2012 (6) TMI 404 - AT - Income Tax

Tribunal upholds CIT(A) decision on non-resident tax disallowance, assessee's belief considered

The Tribunal upheld the CIT(A)'s decision to delete disallowances under Section 40(a)(i) for non-deduction of tax on payments to non-residents. The ... Disallowance under Section 40(a)(i) of Income-tax Act for non deduction of tax on consultancy charges paid to nonresidents working in oil exploration projects in India – Held that:- payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee. Assessee being engaged in consultancy business, the fees paid to such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. - Therefore, clearly Section 9(1)(vii)(b) of the Act applied and the income earned by such non-residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason to hold a bona fide belief that no part of the payment had any element of income which was chargeable to tax in India. It cannot be fastened with any liability associated with non-deduction of tax at source on such payments. application of Section 40(a)(i) of the Act was not called for. appeal filed by the Revenue is dismissed Issues Involved:1. Deletion of disallowance under Section 40(a)(i) for non-deduction of tax on consultancy charges paid to non-residents.2. Deletion of disallowance under Section 40(a)(i) for payments made to non-residents for consultancy services rendered in Nigeria.Issue-wise Detailed Analysis:1. Deletion of disallowance under Section 40(a)(i) for non-deduction of tax on consultancy charges paid to non-residents:The Revenue's grievance was that the CIT(A) had deleted the disallowance of Rs. 46,99,128/- made by the A.O. under Section 40(a)(i) of the Income-tax Act, 1961, for non-deduction of tax on consultancy charges paid to non-residents working in oil exploration projects in India. The Revenue argued that tax deduction was compulsory, relying on the decisions of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. and the Supreme Court in Transmission Corpn. of AP Ltd. v. CIT.The assessee, engaged in consultancy services for oil exploration, had deducted 4% tax on payments to non-residents, believing Section 44BB of the Act applied, which considers only 10% of the payments as income. The A.O. disagreed, stating that the assessee should have obtained a certificate under Section 195(2) for a lower deduction rate and made a disallowance under Section 40(a)(i).The CIT(A) found that the assessee had a bona fide belief that Section 44BB applied and had deducted tax accordingly. The CIT(A) relied on the Special Bench decision in ITO v. Prasad Productions Ltd. and the Supreme Court decision in GE India Technology Cen. (P.) Ltd., which stated that if the payer believed no income was chargeable to tax, Section 195 did not apply. The CIT(A) concluded that the assessee could not be forced to follow Section 195(2) procedures and deleted the disallowance.The Tribunal upheld the CIT(A)'s decision, noting that Section 44BB is a special provision for computing profits and gains from mineral oil exploration, which prevails over general provisions. The Tribunal referred to the decision in Cairn Energy India Pty. Ltd., which held that special provisions override general provisions. Thus, the Tribunal concluded that non-deduction or lower deduction of tax did not warrant disallowance under Section 40(a)(i) and dismissed the Revenue's ground.2. Deletion of disallowance under Section 40(a)(i) for payments made to non-residents for consultancy services rendered in Nigeria:The Revenue was aggrieved by the deletion of disallowance under Section 40(a)(i) for payments made to non-residents for consultancy services rendered in Nigeria. The A.O. had disallowed Rs. 60,95,311/- for non-deduction of tax at source, arguing that the payments constituted income in India since the assessee did not have a separate business outside India.The assessee contended that the payments were for services utilized in its business in Nigeria, and under Section 9(1)(vii)(b), such payments could not be deemed to accrue or arise in India. The CIT(A) agreed, citing the Supreme Court decision in GE India Technology Cen. (P.) Ltd., which held that tax at source is deductible only from sums chargeable under the Act. The CIT(A) concluded that since the payments were not chargeable to tax in India, Section 195(2) did not apply, and disallowance under Section 40(a)(i) was not warranted.The Tribunal upheld the CIT(A)'s decision, noting that the payments were directly related to the assessee's Nigerian projects. The Tribunal found that the payments were for services utilized in the assessee's business outside India, and under Section 9(1)(vii)(b), such payments could not be deemed to accrue or arise in India. The Tribunal concluded that the assessee had a bona fide belief that no part of the payment was chargeable to tax in India and, therefore, could not be held liable for non-deduction of tax at source. The Tribunal dismissed the Revenue's ground.Conclusion:The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s deletion of disallowances under Section 40(a)(i) for non-deduction of tax on payments to non-residents. The Tribunal found that the assessee had a bona fide belief that the payments were not chargeable to tax in India and that special provisions under Section 44BB and Section 9(1)(vii)(b) applied. The Tribunal also dismissed the assessee's Cross Objection as withdrawn.