TaxTMI 
TaxTMI 
2010 (3) TMI 167
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....iii) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in not adjudicating the issue regarding non-applicability of Section 40(a)(i) of the Act in view of the provisions contained in Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty relating to non-discrimination? 2. Counsel for both the parties have made oral arguments, which are supplemented by the written submissions. We have considered the oral as well as written arguments filed by them and proceed to answer to the aforementioned questions of law. However, it would first be apposite to take note of the relevant facts, sans unnecessary details. 3. The appellant/assessee is a company incorporated in India and is a wholly owned subsidiary of Van Oord ACZ Marine Contractors BV, Netherlands, (VOAMC in brief), a company incorporated in the Netherlands. The assessee is engaged in the business of dredging, contracting, reclamation and marine activities. The case relates to the Assessment Year 2003-04. During the relevant previous year, the appellant executed inter alia dredging contract at Port Mundra for Gujarat Adani Port Ltd. In terms of the completed contract method, the a....
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....come Tax Appellate Tribunal (hereinafter referred to as "the Tribunal"). The Tribunal upheld, in principle, the disallowance of expenses to VOAMC, made under Section 40(a)(i) of the Act, for alleged non-deduction of tax at source. According to the Tribunal, since payment was made to a non resident, the appellant was mandatorily liable to deduct tax at source under Section 195 of the Act. The Tribunal has further held that it was not necessary to determine whether such payment was chargeable to tax in India in the hands of the non-resident. The Tribunal in detail took note of the nature of transaction in its impugned order. It found that VOAMC was originally awarded contract by Gujarat Adani Port. Subsequently, this contract was assigned to the assessee company on 13.07.2001. The reason for awarding the aforesaid contract to the foreign company was that it suited the contract requirements, technical competence and resources to complete the project, notwithstanding this assignment to the assessee company, i.e. VOAMC, which was executing the contract. 7. The AO had recorded the following findings: (i) The foreign company is executing the contract even after assigning the ....
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....o a non-resident or to a foreign company. For this conclusion, the Tribunal referred to certain case law including the judgment of the Supreme Court in the case of Transmission Corporation of AP Ltd. & Another Vs. Commissioner of Income Tax [239 ITR 387] and extensively quoting therefrom. It, then, summed up the legal position under the provisions of Section 195 of the Act by deducing the following principles: "a) Section 195deals with the deduction of tax at source by the payer i.e. assessee if the payments are to be made to a non-resident. b) The payer/assessee is required to deduct Income tax on such payments made to non-resident at the specified rates in force. c) If the parties feel that either the deduction of tax at source by the payer is required to be at a rate lower than the prescribed rate or no deduction is required to be made they are required to file an application before the ITO for obtaining such certificate. In case no such application is filed before Assessing Officer for obtaining such certificate or such application is 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....
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.... of recipient non-resident to be taxed in India is a separate issue and in the absence of any certificate obtained from the concerned Assessing Officer u/s 195(2), it was obligatory on the part of the assessee to deduct tax at source from the payments made to the concerned non-resident. That the payer/assessee having failed to deduct such tax as required by section - 195 the payments made to the recipient non-resident were liable to be disallowed as per the specific provisions contained in Section 40(a)(i). that while deciding the issue whether for such payments made to non-resident by the payer/assessee deduction u/s 10(a)(i) could be allowed to the payer or not. We are not required to look into whether such payments are income or part of the income in the hands of recipient non-resident taxable in India and many other relevant factors relating to taxability of the payments in the hands of recipient non-resident as its income in India. That having held so the detailed arguments of both the parties on the question of the nature of the payments made by the payer to the payee non-resident and the taxability of such payment as income in the hands of recipient non-resident is thus beyo....
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....l dismissed the appeal of the assessee herein. 11. The basic premise of the submissions of the learned counsel for the assessee, while challenging the aforesaid approach of the learned Tribunal, is that the Tribunal did not deal with the arguments/submissions of the appellant to the effect that since on the facts of the case, the amount reimbursed to VOAMC was not chargeable to tax in India in the hands of VOAMC, the appellant was consequently not liable to deduct tax at source under Section 195 and the disallowance under Section 40(a)(i) of the Act was, therefore, not warranted. The Tribunal also did not deal with the alternate contention of the appellant that no disallowance under Section 40(a)(i) was called for, in view of the non-discrimination provision contained in Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty. His submission was that obligation to deduct tax at source under Section 195 of the Act was predicated on the condition that tax is payable by the non-resident on the payments received by the said non-resident and once it was established that no such tax was payable by the non-resident, the assessee could not be treated to be in breach. 12. We sh....
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.... held in the following cases as well: (i) Commissioner of Income Tax Vs. Estel Communications (P) Ltd. [2009] 318 ITR 185 (Delhi); 217 CTR 102]; (ii) Jindal Thermal Power Company Limited v. Dy. CIT,[2009] 182 Taxmann 250 (Karn); [2010] 321 ITR 31 (Karn.); (iii) CIT v. ICL Shipping Ltd. [2009]315 ITR 165 (Mad.); (iv) KnoWerx Education India Pvt. Ltd., In re [2008] 301 ITR 207 (ARR); (v) Cushman & Wakefield (S) Pte Ltd., In re [2008]305 ITR 208 (ARR)]; and (vi) Mahindra & Mahindra Ltd. v. Dy. CIT [2009]313 ITR (AT) 263 (Mum) (SB). 14. He thus submitted that as a consequence, the payment must be chargeable to tax in India in the hands of the non-resident. Therefore, before such a provision is invoked, it needs to be examined whether the payment was chargeable to tax in India in the hands of non-resident or not. His further submission was that no mileage could be taken from the fact that order under Section 195(2) of the Act had been passed directing the appellant to deduct the tax at source out of payment made to the VOAMC and failure on the part of the assessee to fully comply with the terms of such order or that the assessee's appeal under Section 249 of ....
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.... heavily relied upon the judgment of the Transmission Corporation of AP Ltd.(supra) and in fact, the impugned decision of the Tribunal is entirely based on this judgment, it would be appropriate to first examine as to what this case actually decides. A reading of the judgment would indicate that the case issue before the Apex Court in the said judgment was whether the tax at source was to be deducted by the payee on the entire amount paid by it to the recipient or it was to be deducted on "pure income profits". Section 195 of the Act uses the expression, for the purpose of deduction of tax at source, on "any other sum chargeable under the provisions of this Act". The contention of the assessee was that it would mean "sum" on which income tax is leviable and therefore, only on that component which was "pure income profits", tax was to be deducted and not which were trade receipts and therefore, outside the ambit of income. It was in this context the precise question, which was decided was as to whether the tax is leviable to be determined on the gross sum of trading receipts paid to the non-residents or in respect of bad portion of trading receipts, which may be chargeable as ....
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....vision 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. ... ... ..." (emphasis supplied) 18. It is clear from the above that the Supreme Court dealt with a situation where the sum paid to the non-resident was chargeable and opined that in such a situation tax at source is to be deducted and entire amount paid and not on the "pure income profits", as it was not for the assessee to determine as to how much of the sum paid by the assessee to the recipient would be taxable at the hands of the recipient. The Court was not confronted with the situation where the amount paid was not chargeable to tax at the hands of non-residents at all. 19. The judgment of the Supreme Court is not to be read as a statute. We have to cull out the ratio of the judgment viz. what it decides and not logically follows from it. 20. Plain language of Section 195 of the Act shows that the tax at source is to be deducted on the "sum chargeable under the provisions of the Act". This section reads as under: "195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign ....
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....] 22. We are also in agreement with the following discussion contained in the decision of the Special Bench of Income Tax Appellate Tribunal in the case of Mahindra & Mahindra Vs. Dy. Commissioner of Income Tax [2009] 313 ITR (AT) 263] (Mum) (page 280): "Section 195(1) provides that any person responsible for paying to a nonresident not being company or to a foreign company any interest or any other sum chargeable under the provisions of this Act, not being income chargeable under the head 'Salaries', shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force. Sub-section (2) of Section 195 states that where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that whole of such sum would not be income chargeable in the case of recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum so chargeable and upon such dete....
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....ate of the assessment in the hands of the recipient. ... ... ... From here it follows that Sub-section (2) onwards of Section 195 and Section 197 apply, primarily, in respect of a sum which is chargeable to tax. It is only where the sum is otherwise chargeable to tax but deduction of tax at source is not warranted on the whole or any part of it, depending upon the peculiar circumstances, that the person responsible for paying such sum or the person entitled to receive such sum can apply for no deduction or deduction at lower rate of tax. Thus the pre-requisite condition- for the application of Section 195 and thereafter Section 201 is that the amount paid to the non-resident is otherwise chargeable to tax under the provisions of this Act. If however the amount paid or payable to the non resident is not chargeable to tax under the regular provisions of this Act or such amount is not taxable by virtue of the provisions Double Taxation Avoidance Agreement (hereinafter called the DTAA) entered into by India with such other country of which the non-resident is resident, in accordance with Chapter IX, then the provisions of Chapter XVII about the Collection and recovery of tax are rul....
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..... We therefore hold that in order to treat the payer as assessee in default it is of the utmost importance that the income so paid or credited to the account of payee is capable of being brought within the purview of tax net and such assessment can be lawfully made on the payee. ... Further these sections do not override Section 195, which in turn, fixes the liability on person responsible for deducting tax at source only if the sum paid or credited to the account of the non-resident is chargeable to tax. The question of deducting tax at source will arise only if the sum payable to the non-resident is chargeable to tax in India. Therefore to argue that the liability to deduct tax at source is de hors the eventual liability of the non-resident and the person responsible for paying or crediting any sum can be treated ass assessee in default even without the possibility of fixing the liability to tax on the non-resident, is fallacious. Adverting to the facts of the instant case we find that that no assessment has been made in the hands of the payee in respect of the sums received from the assessee in respect of both the Euro issues. Similarly no proceedings have been taken ag....
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....hat he was not liable to pay any tax on the sums received, the assessee cannot be treated in "default" inasmuch as Section 195(1) of the Act casts an obligation to deduct the tax at source on the sum "chargeable under the provisions of this Act". 24. In Commissioner of Income Tax Vs. Samsung Electronic Company Ltd. [2010] 320 ITR 209 in ITA No.2808 of 2005 and other batch of appeals decided by the Karnataka High Court vide its judgment dated 24.09.2009, the context was different. The assessees wanted to show their own assessment proceedings, that amount paid by them was not assessable to tax at the hands of recipient. No doubt, they would be precluded to do so. However, when in the assessment proceedings relating to recipient itself, it is opined by the income tax authorities that the tax is not payable at all on the amounts so received, provision of Section 195 would not be attracted. Even otherwise, because of our analysis of what Transmission Corporation of AP Ltd. [1999] 239 ITR 587 (SC) decides, we, with due respect, are not in agreement with some of the observations made in the aforesaid judgment of the Karnataka High Court. 25. We hereby summarize the lega....