TaxTMI 
TaxTMI 
2014 (1) TMI 865
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.... an Indian company having its registered office in Mumbai. WHPL wanted to acquire and own 51% of the paid-up equity capital of the assessee. There was an oral agreement between Shri G.N. Mohan Raju and other shareholders/assessee and WHPL on 01.02.2006 whereby it was agreed that WHPL would be allowed to have 51% of the paid up capital of the Assessee. The terms of the oral agreement were later reduced to writing and a "share subscription and shareholders agreement" dated 12.09.2006 was entered into between the WHPL, Shri G.N. Mohan Raju and the assessee. As on the date of the said agreement, Shri G.N. Mohan Raju held 4,67,000 shares of Rs.10 each. WHPL proposed to make investments in the assessee company by which it would become the 51% shareholder of the assessee company. As already stated, the share subscription and shareholders agreement dated 12.09.2006 which evidenced the oral agreement on 01.02.2006 provides for the manner in which the shares will be issued and other details. It has also been agreed under clause XIV of the agreement that if Shri G.N. Mohan Raju starts any new business in the field of telecommunication, digital media and convergence, then he shall offer 74% ec....
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....s. 133A carried out by the revenue on 26.02.2010 in the case of the assessee. In the course of survey, the payment of Rs.5 crores by the assessee and the applicability of the obligation of the assessee to deduct tax at source while making payment to Shri G.N. Mohan Raju came up for consideration. The AO issued show cause notice u/s. 201(1) & 201(1A) of the Act calling upon the assessee to show cause as to why the assessee should not be considered as an assessee in default for not deducting tax at source while making payments to Shri G.N. Mohan Raju. According to the AO, the payment in question was in the nature of royalty falling within Explanation 2(v) to clause (vi) of section 9(1) i.e., consideration for the transfer of all or any rights (including the granting of licence) in respect of any copyright, literarily, artistic or scientific work. 7. From a perusal of the order of the Assessing Officer, it transpires that he has proceeded on the basis that the payment made by the assessee to Shri G.N. Mohan Raju is royalty and therefore there is an obligation on the part of the assessee to deduct tax at source while making the payment to Shri G.N. Mohan Raju u/s. 194J of the Act. The....
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....iva) and (v) of the definition of the term 'royalty'. The payment made therefore cannot be regarded as 'royalty'. It was submitted that the conclusions of the assessing officer in treating the appellant as 'assessee in default' under section 201 for not deducting tax at source in respect of payments made to the promoter is bad in law and liable to be quashed. 10. The CIT(Appeals) called for a remand report from the Assessing Officer. In the remand report, the AO submitted that the payment by the assessee to Shri G.N. Mohan Raju of Rs.5 crores was only because Shri G.N. Mohan Raju had knowledge of process related technology in the filed of networking and by giving the assessee and WHPL the first right of refusal to participate up to 74% of economic interest in any future business venture that may be started by Shri G.N. Mohan Raju was parting with rights related to knowledge of the process, hence clause (i) of Explanation 2 to section 9(1)(vi) of the Act will be attracted. Alternatively, the AO submitted that the payment in question can also be considered as a payment for imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or s....
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....u. In view of the facts discussed above, the action of the A0 in raising demand u/s 201(1) and charging interest u/s 201(1A) of the Act on the appellant-company for the two assessment years in question is upheld." 13. Aggrieved by the order of the CIT(Appeals), the assessee has preferred the present appeals before the Tribunal. 14. The assessee has filed four appeals. Two appeals are against the order u/s. 201(1) and the other two appeals are against the order u/s. 201(1A) of the Act. The first issue that needs consideration is as to whether the provisions of section 194J of the Act are attracted to the case of the assessee or not? 15. The relevant provisions and the statutory amendments thereto need to be looked at. This section, as introduced by the Finance Act, 1995, w.e.f. from July, 1995, reads as follows : "SECTION 194J-TDS FROM FEES FOR PROFESSIONAL OR TECHNICAL SERVICES "194J. Fees for professional or technical services. - (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of- (a) fees for professional services, or &n....
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....edical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section; (b) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (c) where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly." 16. By the Taxation Laws (Amendment) Act, 2006, w.e.f. 13th July, 2006, in section 194J, in sub-section (1), - (i) in clause (b), the word ''or'' was inserted at the end; (ii) after clause (b), the following clauses were inserted, namely:- "(c) royalty, or (d) any sum referred to in clause (va) of section 28,"; .......  ....
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....entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging." 18. U/s.194J of the Act tax is deductible at the time of credit of interest income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. Sec.193 prior to its to amendment w.e.f. 1st June, 1989 tax was deductible at the time of payment. The provisions of Sec.193 were later amended w.e.f. 1st June, 1989 to provide that the obligation to deduct tax at source would arise at the time of credit to the account of the payee or at the time of actual payment, whichever is earlier. Similar language appears in section 194J of the Act which provides that the obligation to deduct tax at source would arise at the time of credit to the account of the payee or at the time of actual payment, whichever is earlier. Explanation-(c) to section 194J of the Act again would further explain the concept of credit to include whether such credit is to account or suspense account or any other account in any other name in the books ....
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.... as on 01.02.2006 whereby the assessee agreed to pay Rs.5 crores to Shri G.N. Mohan Raju, for Shri G.N. Mohan Raju agreeing to offer 74% of economic interest in any new business initiative in the field of telecommunication, digital media and convergence that may be undertaken by digital media and convergence that may be undertaken by Shri G.N. Mohan Raju during his lifetime. In fact, the payments made by the assessee go to show that the oral agreement dated 01.02.2006 pleaded by the assessee is true. The assessee has credited Shri G.N. Mohan Raju in its books of accounts with regard to the liability of Rs.5 crores as on the date of oral agreement. The liability to deduct tax at source u/s. 194J of the Act will have to be tested as on the date of credit of the amount to the account of the payee and not on the date of payment because the date of credit in the books of accounts of the Assessee is earlier in point of time. Thus, the law as on 01.02.2006 as contained in section 194J of the Act has to be seen. It is an admitted position that prior to 13.07.2006, neither royalty or non-compete fee u/s. 28(va) of the Act was covered by the provisions of section 194J of the Act. In such cir....