TaxTMI 
TaxTMI 
2008 (1) TMI 437
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....ssessee was not statutorily liable to deduct tax at source. The Assessing Officer relying on the provisions of section 195 held that the TDS provisions were applicable both to non-companies and foreign companies. Assessing Officer followed the decision of ITAT Hyderabad Bench in the case of Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37 wherein it was held that wherever remittances abroad were made, it was the duty of the assessee to apply for nil deduction or deduction at lower rate under section 195(2) and if the payer remitted the same without TDS or without certificate there was a liability on the payer to pay tax. Reliance was also placed on the decision in the case of Fertilizer & Chemicals Travancore Ltd. v. CIT [2002] 255 ITR 449 (Ker.) wherein the Indian company was held to be liable to deduct tax at source under section 195(1) on payments made to foreign collaborator. He, accordingly, disallowed the amount of Rs. 3,26,386 under section 40(a)(i) of the Act. 3. On appeal it was explained that the assessee paid Rs. 59,037 to Bulk Register LLC, Maryland and Rs. 6,662 to Network Solution, Inc. Virginia on internet through credit card for registering of the domain name for a part....
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.... of the Act as these were in the nature of royalties as defined in Explanation 2 to section 9(1)(vi) of the Act. Consideration for domain registration amounted for the use of property similar to trademark referred to in clause (iii) of the said Explanation 2 and hiring of server implied the use of processes of the server and hence also fell within clause (iii) of the said Explanation 2. 4.1 She further observed that the authority for advance ruling held that if payment is made for services which are utilized in a business or profession carried on by the payer in India or for the purpose of making any income from a source in India, they will be deemed to accrue or arise in India. The authority affirmed that if the services are utilized in a business in India then irrespective of the place where the services are rendered the amounts should be deemed to accrue or arise in India. Since the websites were accessible from India, the usage was in India and hence the payments represented income arising in India of the recipient. 4.2 As regards for non-deduction of tax at source she placed reliance on the decision of Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Lt....
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.... The Assessing Officer had relied on the decision of Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. which in fact supports the case of the assessee. The Assessing Officer has also placed reliance on the decision of ITAT Hyderabad Bench in the case of Cheminor Drugs Ltd. wherein it has been held that wherever there is a remittance abroad, it was the duty of the assessee to apply for nil deduction or deduction at lower rate under section 195(2) of the Act. The provisions of section 195(2) are not penal provisions. These are machinery provisions. It has been further submitted that ITAT Hyderabad Bench had not considered the decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Superintending Engineer, Upper Sileru [1985] 152 ITR 753 which was available at the relevant time. Revenue had accepted the part of the decision of Hon'ble Andhra Pradesh High Court holding that only portion of the amount, which represented income, or profit was liable for deduction of tax at source. As at that point of time the decision of Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. was not available, the decision of ITAT Hyderabad Bench in the case....
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....ITD 450. Ld. AR of the assessee further submitted that article 24(4) of OECD Model Convention provides that royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise be deductible under the same conditions as if they had been paid to a resident of the first mentioned State. On the basis of above arguments it has been pleaded that provisions of section 195 are not attracted in the case of the assessee. 6. On the other hand Ld. D.R. submitted that provisions of section 195(1) statutorily cast responsibility on the assessee to deduct tax at source at the time of payment or credit into the account of the payee. Section 195 provides for deduction of tax at source subject to regular assessment to be made later on. The determination of nature and income is to be done at time of regular assessment. Placing reliance on the decision of Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd., he submitted that by deduction of tax at source at the time of payment made to the non-resident, the rights of the parties are not, in any man....
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.... income of non-resident is taxable either in USA or in India. Article 26(3) can be invoked in such situation and hence not applicable. Ld. DR also placed reliance on the decision of Authority for Advance Ruling in the case of Timken India Ltd., In re. [2005] 273 ITR 67 (New Delhi) and Headstart Business Solution (P.) Ltd., In re. [2006] 285 ITR 530. 7. In rejoinder the Ld. AR of the assessee submitted that the provisions of section 195 are substantive in nature and the Assessing Officer is duty bound to exercise his powers judiciously for finding out the defaults committed by the assessees. If there was no default committed by an assessee, the order passed under sections 201(1) and 40(a)(i) will be bad in law. The expression 'sum chargeable to tax' has to be read contextually. He placed reliance on the decision of Hon'ble Supreme Court in the case of CIT v. Sun Engg. (P.) Ltd. [1992] 198 ITR 297. As per the verdict of Hon'ble Andhra Pradesh High Court, the nature of income has to be determined under section 195 of the Act in order to determine the tax payable at the time of the remittance to the non-resident. The second part of this decision relating to determination of nature of ....
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....r XVII-B in any subsequent year, such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid or deducted. Sub-clause (ia) which contains identical provisions in respect of payments made to a resident has been inserted by the Finance (No. 2) Act, 2004 with effect from 1-4-2005. In this sub-clause words 'rent, royalty' have been inserted with effect from 1-4-2006. Provisions of sub-clause (i) deals with the payments made outside India or to a non-resident whereas sub-clause (ia) deals with the payments made to residents. Thus, with effect from 1-4-2005 payments made to a resident on account of interest, or fee for technical services and royalty with effect from 1-4-2006 will also not be allowed as deduction unless tax at source has been deducted. From the language employed in sub-clause (i) it is clear that the payments made outside India or to a non-resident on account of any interest, royalty, fee for technical services or other sum should be chargeable to tax in India. In the case of assessee, the payments have been made to non-residents on account of rentals for hosting the websites on their servers located in USA. Thus, we ....
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....ed to be understood in the context in which it is used, 'fee for technical services' could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with 'technical' is 'involving or concerning applied and industrial science'. 5. In the modem day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On the score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service. When a person hires a taxi from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who control the vehicle, and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly when person travels by a train or in an airplane it cannot be said that the railways ....
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....property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with the television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to-in sub-clauses (i) to (v)." From above-mentioned definition of 'royalty' one can find that none of the clauses of the Explanation take into its ambit the consideration paid for renting of space for hosting of websites on servers. However, clause (iva) to Explanation 2 was inserted by the Finance Act, 2001,....
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....ial or scientific equipment. The proposed amendment will take effect from 1-4-2002 and will accordingly, apply in relation to assessment year 2002-03 and subsequent assessment years. [Clause 4]" From plain reading of the memorandum explaining the provisions of the Finance Bill, 2001, it is clear that prior to the amendment, the consideration for the use of, or the right to use, industrial, commercial or scientific equipment was not included in the definition of 'royalty' in Explanation 2 and consequently the income from the leasing of industrial, commercial or scientific equipment became taxable in the source country as business income from assessment year 2002-03 and onwards. 8.6 As per paragraph 1 of Article 12 of Double Taxation Avoidance Agreement between India and United States of America dated 20-12-1990, royalties and fees for included services arising in a Contracting State and paid to a resident of other Contracting State may be taxed in that other State. However, as per paragraph 2 of article 12 such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner....
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.... submit the undertaking along with the said certificate of the accountant to the Reserve Bank of India, who in turn shall forward a copy thereof to the Assessing Officer. 3. The contents of this circular may be brought to the notice of all the officers working in your charge." 8.8 The undertaking to be filed by the assessee reads as under:- "UNDERTAKING To ..................... (Designation of the Assessing Officer) I/We.............. (name, address & Permanent Account Number) propose to make a remittance of......... (Amount) being..................... (nature of payment) to..................... (name & complete address of the person .................................................. to whom the remittance has been made) after deducting a sum of Rs......... being the tax at the rate of.........., which is the appropriate rate of tax deductible at source on the said amount of remittance. 2. A certificate from the accountant as defined in Explanation below section 288 of the Income-tax Act certifying the nature and amount of i....
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....o the Reserve Bank of India, who in turn shall forward a copy thereof to the Assessing Officer. CBDT in Circular No. 767, dated 22-5-1998 reiterated the requirements to be fulfilled as in earlier Circular No. 759, dated 181997. However in Para 4 of this circular it has been clarified that Circular No. 759 will cover those remittances for which RBI had prescribed the production of a No Objection Certificate from the income-tax authorities under the Exchange Control Manual. Further, if an order under section 195(2) has been obtained by a person responsible for deducting tax, the new procedure of filing an undertaking alongwith a Certificate prescribed in Circular No. 759 would not be applicable. Nothing has been produced before us by the revenue that No Objection Certificate from income-tax authorities was required to be filed by the assessee. Again CBDT in Circular No. 10/2002, dated 9-10-2002 reiterated the submitting of an undertaking alongwith a Certificate from a Chartered Accountant before RBI at the time of the remittances to non-residents. In this Circular new formats of the undertaking by the assessee and Certificate from an Accountant have been prescribed. In undertaking fu....
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....ee non-residents was under obligation to deduct tax at source under section 195 of the Act in respect of sums paid to them under the contracts entered into; and (ii) the obligation of the respondent-assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act, are correct." Hon'ble Supreme Court has clearly laid down the principle that the obligation of the assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act. This leaves no doubt in our mind that at the time of making payments of any sums to non-residents, the nature of the remittance has to be determined for the purposes of deduction of tax at source. CBDT in three Circulars, i.e., Circular No. 759, dated 18-11-1997; No. 767, dated 22-5-1998, and No. 101 2002, dated 9-10-2002 have entrusted this task to the chartered accountant. Only in the cases where the person responsible for paying any such sum, other than salary, 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 is obliged to make application to the Asse....
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....Article 26(2) provides against discrimination in the context of a permanent establishment in the other Contracting State. Article 26(3) is a general clause providing for indirect discrimination against a non-resident. It reads as below:- "Article 26(3). Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for Included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of another Contracting State shall for the purposes of determining the taxable profits of the first mentioned resident. be deductible under the same conditions as if they had been paid to a resident of the first mentioned State." 8.14 Apparently the provisions of paragraph 1 of article 9 (Associated Enterprises) and paragraph 7 of article 11 (Interest) of DT AA are not applicable to facts of the case of the assessee. Paragraph 8 of article 12 (Royalties and Fees for Included Services) deals with a situation where, by reason of a special relationship between the payer and the beneficial owner or between them and some other person, an exc....
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....ted. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same condition as if the payment is made to a resident. Thus, this clause in DTAA neutralizes the rigour of the provisions of section 40(a)(i) of the Act. In this regard it would be relevant to refer to the provisions of section 90(2) of the IT Act, 1961. It reads thus:- "90(2) Where the Central Government has entered into an agreement with the Government of any other country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee." Hence by virtue of the provisions of section 90(2), the law which is beneficial to the assessee to whom DTAA applies, should be followed. This view is supported by the decision of Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. Hon'ble Supreme Court held as under:- "No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax lia....