulted. Whether the petitioner is required to deduct TDS u/s 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of FISCAL evasion? - It is clear that 'FIS' under Article 12(4) would refer to payments of any kind to any person in consideration for rendering of technical or consultancy services (including through the provision of services of technical or other personnel) if such services make available technical knowledge, experience, skill, know-how or processes or consists of development or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation-2 in Section 9(1)(vi) and that the element of profit is not an essential ingredient of receipt, to make it taxable is erroneous. It must be noted that as observed above, the provisions of the I.T. Act, will have to give way to the provisions of 'DTAA' when 'DTAA' is more beneficial to the assessee. It is in this context that the reliance on Explanation-2 in Section 9(1)(vii) may not be of relevance. The aforesaid provision of the I.T. Act which deals with 'FTS' is different from the concept of 'FIS' under Article 12(4). The 'make available' requirement that is mandated under Article 12(4) grants benefit to the petitioner and accordingly, the question of falling back on the provisions of Section 9 of the I.T. Act does not arise. On this score alone, the conclusion in the impugned order of the payment for the service falling within the description under Section 9 of the I.T. Act as 'deemed income', is to be rejected. Whether Deduction is on gross receipts? - What needs to be noticed is that the logic of deduction of tax on the gross amount as has been held in respect to Section 194C and Section 194J cannot be extended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was 'FIS'. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting 'nil tax deduction at source.' Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 01.05.2020 is set aside and the respondent No.1 is directed to issue a Certificate under Section 195(2) of I.T. Act to the effect of 'Nil Tax Deduction at Source' as regards the petitioner's application dated 15.01.2020. - WRIT PETITION NO. 3619/2021 (T-IT) - - - Dated:- 24-6-2022 - THE HON'BLE MR.JUSTICE S. SUNIL DUTT YADAV FOR THE PETITIONER : SRI TARUN GULATI, SENIOR ADVOCATE FOR SRI KISHORE KUNAL, SRI PARTH, MS.ANKITA PRAKASH SRI PRADEEP NAYAK, ADVOCATES FOR THE RESPONDENTS : SRI K.V.ARAVIND, ADVOCATE ORDER S. SUNIL DUTT YADAV. J This order has been divided into the following Sections to facilitate analysis: I Brief Facts 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction nor does it obviate the need to deduct u/s 195. 4. Once the income is in the nature of FTS/FIS, it is to be taxed on gross basis; there is no need to examine whether or not income element is embedded in the said payment. 2. Consequent to the grant of relief at prayer (a), the petitioner has sought for issuance of writ of mandamus to direct the first respondent to issue 'Nil Tax Deduction at Source Certificate' to the petitioner under Section 195(2) of the Income Tax Act, 1961 ['I.T. Act' for brevity]. I. BRIEF FACTS:- 3. The petitioner is stated to be engaged in the business of providing Information Technology Solutions and Support Services for e-commerce industry. In the course of its business, the petitioner is stated to have made payments in the nature of pure reimbursements to M/s.Walmart Inc., Delaware, USA (hereinafter referred to as 'Walmart Inc.') for the Assessment Year 2020-2021 and in that regard had requested the Department for issuance of a 'Certificate of No Deduction of Tax at Source'. The payment of salaries to the deputed expatriate employees were stated to have been made by 'Walmart Inc.' for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for being taxed for such income in the Country of residence, is to be avoided. 12. However, the said application came to be rejected while directing the petitioner to deduct tax at source on the premise as found in the conclusion of the impugned order reproduced supra at para-1. II. CONTENTIONS OF PETITIONER:- 13. The petitioner is not required to deduct tax under Section 195 on payments which are in the nature of reimbursement, as 'withholding obligations' under Section 195 arise only when the 'sum paid' to the non-resident is 'chargeable to tax' under the Act. Reliance is placed on the judgment in the case of GE India Technology Centre Private Limited v. Commissioner of Income Tax and Another (2010) 10 SCC 29 14. As per Article 12 of the 'DTAA', the sums paid could not be regarded as Fee for Technical Services (hereinafter referred to as 'FTS') and accordingly, there will be no income of 'Walmart Inc.' chargeable to tax in India. 15. The 'Memorandum of Understanding' (MoU) dated 12.09.1989 entered into between the Government of India and U.S.A. which is stated to be forming part of the 'DTAA' p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the employees, the petitioner would qualify to be the real and economic employer of the seconded employees. 20. 'Walmart Inc.' being a tax resident of U.S.A., the disputed transaction will be governed by the provisions of 'DTAA' in view of Section 90(2) and whether the payments made by the petitioner to 'Walmart Inc.' amounts to 'FTS' / 'FIS' will have to be determined as per the provisions of Article 12 of 'DTAA.' While placing reliance on the judgment in Commissioner of Income-Tax, Central Circle v. De beers India Minerals (P) Ltd (2012) 346 ITR 467 (KAR), it is contended that the terms of Article 12 is only to those payments which are made for rendering the technical or consultancy services and making the technical knowledge, experience available to the recipient which only are covered within the meaning of 'FIS'. 21. Once the transaction is admittedly in the nature of payment of salaries, same is excluded from purview of Section 195 and cannot be subjected to further deduction. 22. The reliance placed by the respondents in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi (2014) 227 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were offered senior positions in the Management and such employees were assigned by 'Walmart Inc.' to the petitioner only because of their experience in managerial and consultancy skills required by the petitioner and accordingly, the payment made ought to be construed as 'FTS' as defined in Section 9(1)(vii) of the I.T. Act. 30. The examination of documents would reveal that the seconded employees remain the employees of 'Walmart Inc.' even during the period of secondment. 31. The deduction of tax at source under Section 192 will not take away the applicability of the appropriate Section. IV. ANALYSIS:- 32. In light of the above factual matrix, the following points arise for consideration:- (A) Whether the application of the petitioner dated 15.01.2020 filed under Section 195(2) of the Income Tax Act was not maintainable? (i) It is the contention of Revenue that the application under Section 195(2) is maintainable only in the event of composite payment and that where a 'NIL Deduction Certificate' is sought for, recourse is to be made under Section 197. (ii) It must be noted that the Deputy Commissioner of Income Tax (DCIT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of sum (other than salary) payable to non-resident, chargeable to tax in case of the recipient. To, The Assessing Officer, ............................ I ______________ being the person responsible for making payment to a non-resident or to a foreign company any sum (not being income chargeable under the head Salaries ) do, hereby, request that a certificate may be issued to me after determining the appropriate proportion of such sum chargeable to tax in the case of the recipient (if any) and authorise me to deduct income-tax on such appropriate proportion (if any). ... (vi) As per Rule 28 of Income Tax Rules, 1962, a person can file an application in Form No.13 for grant of a Certificate for deduction of income tax at any lower rates or no deduction of income tax under Section 197(1). Form No.13 prescribes the format of application that is to be made by the recipient/payee for no deduction of tax at source or lower rate for deduction of tax at source and the relevant portion of the Form is extracted as follows : [See rules 28 and 37G] [e-Form] Application by a person for a certificate under section 197 and/or sub-section (9) of section 206C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch determination, tax shall be deducted under Sub-Section (1) only on that proportion of the sum which is so chargeable. However, if the assessing authority is of the view that no tax is chargeable, a certificate to that effect could be issued to the person responsible for making payment. Once a certificate is issued, the liability of the person responsible for paying under the aforesaid provision ceases and without any deduction he may make payment to the non-resident. Insofar as Section 197 is concerned it provides for a similar application being made by the recipient of the income. On such an application being made under Section 197(1), the assessing officer can give to him such certificate as may be appropriate. If such certificates states no tax is deductible, until such certificate is cancelled by the assessing officer, the person responsible for paying the income is under No obligation to deduct tax while making payment. In fact the language employed is Shall . Therefore, it is mandatory in nature. What is the effect of such a certificate was the subject matter of interpretation. Accordingly, it is clear that Section 197 can be invoked by the recipient and acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 195(2) and Section 197 of the Act are in the nature of safeguards for the assessee and are to be invoked to avoid consequences of a finding eventually that the payer ought to have made deduction after assessment and in such case, it would be open to treat the assessee as an assessee in default in terms of Section 201 of the I.T. Act, leading to prosecution being initiated under Section 276B against the payer and disallowance of expenses under Section 40(a)(ia) of the I.T. Act. (xi) Keeping in mind that the determination under Section 195(2) or under Section 197 by grant of Certificate being tentative in nature, the assessee must be permitted to invoke such provision and seek for certificate in order to avoid consequences of non-deduction as enumerated above. It cannot be stated that the assessee is debarred from invoking such a provision if he were of the view that the payment being made was not chargeable under the provisions of the I.T. Act. To place such a heavy burden of adjudication upon the assessee before invoking the tentative determination under Section 195(2), considering the nature of proceedings, may not be called for. Accordingly, the recourse to Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical design. (v) There must be a comparison between the provisions of the I.T. Act and the provisions of 'DTAA' and a finding that 'DTAA' is better in light of the provision under Article 12(4) for the purpose of determining whether the payment made by the petitioner to 'Walmart Inc.' would constitute 'FIS', requires determination. (vi) Section 195(2) places an obligation on the petitioner to make deduction of tax under sub-section (1) where payment of any such sum chargeable under this Act is being made to a non-resident. (vii) The words chargeable under this Act if read in conjunction with provision of Article 12(4) of 'DTAA' and the obligation under Section 195(2) is looked at, it becomes clear that 'FIS' as defined under Article 12(4) are more beneficial to the assessee insofar as his obligation to deduct the tax. Accordingly, Article 12(4) requires to be applied to determine liability to deduct tax. (viii) It is clear that 'FIS' under Article 12(4) would refer to payments of any kind to any person in consideration for rendering of technical or consultancy services (including through the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Secondment (Clause 6.2.4 of M.S.A.) by itself is insufficient to treat it as 'FIS' as has been concluded, de hors the satisfaction of 'make available.' (xiv) The proceeding under Section 195 results in a tentative finding more as a safeguard to the payee and if such determination exempts the payee from making a deduction at that stage, such tentative deduction, it must be emphasized is still subject to final determination of taxability qua the recipient. (xv) Accordingly, the contention of respondents raised at the time of oral arguments that the enquiry regarding 'make available' still remains to be determined and is based on further material to be submitted regarding the requisition of the employees by the petitioner is an enquiry that is not called for. As the M.S.A. does not support 'make available', further enquiry beyond that may not be called for, considering the nature and scope of proceedings. (C) Deduction under Section 195(2) of Income Tax Act on the 'sum chargeable under this Act':- (i) As discussed above, it is the provision of 'DTAA' that would be of only relevance in determining the necessity of deducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned to the income component of that sum was under consideration. The Apex Court has observed that it was neither possible nor permissible to the payer to determine what part of the amount paid by him to the contractor constitutes income of the latter. It was further observed that permitting such ascertainment of income component would result in placing an impossible burden upon the payer and would result in 'an impractical and unworkable provision'. This would not further the case of the Revenue as Section 194C(1) refers to deduction at the time of credit of 'such sum', which is in contradistinction to Section 195 where the deduction is on 'any other sum chargeable under the provisions of the I.T. Act' (iv) What needs to be noticed is that the logic of deduction of tax on the gross amount as has been held in respect to Section 194C and Section 194J cannot be extended to Section 195 which specifically uses the term any other sum chargeable under the provisions of this Act. Such terminology is absent in Section 194C and Section 194J of the I.T. Act. The difficulty of ascertainment of income component as being an impossible burden on the payer in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the secondment. (b) Clause 1.5 defines the scope of work relating to the secondment. (c) Clause 3.1 which provides that Flipkart may terminate the services of the secondees. (d) Clause 4.2 provides that the party placing the secondees can invoice the party receiving the service, the secondment costs, expenses and incidental costs borne by the Home Country. (iii) While passing the impugned order, the DCIT has concluded that there is no employer-employee relationship between the petitioner and the seconded employees. Such a conclusion is arrived at while noticing that.- (a) 'Walmart Inc.' has the power to decide on continuance of the services with 'Walmart Inc.' in U.S.A. after termination of their secondment in India. (see para 11.1 of the impugned order), (b) 'Walmart Inc.' raises invoice after incurring the secondment costs (as per Clause 4.2 of M.S.A.), (c) The equity eligibility of the seconded employee continues to be tied to 'Walmart Inc.'. (iv) However, what would be of significance is the relationship between the petitioner and the seconded employees during the period of secondment that has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the particular facts of the case had held that the Overseas Co., had a pool of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice. (x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of man power was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as 'FIS' which is make available to the Indian Company. (xi) Accordingly, any conclusion on an interpretation of secondment as contained in the M.S.A. to determine who the employer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for 'FIS' in light of the further requirement of make available. (F) Distinguishing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the real employer, that there was no Service PE in the local Country. (b) That there was indeed a reimbursement in the true sense and that cost payment among related Entities was to be ignored. (c) That 'FIS' satisfied the 'make available' test. Finally, the judgment in Centrica is on the facts and material on record. V. CONCLUSION:- 33. In the present case, the stand taken on the material available is on the construction of legal position. As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application. 34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings. A perusal of the file of the Department does not make out any instance where the Department had sought for further information which was not furnished. On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered. In f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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