TaxTMI 
TaxTMI 
2017 (8) TMI 1457
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....ssee. The Assessing Officer also referred to 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....
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....006-07 is enclosed and marked as Annexure-2 for your kind reference. 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 with....
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....Gujrat High Court held that: "It is no doubt true that the strict rule of the doctrine of res 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 authori....
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....rlier, deduct the income tax there on at the rate in force. * Since no income is chargeable in India under the provision of 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-packa....
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.... tax would also render a person liable to penalty under section 201, read with section 221. In addition, he would also be liable under section 201(1 A) to pay 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 ....
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....emains outside the purview of Sec 195 of the Act and therefore there is no scope for any disallowance u/s 40(a)(1) 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 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 fo....
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....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 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 th....
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.... in section 195fl) 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. 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. 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, sect....
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....him is not a sum chargeable under the Act. The interpretation of the department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the department would result in a situation 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 depa....
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....payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lay down that tax at source is deductible only from "sums chargeable" under the provisions of the Income-tax, i.e. chargeable under sections 4, 5 and 9. o In the instant 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 Hi....
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....n India to a non-resident, not being a company or to a foreign company, ! on which tax is deductible at source under Chapter XVII-B and' such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub- section (1) of section 200 : 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 t....
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.... such compliances was never to bring all remittances under the purview of the above compliances, such compliance was introduced to avoid any payments which are taxable under the Act to escape being taxed in India. Subsequently, taxpayers were facing difficulties while undertaking compliances with respect to the foreign remittances and certain relaxation were provided by the RBI in complying with these 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 th....
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....he proportionate income-tax claimed to have been paid was Rs. 9,314-13-4. On 20 May 1943, the appellant was ordered to be wound up and Udmi Ram Aggarwal, a pleader of the old Patiala High Court, was appointed its liquidator. The official liquidator applied under section 186 of the Patiala Companies Act, for a payment order for Rs. 12,204-12-3 against the respondent and in support of his claim be filed, with this application, 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 th....
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....no uncertainly in respect of withholding tax under the provisions of the Act since the payments are not chargeable to tax in India. The above judicial pronouncement has been relied on by the SC in the case of Transmission Corporation of A.P. Ltd. & Anr vs. CIT [(1999) 239 ITR 587 (SC) ] which has ultimately been settled by the SC in GE India Technology's case (supra). It thus follows that the principles laid down by this judgement 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....
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....BB was introduced and the procedure for making remittances is provided for which the certificate of Chartered Accountant in the prescribed Form 15CB is required to be obtained by the Payer before making remittance to the Payee (New Procedure for Remittance). Earlier, there was a requirement for obtaining certificate of Chartered Accountant for making remittance to the Non-Resident, but the same was operating under the Circulars issued by CBDT. The Apex Court 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....
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....cess of assessing the income of the non-resident and by using that as the basis for claiming a proportionate reduction in the rate at which the deduction is required to be made on the payment to the non-resident. Except for this method, there is no other way of the resident payer avoiding the obligations cast on it by the provisions of section 195(1) of the Act and as a consequence of such default when is served with a demand notice in terms of section 201 of the 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 obligati....
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.... goods. Asesesee was asked whether TDS provision is applicable to them or not. A. R. of the assessee stated stat: Since no income is chargeable in India under the provision of 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 the assessee has 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 remain outside the purview of 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(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 oth....
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.... High Court that (i) the assessee who made payments to the three non-residents was under obligation to deduct tax at source u/s.195 of the I.T.Act in respect of the sums paid to them under the contracts entered into and (ii) the obligation" of the respondent assessee to deduct tax u/s.195 is limited only to the appropriate proportion of income chargeable under the Act, are correct". By the above findings of Hon'ble Supreme Court, it is clear that provisions of section Sec. 195 are applicable where assessee enters into a contract with non-resident. 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 Indi....
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.... 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 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 pr....
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....t where a consistent view had been taken in favour of the assessee on the question raised, there was no reason for the court to take a different view unless there were very convincing reasons, which there were not. 10. Therefore, respectfully following the above decision of Hon'ble Supreme Court and keeping in view the fact no change in facts has been brought on record by the revenue during the year under appeal, we confirm the order of the CIT(A) and dismiss the ground of appeal of the revenue. 11. In Ground Nos.4 & 5, the grievance of the revenue is that the CIT(A) is not justified in deleting the 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....
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....her heads in the computation of income and accordingly not disallowed by the AO. However as far as, disallowance of Rs. 26,55,760/- is concerned, we would like to bring the following facts for your kind consideration: During the AY 2010-11, an amount of Rs. 26,54,640/- was booked towards differential expenses on account of purchase of furnace oil from IOCL. PPL uses furnace oil for it's granulators to make the fertilizer into granules forms. PPL purchased FO from IOCL and the provisional billing and settlement of bills is being continued till a final reconciliation has been arrived at, During the relevant AY 2010-11, an amount of Rs. 25,54,640/- was derived to be payable to IOCL based on a 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. Co....
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....ntial is mainly due to change of rate of FO with retrospective effect and difference in invoice quantity and receipt quantity. Therefore, the amount of Rs. 26,54,640/- has been crystallized in the FY 2009-10 relevant to the impugned assessment year. Hence, we confirm the order of the CIT(A) and dismiss the grounds of the revenue. 17. In the result, appeal filed by the revenue is dismissed. Now we take up the Assessee's appeal in ITA No.264/CTK/2014. 18. Ground Nos.1 & 4 are general in nature, hence, requires no separate adjudication by us. 19. In Ground No.2 of the appeal, the grievance of the assessee is that the CIT(A) erred in confirming the disallowance of Rs. 1,74,85,684/- under school expenses. 20. The brief facts of the case 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....
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..... Without considering the basic criteria laid down in the Sec 40 A (9) i.e. "towards the setting up or formation of, or as contribution to, any fund, trust entire amount of school expenses u/s 40 A (9). That the aforesaid amount of Rs. 1,74,85,684/- being the amount incurred during the year for the school (DAV school) does not fall under the ambit of provisions of section 40A(9) of the I.T Act and therefore the said disallowance u/s 40A (9) of the Act is legally untenable. In this regard reliance can be placed on the case of CIT vs Madras Refinery Limited [(2004) 266 ITR 170(Mad)], where the High Court adjudicated that the expenditure incurred for public welfare was in relation to promoting the business in the local community, thereby was incurred for the purpose of business. 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 th....
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....poses. However, the Assessing Officer disallowed the claim observing that the payment had no direct relation with the business activity of the assessee and was more or less in the nature of a donation. The CIT (A) confirmed the disallowance. On appeal, the Tribunal accepted the assessee's claim on the ground the said contribution was for business purposes. On further appeal, Hon'ble High Court held that the expenditure met by the assessee was wholly and exclusively for the welfare of its employees and also for carrying on business of the assessee company more efficiently by having a contended labour force. It was neither a donation covered under section 40A(9) nor a capital in nature not covered by section 37(1) of the Act.. Hence, the Tribunal was justified in allowing the above expenditure 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 contr....