AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (8) TMI 1457
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....the CBDT's Circular No.759 dt.18.11.1997 read with RBI Circular No.767 dt.22.5.1998, No.48 dt.29.11.1997 and also the amended CBDT's Circular No.10/2002 dt.9.10.2002. The Assessing Officer further observed that the assessee did not apply to him to determine the appropriate portion of the sum chargeable u/s.195(2) and did not get a certificate u/s. 195(2) or u/s. 197. The Assessing Officer also observed that neither any undertaking nor CA's certificates as envisaged in the aforesaid CBDT's circulars were submitted before him. Therefore, he concluded that in absence of certificate u/s.195(2) or 197, the assessee was required to deduct tax u/s.195(1) in respect of remittances made for purchases from non-resident concerns. The Assessing Officer cited decisions in the case of CIT v. Barium Chemicals Ltd. (1988), 175 ITR 243 (AP), Agarwal Chambers of Commerce Ltd. v. Ganapati Rai Hiralal, (1958) 33 ITR 245 (SC), and decision in the case of Transmission Corpn. of A.P. Ltd. vs CIT, 239 ITR 587. Relying heavily on the decision in the case of AP State Electricity Board which was confirmed by the Supreme Court, the Assessing Officer stated that tax was deductible by the assess....
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....eference. It may be mentioned here that the Ld. CIT set aside the assessment order for the AY 2007-08 by invoking Section 263 of the Act and directed the AO to do denovo assessment by adding/disallowing an amount of Rs. 1344.63 Crore u/s 40 (a) (i) towards import purchases. Being aggrieved with the aforesaid Order, PPL filed an appeal before the Hon'ble ITAT and the Hon'bie ITAT vide Order dtd 13th June, 2013 quashed the direction of CIT for disallowing Rs. 1344.63 Crore by referring the landmark decision rendered by the Hon'ble Supreme Court in the matter of GE India Technology Centre P. Ltd v CIT (327ITR 456). Copy of the Order passed by the Hon'ble ITAT is enclosed and marked as Annexure-3 for your kind reference. On the same issue for AY 2009-10, the Ld. JCIT adjudicated that withholding tax should have been levied on such imports and has disallowed the entire import purchases. In this regard, it may be noted that the company filed an appeal before your Honour and your Honour vide Order dtd 28th October, 2013 quashed the Order of JCIT by mentioning that import purchases are outside the purview of withholding tax by relying upon the landmark decision rendered by....
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.... judicata does not apply to proceedings under the Income-tax Act. At the same time, it is equally true that unless there is a change of circumstances, the authorities will not depart from previous decisions at their sweet will in the absence of material circumstances or reasons for such departure." Accordingly, the AO while doing the assessment for the AY 2010-11 should have been followed his earlier orders and not deviate from his previous decision since there has been no change in the facts of PPL's case (purchase of materials from overseas countries) which necessitated such departure. It may be mentioned here that, CBDT issued instruction No. 2 u/s 119 of the IT Act on Section 195 on 25.02.2014. The Ld. DCIT passed the Order for the AY 2010-11 on 28.02.2014 ignoring the aforesaid instruction issued by CBDT. Had the instruction been followed by the AO, then the demand on account of Section 195 would not have been raised on PPL. It is worth mentioning here that CBDT has the power to issue instructions to subordinate authorities' u/s 119 of the IT Act and all such authorities and ait other persons employed in the execution of the Act shall observe and follow such Orders/Instr....
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.... the IT Act in respect of the said imports, the question of TDS u/s. 195 of the I.T Act does not arise and therefore we have rightly not deducted any TDS u/s. 195 of the I. T Act on such foreign payments. Thus the aforesaid payments for supply of raw material remains outside the purview of Sec 195 of the Act and therefore there is no scope for any disallowance u/s 40(a)(i) of the Act. This is a well established principle. It is pertinent to mention that the Hon'ble Supreme Court in the case of GE India Technology Cen.(P) Ltd. Vs CIT reported in (2010) 193 Taxman 234(SCT, (2010) 327 ITR 456 (SC) has interpreted the provisions of sec 195 of the Act and has held that payment on supply of goods does not attract TDS u/s 195 of the IT Act and section 195 is applicable to the service components and not to the supply components. The brief facts and the decision is given hereunder: GE India Technology Cen.(P) Ltd. Vs CIT (supra); Brief facts and background of the case: o The assessee-company was a distributor of imported pre-packaged shrink wrapped standardized software from microsoft and other suppliers outside India. During the relevant assessment year, it made payments to the s....
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....y simple interest at 12 per cent ~ per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax was actually paid. The most important expression in section 195(1) consists of the words 'chargeable under the provisions of the Act'. A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Act. 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 Sl. No. Name of Material Value of import calculated on CIF basis (Amount Rs. Lakh) Applicability of TDS Reason for non deduction of TDS 1 Catalyst 113.3....
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....chnology Cen.(P) Ltd. Vs CIT reported in (2010) 193 Taxman 234fSC): (2010) 327 ITR 456 (SC) has interpreted the provisions of sec 195 of the Act and has held that payment on supply of goods does not attract TDS u/s 195 of the IT Act and section 195 is applicable to the service components and not to the supply components. The brief facts and the decision is given hereunder: * GE India Technology Cen. (P) Ltd. Vs CIT (supra); Brief facts and background of the case: o The assessee-company was a distributor of imported pre-packaged shrink wrapped standardized software from Microsoft and other suppliers outside India. During the relevant assessment year, it made payments to the said software suppliers which according to the assessee represented the purchase price of the abovementioned software. The ITO(TDS) held that since the sale of software included a licence to use the same, payments made by the assessee to the foreign suppliers constituted royalty, which was to be deemed to have accrued or arisen in India and, therefore, tax at source was liable to be deducted under section 195. The said finding of the ITO(TDS) was upheld by the Commissioner (Appeals). In second appeal, the Tr....
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....to receive the sum by the recipient and the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Act. 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 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 30-10- 1995, the CBDT 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 ....
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....ore 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. In none of the other provisions, expression 'sum chargeable under the provisions of the Act' is found. Therefore, the Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS); it is a provision requiring tax to be deducted at source to be paid to the revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e., sections 4, 5 and 9. This reasoning flows from the words 'sum chargeable under the provisions of the Act' in section 195(1). The fact that the revenue has not obtained any information per se cannot be a grou....
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.... where even when the income has no territorial nexus with India or is not chargeable to tax in India, the Government would nonetheless collect tax. Section 195(2) provides a remedy by which a person may seek a determination of the 'appropriate proportion of such sum so chargeable' where a proportion of the sum so chargeable is liable to tax. The entire basis of the department's contention was based on administrative convenience in support of its interpretation. According to the department, huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It was the case of the department that section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non- residents. In other words, according to the department section 195(2) is a provision by which paver is required to inform the department of the remittances he makes to the non-resident by which the department is able to keep track of the remittances being made to non-residents outside India. There was no merit in those contentions. Secti....
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....stant case, on facts, the ITO (TDS) had taken the view that since the sale of the concerned software included a licence to use the same, the payment made by the assessee to foreign suppliers constituted 'royalty' which was deemed to accrue or arise in India and, therefore, TAS was liable to be deducted under section 195(1). The said finding of the ITO(TDS) was upheld by the Commissioner (Appeals). However, in the second appeal, the Tribunal held that such sum paid by the assessee to the foreign software supplier was not a 'royalty', and that the same did not give rise to any 'income' taxable in India and, therefore, the assessee was not liable to deduct TAS. However, the High Court did not go into the merits of the case and it went straight to conclude that the moment there is remittance, an obligation to deduct TAS arises, which view stood overruled, o Since the High Court did not go into the merits of the case on the question of payment of royalty, the impugned judgment of the High Court was to be set aside and cases were to be remitted back to the High Court for de novo consideration of the cases on merits. A copy of the aforesaid Judgment in the said ca....
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....Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under subsection (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.-For the purposes of this sub-clause,- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub14 section (1) of section 9" (10)Contentions of the Ld. AO while disallowing payments on account of imports for non deduction of taxes and it's non applicability in the present case The AO has held that the provisions of section 195(1) of the Act were applicable to the Assessee and in the event that certificates under section 195(2) or 195(3) or section 197 of the Act were applied for by neither parties, the Company has failed to discharge its obligations for tax deduction. It has already been decided in the matter of GE Technology that the provisio....
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....provisions. Even if the provisions apply to import transactions, non compliance could not be treated as a ground for disallowing the import transactions under section 40 (a) (i) of the Act. Separately, section 195(6) of the Act requires a person referred to in section 195 (1) of the Act to furnish the required information. Accordingly, if the amount remitted is, not chargeable to tax, the remitter is no a person referred to in section 195(1) of the Act and is not therefore required to comply with section 195(6) of the Act. o The case decisions relied upon by the AO on the basis of which he had contended that the provisions of section 195 are applicable to import transactions as well are not applicable to the facts of PPL. CIT vs Barium Chemicals Ltd. (175 ITR 243) In the facts of this case, the assessee-company, Barium Chemicals Limited, Ramavaram, entered into an agreement with a foreign company, viz. Chemicals and Technical Service limited, on July 9, 1967, where under, the assessee-company undertook to > remit certain amount to the foreign company. No tax was deducted at source by the assesseecompany as required under section 195 of the Act. For that reason, the Income Tax ....
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....ication, copies of the respondent's account I the books of the appellant showing how the amount claimed was due from the respondent. This amount included the sum of Rs. 9,476-13-0, on account of income-tax paid b the Hapur firm for and on behalf of the respondent on the profits of the forward transactions at Hapur and the commission of the Hapur firm. The sole point for decision before the HC was whether the respondent is liable for income-tax, which has been paid by the Hapur firm on the transactions, which were entered into by the appellant with the Hapur firm for and on behalf of the respondent. It could be seen from the above facts that they are entirely different from the facts of PPL and reliance on such decision is totally misplaced. The issue before the Court was to decide whether TDS provisions were applicable on payments made to the non resident Appellant whose global income was a loss. There was no dispute on the fact that tax was deductible on such commission income. However, in PPL's case, the basic issue to decided is whether tax is deductible on import payments, i.e., whether payments made by PPL to the non resident suppliers are chargeable to tax in India o....
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....ment are no longer relevant to determine the obligations of a payer while making payments to non residents that are no chargeable under the Act as in the present case. (11) In view of the above, the aforesaid amount of Rs. 218004.41 lacs is fully allowable and the claim of PPL is legally correct and nothing is disallowable under Section 40(a)(i) of the I.T. Act in respect of the aforesaid remittances to foreign suppliers for import of materials / goods since the same is outside the purview of Sec 195 of the IT Act." 5. The CIT(A) after considering the submissions of the assessee held as under: "I have carefully gone through the observations of the AO for concluding that the appellant was liable to deduct tax at source u/s.195(1), detailed submissions of the appellant, relevant decisions and various facts on record. The dispute has arisen when the appellant purchased machinery, raw materials, components & spares, capital goods and traded goods from non-resident concerns for a total cost of Rs. 2180,04,41,000/- (including all other expenses, duty and taxes)' out of which the total cost of raw materials is Rs. 1730,48,96,000/-. The issue was decided by me in the appellant'....
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....ourt in the case of Transmission Corporation of A.P. Ltd. (239 ITR 597) has held that the expression 'taxable income' used in S. 195( 1) applies^ to any sum payable to the Non-Resident even if such a sum is a trading receipt in the hands of the payee, if, the whole or part thereof is chargeable to tax under the Act. These provisions are only limited to the sums which are of 'Pure Income' nature. Based on this judgment, it was felt by the Payers of such income that the TDS is required to be made u/s. 195(1) only if, the income is chargeable to tax (partly or wholly) under the Act and in cases where, the income itself is not chargeable to tax (Non- taxable income) question of making any TDS should not arise. However, because of the interpretation that it is not for the assesses to decide whether the income is chargeable in the hands of the Payee or not, the litigation on the obligation to make TDS continues, even after the decision of the Apex Court in Transmission Corporation of A.P. Ltd and particularly in view of interpretation of this judgement by the Hon'ble Karnataka High Court in the case of CIT (International Taxation) v. Samsung Electronics Co. Ltd, [2009....
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....he Act." 3.2.1 The AO is of the opinion that the decision of the AP High Court in the case of Transmission Corporation of AP Ltd. v. CIT, which was approved by the Supreme Court in 239 ITR 587 (SC) is applicable and accordingly the assessee was liable to deduct tax u/s. 195(1). In this case the AO considered that the person making payments to a non-resident cannot take a unilateral decision that the payments made by him are not sums chargeable to income tax, and therefore he cannot make such payments without deducting tax at source unless he gets the concurrence of the Assessing Officer as provided in section 195(2) or an exemption certificate under section 195(3). However, as per the High Court's decision the obligation of the assessee is limited to deduct tax u/s.195 on the appropriate portion of the income chargeable under the Act in respect of sums paid under the contract. Accordingly, tax was deductible in respect of income imbedded in the contract amount. In the Instant case, the appellant has purchased raw materials from non-resident business entities and no income can be said to have accrued in India in respect of cost of raw materials. The income, if any, earned by th....
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....therefore there is no scope for any disallowance u/s.40(a)(i) of the Act. This is a well established principle. It is pertinent to mention that the Hon'ble Supreme Court in the case of GE India Technology Cen. (P) Ltd. Vs CIT reported in (2010) 193 Taxman 234(SC); (2010) 327 ITR 456 (SC) has interpreted the provisions of Section 195 of the Act and has held that payment on supply of goods does not attract TDS u/s.195 of the IT Act and section 195 is applicable to the service components and not to the supply components." Argument of the assessee is accepted because of the following reason. 1. According to the provisions of Sec. 195(1) and 195(2), the TDS is required to be made on "any other sum chargeable under the provisions this Act". Changeability is relevant in this case. As per decision of Hon'ble Supreme Court in the case of CWT Vellis Bridge Gymkhan (1998) 229 ITR 1 (SC), if a person has not been brought in the ambit of Section by clear words, he cannot taxed at all. 2. In this case, the above payments are made towards purchase of goods on principal to principal basis. Assessee has not entered into any contract with foreign parties rather assessee has procured the....
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....dent. In this very case, no contract was made by the assessee. Trading transaction was covered under the Sale of Goods Act not under Contract Act." 3.2.3 Under similar circumstances, the Hon'ble IT AT, Cuttack Bench in case of the appellant for AY 2007-08 has quashed the order of CTT, Bhubaneswar u/s. 263 on the ground that the CTT did not consider the direction of Hon'ble Apex Court in GE India Technology case which has been reproduced earlier in the submission of the appellant. Accordingly, in view of the detailed submission of the appellant, the decision of the Hon'ble Supreme Court in the case of GE India Technology which have been referred by the TTAT in appellant's own case for the AY 2007-08 and by the AO for AY 2006-07, it is clear that no tax is deductible u/s,195(l) in respect of remittance made by the appellant for purchase of raw materials amounting to Rs. 4491,86,39,189/- 3.2.4 The case of the appellant is squarely covered by the judgment of e Hon'ble Supreme Court in the case of GE India Technology Cen. (P) |&/. v. CIT (2010) 327 ITR 456 (SC) which has been quoted by the appellant in its submissions. The Hon'ble Supreme Court in GE India te....
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....India. In our view, the above observations of this Court in Transmission Corpn. of A.P. Ltd.'s case (supra) which i$ put in italics has 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 tp tax in India", then no TAS is required to be deducted from such payment. This Interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions] of the Income-tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income-tax Act." In the instant case, the amounts have been paid towards purchase of raw material on principal to principal basis and the appellant has procured the goods from the non-resident seller at its own cost after making payments of custom duty, freight, handling charges etc. on CIF basis. The raw material is sold by the non-resident seller in foreign soil, hence, no income accrues to the non-resident seller in the Indian territory. The AO has not brought any facts on record nor it....
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.... addition of Rs. 26,55,760/- made by the Assessing Officer on account of prior period expenses. 12. The brief facts of the case are that the Assessing Officer made addition of Rs. 26,55,760/- under the head "prior period expenses" in respect of price difference on account of IOCL (Rs.26,54,640/-) and other (Rs.1,120/-). According to the Assessing Officer, the assessee was following hybrid system of accounting, which was not permissible and relying on the decision of Hon'ble Kerala High Court in the case of CIT vs. Travancore Titanium Products Ltd., 183 ITR 73(Ker) disallowed the claim of prior period expenses as the assessee was not maintaining its account on mercantile basis. 13. Before the CIT(A), the assessee has submitted as under: "The learned AO has disallowed an amount of Rs. 26,55,760/- under the nomenclature "Prior period adjustments" solely on the ground of assessee is maintaining books of accounts on mercantile basis. In every mercantile system of accounting, the Prior. Period Expenses are bound to be there as because every expenses can not be accurately measured and provided in the accounts. The term PPE is only applicable in a mercantile system of accounting as b....
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.... mutual reconciliation done between PPL and IOCL. The reason for reconciliation is primarily attributable to change in rate of FO with retrospective effect and the difference in invoiced quantity vis-a-vis receipt quantity. Since IOCL is a Central Govt. PSU and PPL, wholly dependent on IOCL for uninterrupted supply of FO, both the organizations went for a reconciliation for the period 1.4.2005 to 31.03.2009 and arrived at a figure of Rs. 26,54,640/- to be payable by PPL to IOCL. Copy of the signed reconciliation statement is attached and marked as Annexure-8 for your kind reference. This expense was never claimed in any of the Return of Income filed for past years. Since the expense is relating to past period, the statutory auditors insisted to book the same under 'Prior Period Expenses'. Since the expense has been crystallized during the AY 2010-11, the entire amount is allowable as business expenses." 14. The CIT(A) after considering the submissions of the assessee held as under: "I have gone through the submissions of the appellant and facts on record. The disallowance made by the AO on account of prior period adjustment consists of items as under: Price difference....
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.... are that the Assessing Officer disallowed Rs. 1,74,85,684/- u/s.40A(9) of the Act being amount paid to DAV School by the assessee for running the School in the plant premises. The assessee before the Assessing Officer submitted that payment of DAV school management was neither falling under 'setting up' nor 'formation of' nor under "as contribution to" any fund/trust etc, and, therefore, the same was allowable as business expenditure which was not accepted by the Assessing Officer. According to the Assessing Officer, the claim was covered under the provisions of section 40A(9) of the Act and, accordingly disallowed the same. 21. Before the CIT(A), the assessee submitted as under: "In this regard it may be mentioned here that, the learned AO on irrelevant considerations and presumptions has disallowed/ added an amount of Rs. 1,74,85,684/- towards school expenses by invoking Sec 40A (9) of the IT Act in holding that the same is not eligible as expenses . The aforesaid amount of Rs. 1,74,85,684/- is for the welfare of employees being the expenses of the school (DAV school), which has been established within the the Ld. AO disallowed the plant premises and all the expenses are wh....
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....usiness. It may be mentioned here that the Hon'ble ITAT Delhi Bench in the case of CIT V Gujarat Guardian Ltd [2006] 152 Taxman 37 (Delhi) (Mag) held that school expenses can not be disallowed u/s 40 A (9) of the IT Act, Copy of the aforesaid judgement along with detail of school expenditure is enclosed and marked as Annexure-9 for your kind consideration." 22. After considering the submissions of the assessee, the CIT(A) confirmed the disallowance by observing as under: "I have considered the matter carefully. The appellant's submissions are that the amounts spent in running the school is business expenditure since the school is run for staff welfare. The appellant is entitled to look after welfare of its employees which helps in running the business smoothly and also to raise profit and productivity. However, the staff welfare cannot be an excuse to justify running of a school or college and claiming expenditure as business expenses. There has to be a reasonable basis for expenditure on staff welfare activity. Under the guise of staff welfare activities, the employer could not take over every aspect of an employee's private life and day-to-day existence. Running of....
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....towards contribution for the running of the FACT School, as an expenditure for the smooth functioning of the business of the assessee and an expenditure wholly and exclusively for the welfare of the employees of the assessee and thus, allowable under section 37(1) as well as section 40A(10) of the Act. 25. Ld D.R. though relied on the orders of lower authorities but could not cited any contrary decisions before us. 26. After considering the rival submissions and perusing materials available on record, we find that the issue at hand is squarely covered by the decision of Hon'ble Kerala High Court in the case of N.Radhakrishnan quoted above. Respectfully following the same, we set aside the orders of lower authorities and delete the disallowance of Rs. 1,74,85,684/- made u/s.40A(9) of the Act and allow the ground of appeal of the assessee. 27. In Ground No.3 of the appeal, the grievance of the assessee is that the CIT(A) erred in confirming the order of the Assessing Officer in disallowing the claim of post-retirement medical benefit of Rs. 1,37,82,763/-. 28. The brief facts of the case are that the CIT(A) observed that it was submitted before him that the Assessing Officer rejec....