TaxTMI 
TaxTMI 
2010 (2) TMI 696
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....ee in default'." 3. The issue arising in the present appeal is with connection with the applicability of provisions of section 195 of the Income-tax Act on reimbursement of travelling expenditure based on actual expenditure incurred. 4. The brief facts of the case are that the assessee is running a multi specialty hospital in sector 62, Phase VII, Mohali, Punjab. The assessee had entered into an agreement with M/s. Joint Commissioner Resources (International) for conducting accreditation surveys in respect of the hospital. As per the terms of agreement the assessee was to pay fee for survey and in addition to reimburse the expenses of the officials with respect to their boarding and lodging and also travel expenses. The assessee deducted tax at source out of fee paid on account of survey but no tax was deducted on reimbursement of travel expenses amounting to Rs. 10,30,036. The claim of the assessee was that reimbursement of actual expenditure does not constitute income chargeable to tax under section 195 of the Act. The Assessing Officer rejecting the plea of the assessee gave a finding that such reimbursement was nothing but part of fee paid to M/s. Joint Commissioner Resources....
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.... payments. However, in respect of the travelling expenses incurred by the officials of M/s. Joint Commissioner Resources (International), two bills were raised totalling US$ 18275.84 and US$ 7109.59. The copies of the bills are placed at pages 32 & 33 of the paper book. The certificate issued by the C.A. in respect thereof is placed at pages 34 to 37 of the paper book and on conversion to the Indian currency, the total payment in respect of reimbursement of travel expenses was Rs. 10,30,036. The issue of payment to non-residents and the obligation to deduct tax under section 195 of the Act on such payments viz-a-viz the taxability of the remittance has been deliberated upon the Hon'ble Supreme Court in GE India Technology Cen. (P.) Ltd. (supra). The Hon'ble Supreme Court has held that the payer is bound to deduct tax at source only if the sum paid is assessable to tax in India. It has been further held that section 195 of the Act also covers composite payments which have an element of income embedded or incorporated in them. The Court have clarified that though there is an obligation to deduct tax in respect of such composite payment but the obligation is limited to the appropriate....
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.... be regarded as income under the Income-tax Act. It may be noted that section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in section 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728 dated October 30, 1995 the Central Board of Direct Taxes has clarified that the tax deductor can take into consideration the effect of the DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that section 195(1) is in identical terms with section 18(3B) of the 1922 Act. In CIT v. Cooper Engineering Ltd. [1968] 68 ITR 457 it was pointed out that if the....
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.... Submissions and findings thereon 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See : Vijay Ship Breaking Corporation v. CIT [2009] 314 ITR 309). 9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of "any sum paid to any resident". Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of ....
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.... Income-tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income "chargeable under the head salaries". Similarly, section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum "chargeable under the provisions of the Act", which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income-tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income-tax Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It....
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....ssessee under the ordinary provisions of the Income-tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income-tax Act for the said sum as an "expenditure". Under section 40(a)(i), inserted, vide Finance Act, 1988, with effect from April 1, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income-tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the Income-tax Act. This provision ensures effective compliance with section 195 of the Income-tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income-tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the Income-tax Act then it would be open to the Assessing Officer to disall....
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....". The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this court in Transmission Corporation case [1999] 239 ITR 587 (SC) which are put in italics have been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no TAS is required to be deducted from such payment. This interpretation of th....