TaxTMI 
TaxTMI 
2007 (11) TMI 332
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....ot required to deduct tax at source under section 195 of the Act. 2.1 Without prejudice, that the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the disallowance under section 40(a)(i) had to be restricted to only that part of the mobilization and demobilization expenses reimbursed by the appellant which related to activity carried out in the Indian territorial waters. 3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that whether VOAMC claimed deduction of the aforesaid amount paid by that company to nonresident service providers was irrelevant for determining the appellant's obligation to deduct tax at source from the aforesaid amount reimbursed by the appellant to VOAMC. 4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in alleging that the real transaction relating to mobilization and demobilization of dredgers was between the appellant and non-resident service providers (and not VOAMC) and that the appellant failed to discharge its obligation of deducting tax at source in respect of payment made in respect of the aforesaid transaction with the non-resident s....
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....ious year, the assessee in the profit and loss account relating to the relevant previous year debited, inter alia, mobilization and demobilization cost of Rs. 8,92,37,645 reimbursed to VOAMC. Out of the aforesaid amount, Rs. 8,65,57,909 pertained to the aforesaid dredging contract at Port Mundra which was completed during the relevant previous year. The said cost related essentially to transportation of dredger, survey equipment and other plant and machinery from countries outsideIndiato the site inIndiaand re-transportation of the same on completion of the contract, including fuel cost incurred on transportation. The aforesaid services were contracted by VOAMC and were provided by various non-resident parties. The appellant reimbursed the cost relating to mobilization and demobilization incurred by VOAMC on the basis of invoice received by VOAMC from the non-resident service providers. 3. The assessee had filed an application with DCIT, Circle 2(2), International Taxation,New Delhifor issuing Nil tax withholding certificate in respect of reimbursement of various costs required to be made by the assessee to VOAMC in relation to the dredging contracts being executed by the assessee....
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....med by the assessee. 5. Aggrieved with the order of Assessing Officer the assessee filed an appeal before the CIT(A) and contended before him that:- "(i) All the expenses reimbursed were supported by the invoices of third parties and proper contracts. Since all the services were rendered outsideIndia, these payments did not accrue or arise any taxable income inIndia. Therefore, the appellant had not I deducted Income-tax at source from these payments. (ii) The action of the ld. Assessing Officer is not in accordance with the law as he ignored the basic principle that if a particular amount is not includible in the total income of a person, then such amount cannot be considered as income for the purposes of deduction of tax at source is not to collect a sum which is not a tax levied under the Act, it is to facilitate the collection of the tax lawfully leviable under the Act. (iii) An interpretation which would result in collection of certain amounts by the State which is not a tax qualitatively is impermissible in the case of taxing statute. (iv) The position of the statute is that unless the payment is such that the amount is chargeable under the Act, the liability upon th....
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....nt reimbursed. In support of his contention he has placed reliance on following cases:- (i) CIT v. Tejaji Farsaram Kharawalla Ltd. [1968] 67 ITR 95 (SC) (ii) CIT v. Industrial Engg. Products (P.) Ltd. [1993] 202 ITR 1014 (Delhi) (iii) Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 (Delhi) (iv) Addl. CIT v. Enron Expats Services Inc. [IT Appeal Nos. 4756 and 4757 (Delhi) of 2005] (v) Addl. CIT v. Enron Oil & Gas International Inc. [IT Appeal Nos. 2141 to 2143 (Delhi) of 2005] (vi) Coca Cola India Inc. v. Addl. CIT [2006] 7 SOT 224 (Delhi) (vii) United Hotels Ltd. v. ITO [2005] 2 SOT 267 (Delhi) (viii) ITO v. Dr. Willmar Schwabe India (P.) Ltd. [2005] 3 SOT 71 (Delhi) (ix)Clifford Chance,UKv. Dy. CIT [2002] 82 ITD 106 (Mum.) (x) DECTA, In re [1999] 237 ITR 190 (AAR) (xi) Hyder Consulting Ltd., In re [1999] 236 ITR 640 (AAR) 8. AR for the assessee further submitted that the mobilization and demobilization were provided outside India and did not result in any income arising to VOAMC or to the non-resident service providers in India while referring to the decision of the ITAT, Delhi Bench, in the case of Saipem SPA v. Dy. CIT[2004] 88 ITD 213....
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....expenses to VOAMC does not give rise to income in the hands of VOAMC, the transaction of mobilization and demobilization of dredgers was between the appellant and the non-resident service providers and the appellant was required to deduct tax at source from the payment made to non-resident service providers. It has not been appreciated that there was no privity of contract between the appellant and the non-resident service provider and no payment was made by the appellant to the non-resident service providers. Further, CIT(A) having observed that VOAMC had a PE inIndia, in view of the order dated,22-11-2002passed under section 195(2), there was no basis of holding that the aforesaid amount was paid by the appellant to the non-resident providers and the appellant was required to deduct tax at source thereon under section 195 of the Act. 12. Further, he also contended that the decision of the ITAT in the case of Herbalife International India (P.) Ltd. has been wrongly distinguished by the CIT(A) on the ground that the dealings between the appellant and VOAMC, who are associated enterprises were not at arm's length and the provisions contained in Article 24(4) of the Indo-Netherl....
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....ection 37 which do not make a difference between payment to the resident or a non-resident. Section 40(a)(i) and section 195 are machinery provision and permits allowances in the year in which tax is deducted at source and thus provisions of Indo-Netherlands DTAA cannot-be attracted for discrimination. In this regard he has referred to para 55 of the OECD commentary on article 24. Even otherwise, provisions of law (as per the Income-tax Act) have to be followed even if Hon'ble Tribunal finds that provision of article 24 of the DTAA are attracted. The validity of provisions of section 195 or 40(a)(i) cannot be adjudicated upon by the Hon'ble Tribunal. It is submitted with the utmost respect that the Hon'ble Tribunal does not have jurisdiction to adjudicate upon the validity of a provision of Income-tax Act - in view of the Full Bench decision of Hon'ble Supreme Court in case of K.S. Venkatraman & Co. (P.) Ltd. v. State ofMadras[1966] 60 ITR 112. 15. Further he referred to the case of Saipem SPA and submitted that the same is also not relevant as it was decided in reference to section 44BB of the Income-tax Act. The Hon'ble Tribunal failed to appreciate that sect....
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....s per sub-clause (i) of clause (a) of section 40 which has been substituted by Finance Act, 1988 with effect from 1-4-1989 to extend the applicability of the clause also to the payments made to non-resident of royalty, fee for technical services or any other payment chargeable under this Act. Now, the inclusion of the words 'any another payments' in the amended provision has widened the scope of the meaning of the word payment and so the payments made by the assessee through M/s. Van Oord ACZ Marine Contractors BV, Netherlands to the non-residents in respect of mobilization and demobilization charges amounting to Rs. 8,65,57,909 under consideration is covered within the provision of section 40(a)(i) of the Act. 21. From the existing provisions of sub-clause (i) of clause (a) of the section 40 of the Act, it is further clear that no deduction is allowed in the computation of income on account of interest, royalty, fee for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company, if tax is not deducted at source from payment of these sums or after deduction of tax at source, payment is not made to the account o....
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.... to the non-resident is chargeable to tax under the provisions of the Act or not? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum, what would be the income is to be computed on the. basis of various provisions of the Act including provisions for computation of the business income) if the Payment is a trade receipt. However, what is to be deducted is income-tax payable thereon at the rates in force. Under the Act, total income for the previous year would become chargeable to tax under section 4. Sub-section (2) of section 4, inter alia, provides that in respect of income chargeable under sub-section (1), income-tax shall be deducted at source where it is so deductible under any provision of the Act. If the sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted." 24. Their Lordships thereafter while discussing the purpose of the enactments of section 195 of the Act observed as under:- "Whatever may be the position, if the income is from profits and gains of business, it would be computed under the Act as provided at the time of regular assessment. The purpose of su....
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....s rejected by Assessing Officer and direction is issued by the Assessing Officer to deduct such tax at a particular rate the payer is duty bound to deduct tax as per the directions of Assessing Officer and in case no such application for obtaining the certificate was filed before the Assessing Officer then the payer is duty bound to deduct tax as per the prescribed rates in force at the relevant time. If the payer still fails to comply with the provisions there is no escape for the payer from suffering the consequences provided under the Income-tax Act. (d) Since the deduction of tax under section 195 on such payments to non-residents is subject to regular assessments the rights of parties are not adversely affected in any manner whatsoever and is clearly indicative of a fact that such deductions are tentative. 27. From the above discussion we can further deduce that rights and duties of the payer now clearly stand demarcated and limited to the extent as laid down by the Apex Court in their order i.e., that the payer/assessee is duty bound to deduct tax at source for the payments made to non-residents at the appropriate rates as provided under these provisions. The payer cannot ....
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....re required to be established by them. 30. For non-compliance of the statutory provisions of section 195 by the payer it would have to suffer the consequences laid down by the Legislature under section 40(a)(i) of the Income-tax Act. 31. The provision of section 40(a)(i) has been enacted by the Legislature in its wisdom to ensure the effective compliance of provisions of section 195 of the Act relating to tax deductions at source in respect of payments made to non-residents outsideIndia. Thus the provision mandates that no deduction for such payments made to non-residents outside India is to be allowed to the payer/assessee while computing its income while considering its claim of deduction for such payments made to nonresident at the time of assessment in case the tax is not deducted at source from the payment of such sums as per provisions of section 195. 32. With this enactment now the duty is cast upon the Assessing Officer to not allow the deduction to the payer/assessee for such payments in the cases where the provisions of section 195 are not complied with by the payer while computing the income of such payer assessee during the course of assessment proceedings. 33. Thus....
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....ciding the issue under section 40(a)(i) as being not relevant and so we are also not referring to the same in this order. 34. Hence, from our elaborate discussion now the rights and duties of the payer/payee under sections 195 and 197 of the Act as well as the duty of the Assessing Officer to take action against such payer/assessee under the provisions of section 40(a)(i) of Income-tax Act in case of non-compliance with the provisions of section 195 at an appropriate stage stand enlisted by us. 35. Now reverting to the facts of the instant case of the assessee, the undisputed position emerges as under:- (a) The payer/assessee has made payments to the non-resident for the services rendered for mobilization and demobilization of dredgers toAdaniPortinIndia. An application under section 195 was moved for issuing 'Nil' tax withholding certificate on which an order under section 195(2) was passed on 4-3-2001 and 17-4-2002 wherein VOAMC i.e., the non-resident company was held to have a PE in India on the ground that it was executing the Adani contract in India as the assessee did not have the technical competence or the infrastructure to execute the aforesaid contract. (b) ....