TaxTMI 
TaxTMI 
2020 (1) TMI 650
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....missioner of Income tax, Range 11(3)(1) ('AO') of reimbursement of demurrage expenses made to non-residents including group entities of the Appellant under section 40(a)(i) of the Act on account of alleged non-deduction of taxes at source under section 195 of the Act. 2. Reimbursement of demurrage expenses of INR 1,75,27,541 Based on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in facts and in law: 2.1. in upholding the disallowance of reimbursement of demurrage charges amounting to INR 1,75,27,541 made to non-residents including group entities pertaining to AY 2013-14 of the Appellant under section 40(a)(i) on account of non-deduction of taxes at source under section 195 of the Act. 2.2. in upholding the action of the learned AO in characterising such reimbursement of demurrage charges as fees for technical services taxable under section 9(1)(vii) of the Act. 2.3. in not appreciating the fact that the payments to the non-residents including group entities are pure cost reimbursements and do not contain any service element. 2.4. in disregarding the order of the Commissioner of I....
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....xpenses of Rs. 2,59,99,105/-. The said amount was disallowed u/s 40(a)(ia) of the Act. The said amount was disallowed u/s 40(ia) of the Act on account of non-deduction tax at source u/s 195 of the Act. The AO characterizing such reimbursement of demurrage repayment costs as fee for technical services taxable u/s 9(1)(vii) of the Act. It is argued by the Ld. Representative of the assessee that the assessee company nowhere indulge in any service element and the said amount was purely reimbursement and the said issue has been covered in the assessee's favour by the decision of the Bombay High Court in the case of CIT Vs. Dempo and Co. P. Ltd. (381 ITR 303) and also by the decision of the Hon'ble ITAT Mumbai Bench in the case of Kuloday Technopack (P) Ltd. Vs. ITO (86 Taxmann.com 74). Therefore, the claim of the Assessee is liable to be allowed. On the other hand, the Ld. Representative of the revenue has refuted the said contention. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.: - "8.2 The submission made by the appellant has been examined. It is noticed that the entire submission made by the appellant is under the presumpt....
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....ts through a related foreign party. In all its submission, the appellant has merely harped on the character of payment made by it to its associate without discussing whether the amount, with reference to the actual beneficiary represented a sum having income component in it. 8.2.3 Demurrage is paid to the ship owner on account of delay caused to his ship due to delay in loading or unloading for which his ship has to berth in die harbour for a longer period. Demurrage may also be charged by pod authorities to the ship owner or the party whose goods are being unloaded. Generally, demurrage partakes the character of freight and is liable to tax in the country where the port, where demoage has been levied, is situated. It has been ascertained that the demurrage above has been paid in respect of Indian ports and the shipping lines involved are foreign ship owners. Freight income generated in India is a taxable income under Income Tax Act and hence, any payment of freight to a non-resident will invite TDS u/s 195. Generally, freight income of non-residents visiting Indian ports is governed by section 172 and hence, if the ship owner has paid taxes u/s 172, then....
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....n the matter, the appeal deserves to be allowed by quashing and setting aside the Order passed by the learned Commissioner of Income Tax (Appeals) dated 28- 8-2002 and the Order passed by the Income-tax Appellate Tribunal, Panaji dated 2-12-2004. The same are, accordingly, quashed and set aside and the Order passed by the Assessing Officer stands upheld. Appeal is, accordingly, allowed and disposed of with no order as to costs." 8.6 In light of the fads narrated above, the action of the AO in disallowing the expenditure u/s 40(a)(i) is upheld and the ground raised by the appellant is dismissed." 8. On appraisal of the above said finding, we noticed that the matter of controversy has been decided by the CIT(A) on the basis of decision of Bombay High Court in the case of Orient (Goa) (P) ltd., [20091 185 TaX 111311 131 Bombay. But the situation has been changed now specifically in view of the decision of Bombay High Court in the case of CIT Vs. Dempo and Co. P. Ltd. (381 ITR 303). The relevant finding has been given in para no. 46 to 54 which is hereby reproduced as under.: - "46. A bare perusal thereof would indicate as to how this provision cover....
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....ed, assessed and recovered. Therefore, there is no warrant in applying the provisions in chapter XVII for collection and recovery of the tax and its deduction at source vide section 195. 47. To our mind, the Division Bench judgment in Commissioner of Income-tax vs. Orient (Goa) Pvt. Ltd. seen in this light does not, with greatest respect, take into account the scheme and setting as understood above. There need not be apprehension because there is no escape from the levy and recovery of tax. The tax has to be levied and collected. The ship cannot leave the port or if allowed to leave any port in India, it must either pay or make arrangement to pay the tax. Hence, the apprehension of SRP 64/79 ITXA989.15.doc avoidance or evasion both are taken care of by the legislature. That is how advisedly the legislature cast the obligation to deduct tax at source on the person responsible to make payment to a non-resident in shipping business. 48. The resident assessee contended before the Division Bench in Orient (Goa) (supra) as well as the Division Bench which made the referring order that section 172 of the Income Tax Act has a bearing and an impo....
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....rom occasional shipping business". It creates a tax liability in respect of occasional shipping by making a special provision for the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped at a port in India. The object of the section is to ensure the levy and recovery of tax in the case of ships belonging to or chartered by nonresidents. The section brings to tax the profits made by them from occasional shipping, by means of summary assessment in which one-sixth of the gross amount received by them is deemed to be the assessable profit. Before the departure of the ship, the master of the ship has to furnish to the Income-tax Officer a return of the full amount paid or payable to the owner or charter on account of the carriage of passengers, goods etc., shipped at the port in India since the last arrival of the ship at the port. In the event that, to the satisfaction of the Income-tax Officer, the master is unable so to do, he has to make satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf. A port clearance cannot be gra....
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.... assessing authority. The assessee has no right to object to the same. Normally, this will be assessment of the assessee for the year. But, under Section 172(7) of the Act a right is given to the assessee to claim before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment, according to the provisions of the Act, in a regular manner be made. Thus, a right is given to the assessee to opt for a regular assessment although a "rough and ready" or a "summary assessment" has already been made under Section 172(4) of the Act. It is a valuable right. If the assessee exercises the right conferred on him under section 172(7) of the Act, the Income Tax Officer is bound to make an assessment of the total income of the previous year of the assessee and the tax payable on the basis thereof "should be determined in accordance with the other provisions of the Act" and any payment made under the section (earlier) "shall be treated as a payment in advance of the tax" leviable for that assessment year and the difference between the sum so paid and the amount of tax found payable by him on such assessm....
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.... of the tax" Mentioned in Section 172(7) of the Act. We hold that the distinction so drawn has no basis. The High Court has furtehr held that the payment made under Section 172(4) of the Act is not a payment of SRP 70/79 ITXA989.15.doc advance tax within the meaning of the Act, as the tax under Section 172(4) of the Act is a payment on assessment and not a payment of advance tax under the Act. We are afraid that the High Court has failed to give due effect to the language employed in Section 172(7) of the Act and the scope of the legal fiction enshrined therein. The reasoning of the High Court is rather strained as the distinction drawn is without any substance or difference. Section 172(7) of the Act provides for a regular assessment, wherein all the provisions of the Act will apply. It is not a mere provision for adjustment. The High Court was swayed by the title used in the corresponding provision of the predecessor Act (Income Tax Act, 1922 - Section 44-C), wherein there was a heading to the section - "Adjustment". Section 172 of the Act contains no such heading. We hold that the Income Tax Appellate Tribunal was justified in holding that since the payment made under S....
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....d. 8. 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 I.T. 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 that 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 I.T. Act. contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has 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 nonresident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), n....
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.... 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 "any amount" referred to in the specified provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 195(1). Therefore, this 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. 15. 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 SRP 74/79 ITXA989.15.doc 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 S....
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....quired 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 I.T. 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 must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by 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 in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination....
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....s, fees or other sums chargeable under the I.T. Act. In a given case where the payer is an assessee he will definitely claim deduction under the I.T. Act for such SRP 77/79ITXA989.15.doc remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-Section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage." 53. In the view that we have taken, it is not necessary to refer the judgment of a Division Bench of the Delhi High in the case of Emirates shipping Line, FZE vs. Assistant Director of Income Tax reported in (2012) 349 ITR 493 . Suffice it to note that the ....
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.... the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in granting relief to the assessee by relying on documents filed by the assessee viz. copy of system ledger and remittance documents from where it was observed that an amount of Rs. 1,37,99,5257- was debited in earlier years (A.Y. 2012-13) as provision demurrage charges and that was paid during the current year (A.Y. 2013-14) and was refleced in the list of remittances made and this amount was not claimed as a deduction from total income in A.Y. 2013-14. Further the assessee had not submitted any evidence during assessment proceeding to show which particular expense pertained to the year which they claimed to be. "3. Whether in law and on the facts and in the circumstances of the case, the Ld. CIT(A) erred in ignoring the pertinent fact that that by sending their employees to India, the AEs are actually rendering services to the assessee company in India and accordingly, the payments made by the assessee company are in the nature of Fees for Technical Services (FTS). The assessee company was under the obligation to deduct tax at source on the payments stated to be in the nature of reimbursemen....
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....rounds of appeal, Ld. Counsel for the assessee submitted that these grounds are relating to reimbursement of salary cost which was on account of availing personnel services from its AE's who were sent to India at secondment. 17. At the outset, it is submitted that identical issue has been decided in favour of the assessee by the Coordinate Bench of the Tribunal for the A.Y.2010-11 in ITA No. 4300/MUM/2016 dated 09.07.2019 wherein the Coordinate Bench rejected the revenue's appeal and sustained the order of the Ld.CIT(A) in deleting the disallowance. 18. Ld. DR vehemently supported the orders of the Assessing Officer. 19. On hearing both the sides, perusing the orders of the authorities below and the decision of the Coordinate Bench in assessee's own case for the A.Y. 2010-11 in ITA No. 4300/MUM/2016 dated 09.07.2019 we find that the Coordinate Bench of the Tribunal dismissed appeal of the revenue and sustained the order of the Ld.CIT(A) in deleting the disallowance of expenses relating to reimbursement of salary cost, observing as under: - "15. Under this issue the revenue has challenged the allowance of the claim of assessee in connection with the reimburseme....
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.... actually rendering services to the assessee company in India and accordingly, the payments made by the assessee company are in the nature of Fee for Technical Service (FTS). Accordingly, the AO has concluded that TUS ought to have been deducted u/s 195 by the appellant. 9.2 The AO has relied on the decision of AAR in the case of Verizon Data Services India Pvt I.td (AAR No. 865 of 2010), Centrica Offshore Pvt Ltd (AAR No. 856 of 2010) and AT&S India Pvt Ltd [2006) 287 ITR 421 wherein it has been held that reimbursement is in the nature of FTS and the fact that taxes are paid under head 'Salaries' is of no consequence. 9.3 The submission made by the appellant on this issue is summarized as below; 9.3.1 The Appellant had availed services of personnel/employees who were oil payrolls of its Associated Enterprises ('AE'), and in lieu of the same, salary, relocation and other related charges were subsequently recharged (by way of reimbursements) by the AEs to the Appellant. It may be noted that for the purposes of administrative convenience, the employees remained on the payrolls of the AEs and their salary and other related costs were reimburs....
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....3.4 The appellant has relied on a number of judicial pronouncements. Some of them are: DDIT vs Tekmark Global Solutions LLC (38 SOT 7)(Mum), wherein the Mumbai Tribunal held that personnel deputed to the Indian company worked under the control and supervision of the Indian company and carried out work allotted to them by the Indian company. IDS Software Solutions India (P) Ltd vs l'I'0 (122 TTJ 410) (Bang), wherein it was held that Indian Company exercising control and supervision over a seconded employee and bearing the salary cost should be considered as an economic employer and not liable to withhold tax on the reimbursement of the salary to the overseas company. CIT vs 003 Engineers (32 Taxmann.com 271)(Bom) wherein it has been that reimbursement to sister concerns for payment of salaries to their employees as they were deputed to the respondent assessee on an actual basis is not liable to tax in India hence not subject to TDS. Aon Specialty Services Private Limited (ITA No. 1640/ Bang/ 2012) wherein it was held that salary recharge by F Co to I Co would TICA be subject to tax withholding in India as it did not represent income in the....
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....ies as TOTAL LUBRICANTS Ltd directs you to perform from time to time. TOTAL LUBRICANTS India Ltd. shall assume complete responsibility or the work carried out during your Indian assignment. 4. While assigned to TOTAL LUBRICANTS India Ltd you will be required to comply with any local employment regulations established by TOTAL LUBRICANTS India Ltd. at the assignment location. 5. Your performance evaluation will be done by TOTAL LUBRICANTS India Ltd. based on the performance objectives set by your supervisor and the actual results achieved during your assignment. Terms and conditions The remuneration and other benefits that you be authorized during this assignment are specified in your addendum issued to you by TOTAL raffinage MARKETING dated I" September 2006. We wish you good luck on your India assignment 9.6 The secondment letter as reproduced above indicates that during the period of deputation with the appellant company, the AE does not have any control over the non-resident employee who is functioning under the control and management of the Indian party. Further, the deputation is not carrying out any activity mandated by th....
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....ed by the Ld. Representative of the assessee has been produced before us. In view of the said circumstances, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage." 20. Facts being identical, respectfully following the said decision we reject Ground Nos. 3 to 5 of grounds raised by the revenue and sustain the order of the Ld.CIT(A) on this issue. 21. Coming to the appeal of the assessee for the A.Y. 2014-15, following grounds have been raised. "1. Disallowance of reimbursement of expenses under section 40(a)(ia) of the Act Based on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in facts and in law in upholding the disallowance made by the Assistant Commissioner of Income tax, Range 11(3)(1) ('AO') of reimbursement of demurrage expenses made to non-residents under section 40(a)(i) of the Act on account of alleged non-deduction of taxes at source under section 195 of the Act. 2. Reimbursement of demurrage expenses of INR 2,28,42,897 Based on the facts and in the circumstances of the cas....
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....e Assessing Officer and to decide in accordance with law. 26. Coming to revenue's appeal for the A.Y. 2014-15, following grounds have been raised: - "1. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in granting relief to the assessee on the issue of demurrage charges of Rs. 77,35,831/- by relying on the submissions made by the assessee company in violation of Rule 46A by not remanding back the issue for AO's comments. 2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in granting relief to the assessee by relying on documents filed by the assessee viz. copy of system ledger and remittance documents from where it was observed that an amount of Rs. 77,35,831/- was debited in earlier years (A.Y. 2012-13 & 2013-14) as provision demurrage charges and that was paid during the current year (A.Y. 2014-15) and was reflected in the list of remittances made and this amount was not claimed as a deduction from total income in A.Y. 2014-15. Further the assessee had not submitted any evidence during assessment proceeding to show which particular expense pertained to the years whic....