TaxTMI 
TaxTMI 
2009 (3) TMI 401
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....ered into four separate contracts with REOL, BHEL, BEI and EOI. BHEL under the contract was obliged to supply boilers, steam turbine generators, main power transformers and process piping. The BEI under the contract is obliged to local services, construct-ion of all BHEL supply, start-up and commissioning. The obligation of EOI under the contract is to collect and purchase local material equipment supply and construction of all REOL and local supply. REOL under the contract has the obligation of off-shore services which includes conceptualization of the project, designs, drawings and other technical aspects for commissioning and to make the project operative. REOL also must supply equipment and material supply. The remuneration for services to be rendered by BHEL, BEI and EOI is separately agreed under the contract. The remuneration to be payable to REOL under the contract is under three categories: (1) Technical service: The technical services to be provided under REOL were to be rendered entirely outside India and includes the following services: (i) providing engineering and design work relating to conceptualisation of the power plant, i.e., overall po....
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....ciency, (iv) providing extended mechanical warranties provided to JINDAL, beyond the standard guarantees provided by the equipment suppliers, (v) managing the project by interfacing with the other contractors on the job site, on a daily basis, through phone calls and faxes, and (vi) reviewing weekly and monthly status reports issued by the other contractors to REOL for its review and action. 2. JINDAL while making payments to REOL under the contract for the assessment year 1996-97 initially deducted part of the tax liability by way of TDS. For the assessment year 1997-98, no TDS deductions are effected. It is the contention of the appellant that the initial remuneration agreed to be payable by REOL under the contract for technical services 28,270,000 USD, for start-up services 7,406,325 USD and for overall responsibility 14,106,333 USD. The contract value for technical services modified to 14,484,560 USD, for start-up services 6,235,325 USD and for overall responsibility 10,724,651 USD. 3. The assessing authority issued notice to JINDAL calling upon it to pay tax in respect of the remuneration paid to REOL. Since JINDAL had not effected TDS as requi....
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....7] 288 ITR 408; [2007] 3 SCC 481 was not yet rendered. On the alternate contention it was held that, Jindal has not produced the customs payment receipts to prove that the technical services rendered by REOL were part of the price of the equipment and machinery imported. In the absence of such evidence, it was held that technical services rendered do not constitute part of the cost price. The remuneration towards technical services is distinct and independent from the cost price. 6. Heard Sri Suhail Dutt, counsel for Jindal and Sri Mohan Parasaran on the facts and law involved in the case. On considering the submissions at the Bar, the following points would arise for consideration: (1) Whether the payments made to REOL attract tax liability under section 9(1) (vii) (c) read with the Explanation to section 9(2) of the Income-tax Act and whether Jindal was obliged to effect TDS in the payments made to REOL under section 195 of the Income-tax Act? (2) Whether the services rendered by REOL are ancillary and inextricably mixed with the cost of the equipment supplied ; as such the payment is exempt under article 12(5) of the Double Taxation Avoidance Agreement? ....
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....e Act, which would include section 9, and the income deemed to accrue or arise in terms of section 9 gets covered under section 5. Income does not have to actually accrue or arise in India to be deemed to accrue or arise in India." 8. Sri Mohan Parasaran argued that the Explanation incorporated by way 12 of amendment to section 9(2) is to overcome the legal lacuna pointed out by the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd.'s case [2007] 288 ITR 408 ; [2007] 3 SCC 481. It is submitted that after incorporation of section 9(2), it is no longer necessary that the criterion of rendering of service in India is to be established. It is suffice for attracting the tax liability, if the services are utilised in India. In such case the income is deemed to accrue in India. 9. Sri Mohan Parasaran relied on the decision of the Bombay High Court in CIT v. Siemens Aktiongesellschaft reported in Manupathra MANO/MH/1271/2008; [2008] 220 CTR (Bom) 425; [2009] 310 ITR 320 to contend that the Explanation incorporated to section 9(2) has done away with the ratio laid down by the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd.'s case [2007] 288 fUR 408; [207] 3 ....
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....o representative capacity and cannot litigate proxy for REOL. 13. The decision of the Bombay High Court in Vodafone International Holdings B. V. v. Union of India, Ministry of Finance, New Delhi [2009] 311 ITR 46 (Bom), is relied on to contend that when there is suppression of material documents an adverse inference be drawn against the party who has suppressed the documents. In this regard, it is submitted that the customs duty documents have been suppressed. Therefore an adverse inference should be drawn against Jindal. 14. Per contra, Mr. Suhail Dutt, counsel for Jindal relied upon the decision of the Bombay High Court in Clifford Chance v. Deputy CIT reported in online Manupathra MANU/MH/1217/2008 ; [2009] 318 ITR 237 (Bom) to contend that the ratio of the Supreme Court in Ishikawajima's case regarding the twin criteria of rendering of service in India and its utilisation in India has not been done away with by the incorporation of Explanation to section 9(2). The Explanation makes it clear that the tax liability is subject to the provisions of section 9(1)(vii)(c). Thus the twin requisites laid down by the Supreme Court in Ishikawajima's case [2007] 288 ITR 408; ....
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....1999] 239 ITR 587 (SC) it is laid down that there is a liability on the assessee to effect TDS in respect of the payments made to others. In paragraph 14 of the judgment the following observations are made (page 596): "In this view of the matter the answers given by the High Court that, (i) the assessee who made the payments to the three 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 contract entered into; and (ii) the obligation of the respondent-assessee to deduct tax under section 195 is limited only to appropriate proportion of income chargeable under the Act are correct." 19. The decision however does not lay down that the person obliged to effect TDS under section 195 has no right to question the assessment of tax liability. Since in law, if TDS is not effected by the payer (Jindal), the payer would be ultimately responsible to pay the tax liability of the payee (REOL). The conjoint reading of sections 195, 201 read with section 246(1)(i) and section 248 makes it clear that Jindal as a payer has every right to question the tax liability of its payee to avoid the vicarious consequenc....