Fortis Healthcare Ltd., Mohali v. Deputy Director of Income Tax, Chandigarh

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SHRI N. BARATHVAJA SANKAR VICE PRESIDENT AND MS SUSHMA CHOWLA JUDICIAL MEMBER ITA NO. 1035/CHD/2010 ASSESSMENT YEAR: 2008-09 M/S FORTIS HEALTHCARE LIMITED VS. DEPUTY DIRECTOR OF MOHALI INCOME TAX (INTERNATIONAL TAXATION) CHANDIGARH PAN NO. AAACF0987E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AMAN PARTI RESPONDENT BY: SHRI N.K.SAINI ORDER PER SUSHMA CHOWLA JM THE APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) CHANDIGARH DATED 9.4.2010 RELATING TO ASSESSMENT YE AR 2008-09 AGAINST THE ORDER PASSED UNDER SECTION 201 & 201(1A) OF THE I.T. ACT. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE HON'BLE CIT(A) HAS ERRED BOTH ON FACTS AS WELL AS IN LAW IN HOLDING THAT REIMBURSEMENT OF TRAVELIN G EXPENDITURE BY THE APPELLANT BASED ON ACTUAL EXPENDITURE INCURRED FORMS PART OF FEE FOR TECHNICA L SERVICES. 2. THAT THE HON'BLE CIT(A) HAS ERRED BOTH ON FACTS AS WELL AS IN LAW IN HOLDING THAT THE PROVISIONS OF WITHHOL DING TAX UNDER SECTION 195 OF THE INCOME TAX ACT 1961 A RE APPLICABLE TO REIMBURSEMENTS BASED ON ACTUAL 2 EXPENDITURE INCURRED AND THUS HOLDING THE ASSESSEE AS ASSESSEE IN DEFAULT. 3. THE ISSUE ARISING IN THE PRESENT APPEAL IS WITH CONNECTION WITH THE APPLICABILITY OF PROVISIONS OF SECTION 195 OF THE I NCOME TAX ACT ON REIMBURSEMENT OF TRAVELING EXPENDITURE BASED ON ACT UAL EXPENDITURE INCURRED. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS RUNNING A MULTI SPECIALTY HOSPITAL IN SECTOR 62 PHASE VII MOHALI PUNJAB. THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH M/S JOINT COMMIS SIONER RESOURCES (INTERNATIONAL) FOR CONDUCTING ACCREDITATION SURVEY S IN RESPECT OF THE HOSPITAL. AS PER THE TERMS OF AGREEMENT THE ASSESS EE 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 TRAV EL EXPENSES. THE ASSESSEE DEDUCTED TAX AT SOURCE OUT OF FEE PAID ON ACCOUNT OF SURVEY BUT NO TAX WAS DEDUCTED ON REIMBURSEMENT OF TRAVEL EXPE NSES AMOUNTING TO RS. 10 30 036/-. THE CLAIM OF THE ASSESSEE WAS THA T REIMBURSEMENT OF ACTUAL EXPENDITURE DOES NOT CONSTITUTE INCOME CHARG EABLE TO TAX UNDER SECTION 195 OF THE ACT. THE ASSESSING OFFICER REJ ECTING THE PLEA OF THE ASSESSEE GAVE A FINDING THAT SUCH REIMBURSEMENT WAS NOTHING BUT PART OF FEE PAID TO M/S JOINT COMMISSIONER RESOURCES (INTER NATIONAL) AND HENCE TAX HAD TO BE DEDUCTED ON SUCH PAYMENTS. BECAUSE O F NON DEDUCTION OF TAX THE ASSESSEE WAS DECLARED TO BE IN DEFAULT U/S 201(1) OF THE ACT AND INTEREST WAS CHARGED US/ 201(1A) OF THE ACT. THE CIT(A) HELD THAT THE TRAVEL EXPENSES INCURRED IN THE COURSE OF PROVIDING TECHNICAL SERVICES TO THE ASSESSEE WERE PART OF TECHNICAL FEE. RELYING ON THE RATIO LAID DOWN IN COCHIN REFINERY VS. CIT [222 ITR 354(KER.)] THE CI T(A) UPHELD THE 3 ORDER OF ASSESSING OFFICER. THE ASSESSEE IS IN APP EAL AGAINST THE SAID ORDER OF CIT(A). 5. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT THE ISSUE STANDS COVERED BY THE RATIO LAID DOWN BY THE HON'BLE SUPRE ME COURT IN GE INDIA TECHNOLOGY CENTRE (P) LTD VS. CIT & ANR AND SAMSUNG ELECTRONICS CO LTD VS. CIT (CIVIL APPEAL NOS. 7765 TO 7767 OF 2010 ) [327 ITR 456 (SC)]. THE LD. AR FURTHER POINTED OUT THAT THAT THE APPLICABILITY OF THE PROVISIONS OF SECTION 195 IN RESPECT OF COMPOSITE P AYMENT WAS ALSO CONSIDERED BY THE SPECIAL BENCH OF THE CHENNAI TRIB UNAL IN ITO INTERNATIONAL TAXATION VS. PRASAD PRODUCTIONS LTD [ 125 ITR 263 (SB)(CHENNAI)]. THE LD. DR FOR THE REVENUE RELIED ON THE ORDERS OF THE AUTHORITIES BELOW AND FURTHER PLACED RELIANCE ON T HE RATIO LAID DOWN IN TRANSMISSION CORPORATION OF A.P. LTD VS. CIT [239 ITR 587 (SC)]. THE LD. DR POINTED OUT THAT THE BILL RAISED FOR REIMBUR SEMENT OF THE EXPENSES IS NOT SUPPORTED BY THE EVIDENCE OF ACTUAL EXPENDIT URE IN THIS REGARD AND HENCE IT CANNOT BE SAID TO BE A REIMBURSEMENT OF EX PENSES. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ISSUE ARISING IN THE PRESENT APPEAL IS WITH REG ARD TO THE WITHHOLDING OF TAX U/S 195 OF THE ACT ON REIMBURSEMENT OF EXPEN SES IN ADDITION TO THE FEES PAID TO THE PROVIDER OF SERVICES. THE ASSESSE E HAD ENTERED INTO AN AGREEMENT WITH M/S JOINT COMMISSIONER RESOURCES (IN TERNATIONAL) FOR CONDUCTING ACCREDITATION SERVICES UNDER WHICH IN ADDITION TO THE AMOUNTS PAYABLE FOR SUCH SERVICE THE UNDERSTANDING BETWEEN THE PARTIES WAS TO REIMBURSE THE EXPENSES OF OFFICIALS OF THE SAID CON CERNS WITH RESPECT OF THEIR BOARDING AND LODGING AND ALSO TRAVEL EXPENSES . THE ASSESSEE HAS DEDUCTED TDS ON THE SURVEY FEE PAID BY IT. THE EXP ENSES ON BOARDING AND 4 LODGING OF THE OFFICIALS OF THE SAID COMPANY VISITI NG INDIA FOR CARRYING OUT THE SERVICES WERE BORNE BY THE ASSESSEE DIRECTLY AN D HENCE NO DISPUTE HAS ARISEN IN RESPECT OF DEDUCTION OF TAX AT SOURCES IN RESPECT OF SUCH PAYMENTS. HOWEVER IN RESPECT OF THE TRAVELING EX PENSES INCURRED BY THE OFFICIALS OF M/S JOINT COMMISSIONER RESOURCES (INTE RNATIONAL) TWO BILLS WERE RAISED TOTALING 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 3 4 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 OBLIGATIO N TO DEDUCT TAX U/S 195 OF THE ACT ON SUCH PAYMENTS VIZ A VIZ THE TAXABILI TY OF THE REMITTANCE HAS BEEN DELIBERATED UPON THE HON'BLE SUPREME COURT IN HON'BLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE (P) LTD VS. CIT & ANR (SUPRA) SAMSUNG ELECTRONICS CO LTD VS. CIT (SUPRA). THE H ON'BLE SUPREME COURT HAS HELD THAT THE PAYER IS BOUND TO DEDUCT TA X AT SOURCE ONLY IF THE SUM PAID IS ASSESSABLE TO TAX IN INDIA. IT HAS BEE N FURTHER HELD THAT SECTION 195 OF THE ACT ALSO COVERS COMPOSITE PAYMEN TS WHICH HAVE AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THE COURT HAVE CLARIFIED THAT THOUGH THERE IS AN OBLIGATION TO DED UCT TAX IN RESPECT OF SUCH COMPOSITE PAYMENT BUT THE OBLIGATION IS LIMITED TO THE APPROPRIATE PORTION OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD AND IN CASE OF SUCH PAYMENTS WHICH INCLUDE AMOUNTS ON WHICH NO TAX IS P AYABLE RECOURSE IS TO BE MADE U/S 195(2) OF THE ACT AND IN THE ABSENCE OF SAME TAX IS TO BE DEDUCTED ON THE ENTIRE COMPOSITE PAYMENT. THE HON'B LE SUPREME COURT HELD AS UNDER:- 7. UNDER SECTION 195(1) THE TAX HAS TO BE DEDUCTE D AT SOURCE FROM INTEREST (OTHER THAN INTEREST ON SECURI TIES) OR ANY 5 OTHER SUM (NOT BEING SALARIES) CHARGEABLE UNDER THE INCOME- TAX ACT IN THE CASE OF NON-RESIDENTS ONLY AND NOT I N THE CASE OF RESIDENTS. FAILURE TO DEDUCT THE TAX UNDER THIS SEC TION MAY DISENTITLE THE PAYER TO ANY ALLOWANCE APART FROM PR OSECUTION UNDER SECTION 276B. THUS SECTION 195 IMPOSES A STA TUTORY OBLIGATION ON ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT ANY INTEREST (NOT BEING INTEREST ON SECU RITIES) OR ANY OTHER SUM (NOT BEING DIVIDEND) CHARGEABLE UNDER THE PROVISIONS OF THE INCOME-TAX ACT TO DEDUCT INCOME- TAX AT THE RATES IN FORCE UNLESS HE IS LIABLE TO PAY INCOME-T AX THEREON AS AN AGENT. PAYMENT TO NONRESIDENTS BY WAY OF ROYALTY AND PAYMENT FOR TECHNICAL SERVICES RENDERED IN INDIA AR E COMMON EXAMPLES OF SUMS CHARGEABLE UNDER THE PROVISIONS OF THE INCOME-TAX ACT TO WHICH THE AFORESTATED REQUIREMENT OF TAX DEDUCTION AT SOURCE APPLIES. THE TAX SO COLLECTED AND DEDUCTED IS REQUIRED TO BE PAID TO THE CREDIT OF T HE CENTRAL GOVERNMENT IN TERMS OF SECTION 200 OF THE INCOME-T AX ACT READ WITH RULE 30 OF THE INCOME-TAX RULES 1962. FA ILURE TO DEDUCT TAX OR FAILURE TO PAY TAX WOULD ALSO RENDER A PERSON LIABLE TO PENALTY UNDER SECTION 201 READ WITH SECT ION 221 OF THE INCOME-TAX ACT. IN ADDITION HE WOULD ALSO BE LIABLE UNDER SECTION 201(1A) TO PAY SIMPLE INTEREST AT 12 PER CENT. PER ANNUM ON THE AMOUNT OF SUCH TAX FROM THE DATE O N WHICH SUCH TAX WAS DEDUCTIBLE TO THE DATE ON WHICH SUCH T AX IS ACTUALLY PAID. THE MOST IMPORTANT EXPRESSION IN SE CTION 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 SU M IS NOT CHARGEABLE TO TAX UNDER THE INCOME-TAX ACT. FOR INS TANCE WHERE THERE IS NO OBLIGATION ON THE PART OF THE PAY ER AND NO RIGHT TO RECEIVE THE SUM BY THE RECIPIENT AND THE PAYMENT DOES NOT ARISE OUT OF ANY CONTRACT OR OBLIGATION B ETWEEN THE PAYER AND THE RECIPIENT BUT IS MADE VOLUNTARILY SU CH PAYMENTS CANNOT BE REGARDED AS INCOME UNDER THE INC OME-TAX ACT. IT MAY BE NOTED THAT SECTION 195 CONTEMPLATES NOT MERELY AMOUNTS THE WHOLE OF WHICH ARE PURE INCOME PAYMEN TS IT ALSO COVERS COMPOSITE PAYMENTS WHICH HAVE AN ELEME NT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THUS WHERE AN AMOUNT IS PAYABLE TO A NON-RESIDENT THE PAYER IS U NDER AN OBLIGATION TO DEDUCT TAS IN RESPECT OF SUCH COMPOSI TE 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 S ECTION 195(1) NAMELY 'CHARGEABLE UNDER THE PROVISIONS O F THE ACT'. IT IS FOR THIS REASON THAT VIDE CIRCULAR NO. 728 D ATED OCTOBER 30 1995 THE CENTRAL BOARD OF DIRECT TAXES HAS CLA RIFIED THAT THE TAX DEDUCTOR CAN TAKE INTO CONSIDERATION THE E FFECT OF THE DTAA IN RESPECT OF PAYMENT OF ROYALTIES AND TECHNIC AL FEES WHILE DEDUCTING TAS. IT MAY ALSO BE NOTED THAT SECT ION 195(1) IS IN IDENTICAL TERMS WITH SECTION 18(3B) OF THE 1 922 ACT. IN CIT V. COOPER ENGINEERING LTD. [1968] 68 ITR 457 I T WAS POINTED OUT THAT IF THE PAYMENT MADE BY THE RESIDE NT TO THE NON-RESIDENT WAS AN AMOUNT WHICH WAS NOT CHARGEABLE TO TAX 6 IN INDIA THEN NO TAX IS DEDUCTIBLE AT SOURCE EVEN THOUGH THE ASSESSEE HAD NOT MADE AN APPLICATION UNDER SECTION 18(3B) (NOW SECTION 195(2) OF THE INCOME-TAX ACT). THE AP PLICATION OF SECTION 195(2) PRE-SUPPOSES THAT THE PERSON RES PONSIBLE FOR MAKING THE PAYMENT TO THE NON-RESIDENT IS IN NO DOUBT THAT TAX IS PAYABLE IN RESPECT OF SOME PART OF THE AMOUNT TO BE REMITTED TO A NON-RESIDENT BUT IS NOT SURE AS TO WH AT SHOULD BE THE PORTION SO TAXABLE OR IS NOT SURE AS TO THE AM OUNT OF TAX TO BE DEDUCTED. IN SUCH A SITUATION HE IS REQUIRE D TO MAKE AN APPLICATION TO THE INCOME-TAX OFFICER (TDS) FOR DE TERMINING THE AMOUNT. IT IS ONLY WHEN THESE CONDITIONS ARE S ATISFIED AND AN APPLICATION IS MADE TO THE INCOME-TAX OFFICER (T DS) THAT THE QUESTION OF MAKING AN ORDER UNDER SECTION 195(2 ) WILL ARISE. IN FACT AT ONE POINT OF TIME THERE WAS A PROVISION IN THE INCOME-TAX ACT TO OBTAIN A NOC FROM THE DEPART MENT THAT NO TAX WAS DUE. THAT CERTIFICATE WAS REQUIRED TO B E GIVEN TO THE RBI FOR MAKING REMITTANCE. IT WAS HELD IN THE CASE OF CZECHOSLOVAK OCEAN SHIPPING INTERNATIONAL JOINT STO CK COMPANY V. ITO [1971] 81 ITR 162 (CAL) THAT AN APP LICATION FOR NOC CANNOT BE SAID TO BE AN APPLICATION UNDER SECTION 195(2) OF THE ACT. WHILE DECIDING THE SCOPE OF SEC TION 195(2) IT IS IMPORTANT TO NOTE THAT THE TAX WHICH IS REQUI RED TO BE DEDUCTED AT SOURCE IS DEDUCTIBLE ONLY OUT OF THE CH ARGEABLE SUM. THIS IS THE UNDERLYING PRINCIPLE OF SECTION 1 95. HENCE APART FROM SECTION 9(1) SECTIONS 4 5 9 90 91 AS WELL AS THE PROVISIONS OF THE DTAA ARE ALSO RELEVANT WHILE AP PLYING TAX DEDUCTION AT SOURCE PROVISIONS. REFERENCE TO THE IN COME-TAX OFFICER (TDS) UNDER SECTION 195(2) OR 195(3) EITHER BY THE NON-RESIDENT OR BY THE RESIDENT PAYER IS TO AVOID ANY FUTURE HASSLES FOR BOTH RESIDENT AS WELL AS NON-RESIDENT. IN OUR VIEW SECTION 195(2) AND 195(3) ARE SAFEGUARDS. THE SAID PROVISIONS ARE OF PRACTICAL IMPORTANCE. THIS REASONING OF OURS IS BASED ON THE DECISION OF THIS COURT IN TRA NSMISSION CORPORATION IN WHICH THIS COURT HAS OBSERVED THAT THE PROVISION OF SECTION 195(2) IS A SAFEGUARD. FROM T HIS IT FOLLOWS THAT WHERE A PERSON RESPONSIBLE FOR DEDUCTI ON IS FAIRLY CERTAIN THEN HE CAN MAKE HIS OWN DETERMINATI ON AS TO WHETHER THE TAX WAS DEDUCTIBLE AT SOURCE AND IF S O WHAT SHOULD BE THE AMOUNT THEREOF . SUBMISSIONS AND FINDINGS THEREON 8. IF THE CONTENTION OF THE DEPARTMENT THAT THE MOM ENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS A RISES IS TO BE ACCEPTED THEN WE ARE OBLITERATING THE WORDS 'CHA RGEABLE UNDER THE PROVISIONS OF THE ACT' IN SECTION 195(1) . THE SAID EXPRESSION IN SECTION 195(1) SHOWS THAT THE REMITTA NCE HAS GOT TO BE OF A TRADING RECEIPT THE WHOLE OR PART O F WHICH IS LIABLE TO TAX IN INDIA. THE PAYER IS BOUND TO DEDU CT TAS ONLY IF THE TAX IS ASSESSABLE IN INDIA. IF TAX IS NOT S O ASSESSABLE THERE IS NO QUESTION OF TAS BEING DEDUCTED. (SEE : VIJAY SHIP BREAKING CORPORATION V. CIT [2009] 314 ITR 309). 7 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 S OURCE BY THE PAYER. ON ANALYSIS OF VARIOUS PROVISIONS OF CH APTER XVII ONE FINDS USE OF DIFFERENT EXPRESSIONS HOWEVER TH E 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 R ESIDENT'. SIMILARLY SECTIONS 194EE AND 194F INTER ALIA PR OVIDE FOR DEDUCTION OF TAX IN RESPECT OF 'ANY AMOUNT' REFERR ED 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 MEANIN G AND EFFECT TO THE SAID EXPRESSION. IT FOLLOWS THEREFO RE THAT THE OBLIGATION TO DEDUCT TAS ARISES ONLY WHEN THERE IS A SUM CHARGEABLE UNDER THE ACT. SECTION 195(2) IS NOT MER ELY A PROVISION TO PROVIDE INFORMATION TO THE INCOME-TAX OFFICER (TDS). IT IS A PROVISION REQUIRING TAX TO BE DEDUC TED 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 'S UM CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN SEC TION 195(1). THE FACT THAT THE REVENUE HAS NOT OBTAINED ANY INF ORMATION PER SE CANNOT BE A GROUND TO CONSTRUE SECTION 195 W IDELY SO AS TO REQUIRE DEDUCTION OF TAS EVEN IN A CASE WHERE AN AMOUNT PAID IS NOT CHARGEABLE TO TAX IN INDIA AT A LL. WE CANNOT READ SECTION 195 AS SUGGESTED BY THE DEPAR TMENT NAMELY THAT THE MOMENT THERE IS REMITTANCE THE OB LIGATION TO DEDUCT TAS ARISES. IF WE WERE TO ACCEPT SUCH A CONT ENTION IT WOULD MEAN THAT ON MERE PAYMENT INCOME WOULD BE SAI D TO ARISE OR ACCRUE IN INDIA. THEREFORE AS STATED EAR LIER IF THE CONTENTION OF THE DEPARTMENT WAS ACCEPTED IT WOULD MEAN OBLITERATION OF THE EXPRESSION 'SUM CHARGEABLE UND ER THE PROVISIONS OF THE ACT' FROM SECTION 195(1). WHILE I NTERPRETING A SECTION ONE HAS TO GIVE WEIGHTAGE TO EVERY WORD U SED IN THAT SECTION. WHILE INTERPRETING THE PROVISIONS OF THE I NCOME-TAX ACT ONE CANNOT READ THE CHARGING SECTIONS OF THAT A CT DE HORS THE MACHINERY SECTIONS. THE ACT IS TO BE READ AS A N INTEGRATED CODE. SECTION 195 APPEARS IN CHAPTER XVII WHICH DE ALS WITH COLLECTION AND RECOVERY. AS HELD IN THE CASE OF CIT V. ELI LILLY AND CO. (INDIA) (P.) LTD. [2009] 312 ITR 225 THE PROVISIONS FOR DEDUCTION OF TAS WHICH ARE IN CHAPT ER XVII DEALING WITH COLLECTION OF TAXES AND THE CHARGING PROVISIONS OF THE INCOME-TAX ACT FORM ONE SINGLE INTEGRAL IN SEPARABLE CODE AND THEREFORE THE PROVISIONS RELATING TO TDS APPLY ONLY TO THOSE SUMS WHICH ARE 'CHARGEABLE TO TAX' UN DER THE INCOMETAX ACT. IT IS TRUE THAT THE JUDGMENT IN ELI LILLY [2009] 312 ITR 225 WAS CONFINED TO SECTION 192 OF THE INC OME-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'. SIMILA RLY SECTION 195 IMPOSES A STATUTORY OBLIGATION ON ANY PERSON 8 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 CHAPT ER XVII. IT IS IN THIS SENSE THAT WE HOLD THAT THE INCOME-TAX A CT CONSTITUTES ONE SINGLE INTEGRAL INSEPARABLE CODE. HENCE THE PROVISIONS RELATING TO TDS APPLIES ONLY TO THOSE S UMS WHICH ARE CHARGEABLE TO TAX UNDER THE INCOMETAX ACT. IF T HE 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 BECA USE THERE IS NO PROVISION IN THE INCOME-TAX ACT BY WHICH A PAYE R CAN OBTAIN REFUND. SECTION 237 READ WITH SECTION 199 IM PLIES THAT ONLY THE RECIPIENT OF THE SUM I.E. THE PAYEE COUL D SEEK A REFUND. IT MUST THEREFORE FOLLOW IF THE DEPARTMEN T IS RIGHT THAT THE LAW REQUIRES TAX TO BE DEDUCTED ON ALL PA YMENTS 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 I S NOT A SUM CHARGEABLE UNDER THE ACT. THE INTERPRETATION O F 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 INTERPRETA TION PLACED BY THE DEPARTMENT WOULD RESULT IN A SITUATIO N WHERE EVEN WHEN THE INCOME HAS NO TERRITORIAL NEXUS WITH INDIA OR IS NOT CHARGEABLE IN INDIA THE GOVERNMENT WOULD N ONETHELESS COLLECT TAX. IN OUR VIEW SECTION 195(2) PROVIDES A REMEDY BY WHICH A PERSON MAY SEEK A DETERMINATION OF THE 'APP ROPRIATE PROPORTION OF SUCH SUM SO CHARGEABLE' WHERE A PROPO RTION OF THE SUM SO CHARGEABLE IS LIABLE TO TAX. THE ENTIRE BASIS OF THE DEPARTMENT'S CONTENTION IS BASED ON ADMINISTRATIVE CONVENIENCE IN SUPPORT OF ITS INTERPRETATION. ACCOR DING TO THE DEPARTMENT HUGE SEEPAGE OF REVENUE CAN TAKE PLACE IF PERSONS MAKING PAYMENTS TO NON-RESIDENTS ARE FREE T O DEDUCT TAS OR NOT TO DEDUCT TAS. IT IS THE CASE OF THE DE PARTMENT THAT SECTION 195(2) AS INTERPRETED BY THE HIGH CO URT WOULD PLUG THE LOOPHOLE AS THE SAID INTERPRETATION REQUI RES THE PAYER TO MAKE A DECLARATION BEFORE THE INCOMETAX OF FICER (TDS) OF PAYMENTS MADE TO NON-RESIDENTS. IN OTHER W ORDS ACCORDING TO THE DEPARTMENT SECTION 195(2) IS A PR OVISION BY WHICH THE PAYER IS REQUIRED TO INFORM THE DEPARTME NT OF THE REMITTANCES HE MAKES TO NON-RESIDENTS BY WHICH THE DEPARTMENT IS ABLE TO KEEP TRACK OF THE REMITTANCES BEING MADE TO NON-RESIDENTS OUTSIDE INDIA. WE FIND NO MER IT IN THESE CONTENTIONS. AS STATED HEREINABOVE SECTION 1 95(1) USES THE EXPRESSION 'SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT.' WE NEED TO GIVE WEIGHTAGE TO THOSE WORDS. FU RTHER SECTION 195 USES THE WORD 'PAYER' AND NOT THE WORD 'ASSESSEE '. THE PAYER IS NOT AN ASSESSEE. THE PAYER BECOMES AN ASSESSEE-IN-DEFAULT ONLY WHEN HE FAILS TO FULFIL THE STATUTORY OBLIGATION UNDER SECTION 195(1). IF THE PAYMENT DO ES NOT CONTAIN THE ELEMENT OF INCOME THE PAYER CANNOT BE MADE LIABLE. HE CANNOT BE DECLARED TO BE AN ASSESSEE-IN-DEFAUL T. THE ABOVEMENTIONED CONTENTION OF THE DEPARTMENT IS BASED 9 ON AN APPREHENSION WHICH IS ILL-FOUNDED. THE PAYER IS ALSO AN ASSESSEE UNDER THE ORDINARY PROVISIONS OF THE INCOM E-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'. UNDE R SECTION 40(A)(I) INSERTED VIDE FINANCE ACT 1988 WITH EF FECT 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 ASSE SSEE FAILS TO DEDUCT TAS IN RESPECT OF PAYMENTS OUTSIDE INDIA WHI CH 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 P AYMENTS OUTSIDE INDIA IN RESPECT OF ROYALTIES FEES OR OTH ER SUMS CHARGEABLE UNDER THE INCOME-TAX ACT. IN A GIVEN CA SE 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 REMIT TED OUTSIDE INDIA COME WITHIN THE DEFINITION OF ROYALTY OR FEE S FOR TECHNICAL SERVICE OR OTHER SUMS CHARGEABLE UNDER T HE INCOME- TAX ACT THEN IT WOULD BE OPEN TO THE ASSESSING OFFI CER TO DISALLOW SUCH CLAIM FOR DEDUCTION. SIMILARLY VIDE THE FINANCE ACT 2008 WITH EFFECT FROM APRIL 1 2008 SUB-SECT ION (6) HAS BEEN INSERTED IN SECTION 195 WHICH REQUIRES THE PA YER 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 APRIL 1 2008. IT WILL NOT APPLY FOR THE PERIOD WITH WHICH WE ARE CONCERNE D IN THESE CASES BEFORE US. THEREFORE IN OUR VIEW THERE ARE ADEQUATE SAFEGUARDS IN THE ACT WHICH WOULD PREVENT REVENUE LEAKAGE. APPLICABILITY OF THE JUDGMENT IN THE CASE OF TRANSM ISSION CORPORATION (SUPRA) 10. IN TRANSMISSION CORPORATION'S CASE [1999] 239 I TR 587 (SC) A NON-RESIDENT HAD ENTERED INTO A COMPOSITE CONTRA CT WITH THE RESIDENT PARTY MAKING THE PAYMENTS. THE S AID COMPOSITE CONTRACT NOT ONLY COMPRISED SUPPLY OF PL ANT MACHINERY AND EQUIPMENT IN INDIA BUT ALSO COMPRISE D THE INSTALLATION AND COMMISSIONING OF THE SAME IN INDIA . IT WAS ADMITTED THAT THE ERECTION AND COMMISSIONING OF PL ANT AND MACHINERY IN INDIA GAVE RISE TO INCOME TAXABLE IN INDIA. IT WAS THEREFORE CLEAR EVEN TO THE PAYER THAT PAYMEN TS REQUIRED TO BE MADE BY HIM TO THE NON-RESIDENT INCLUDED AN E LEMENT OF INCOME WHICH WAS EXIGIBLE TO TAX IN INDIA. THE ONLY ISSUE RAISED IN THAT CASE WAS WHETHER TDS WAS APPLICABLE ONLY TO PURE INCOME PAYMENTS AND NOT TO COMPOSITE PAYMENTS WHICH HAD AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THE CONTROVERSY BEFORE US IN THIS BATCH OF CASES I S THEREFORE QUITE DIFFERENT. IN TRANSMISSION CORPORATION CASE [1999] 239 ITR 587 (SC) IT WAS HELD THAT TAS WAS LIABLE TO BE DEDUCTED BY THE PAYER ON THE GROSS AMOUNT IF SUCH PAYMENT INCLUDED IN IT AN AMOUNT WHICH WAS EXIGIBLE TO TAX IN INDIA. IT WAS HELD THAT IF THE PAYER WANTED TO DEDUCT TAS NO T ON THE GROSS AMOUNT BUT ON THE LESSER AMOUNT ON THE FOOT ING THAT 10 ONLY A PORTION OF THE PAYMENT MADE REPRESENTED 'INC OME CHARGEABLE TO TAX IN INDIA' THEN IT WAS NECESSARY FOR HIM TO MAKE AN APPLICATION UNDER SECTION 195(2) OF THE ACT TO THE INCOME-TAX OFFICER (TDS) AND OBTAIN HIS PERMISSION FOR DEDUCTING TAS AT LESSER AMOUNT. THUS IT WAS HELD BY THIS COURT THAT IF THE PAYER HAD A DOUBT AS TO THE AMOUN T TO BE DEDUCTED AS TAS HE COULD APPROACH THE INCOME-TAX OF FICER (TDS) TO COMPUTE THE AMOUNT WHICH WAS LIABLE TO BE DEDUCTED AT SOURCE. IN OUR VIEW SECTION 195(2) IS BASED ON THE 'PRINCIPLE OF PROPORTIONALITY'. THE SAID SUBSEC TION 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 IN DIA . 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 RE SPONSIBLE FOR PAYING SUCH `SUM' TO DEDUCT TAX THEREON BEFORE MAKI NG PAYMENT. HE HAS TO DISCHARGE THE OBLIGATION TO TDS '. IF ONE READS THE OBSERVATION OF THE SUPREME COURT THE WO RDS 'SUCH SUM ' CLEARLY INDICATE THAT THE OBSERVATION REFERS TO A CASE OF COMPOSITE PAYMENT WHERE THE PAYER HAS A DOUBT REGAR DING THE INCLUSION OF AN AMOUNT IN SUCH PAYMENT WHICH IS EXI GIBLE TO TAX IN INDIA. IN OUR VIEW THE ABOVE OBSERVATIONS OF THIS COURT IN TRANSMISSION CORPORATION CASE [1999] 239 ITR 5 87 (SC) WHICH ARE PUT IN ITALICS HAVE BEEN COMPLETELY WIT H RESPECT MISUNDERSTOOD BY THE KARNATAKA HIGH COURT TO MEAN THAT IT IS NOT OPEN FOR THE PAYER TO CONTEND THAT IF THE AMOU NT PAID BY HIM TO THE NON-RESIDENT IS NOT AT ALL 'CHARGEABLE T O TAX IN INDIA' THEN NO TAS IS REQUIRED TO BE DEDUCTED FROM SUCH PAYMENT. THIS INTERPRETATION OF THE HIGH COURT COM PLETELY LOSES SIGHT OF THE PLAIN WORDS OF SECTION 195(1) W HICH IN CLEAR TERMS LAY DOWN THAT TAX AT SOURCE IS DEDUCTIB LE 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. (UNDERLINE PROVIDED & PORTION HIGHLIGHTED B Y US) 7. THE SPECIAL BENCH OF CHENNAI TRIBUNAL IN ITO VS. PRASAD PRODUCTION LTD (SUPRA) HAVE HELD THAT WHERE THE PAY ER HAS A BONAFIDE BELIEF THAT NO PART OF THE PAYMENT HAS INCOME CHARA CTER SECTION 195 (1) WOULD NOT APPLY AND IT IS NOT MANDATORY FOR HIM TO UNDERGO THE PROCEDURE OF SECTION 195(2) BEFORE MAKING ANY PAYMENT TO THE NON RESIDENTS. ONLY WHERE PART OF THE PAYMENT IS CHARGEABLE TO TAX THE N THE ASSESSEE CAN APPLY U/S 195(2) FOR DEDUCTION AT APPROPRIATE RATES . 11 8. APPLYING THE ABOVE SAID RATIO TO THE FACTS BEFOR E US THE POSITION OF LAW AS SETTLED BY THE APEX COURT IS THAT ALL SUCH P AYMENTS MADE TO NON RESIDENTS HAVING INCOME CHARACTER ASSESSABLE TO TAX IN INDIA ARE EXIGIBLE TO DEDUCTION OF TAX UNDER THE PROVISIONS OF SECTION 195 OF THE ACT. THE EXPRESSION USED IN SECTION 195(1) OF THE ACT IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. SUCH PAYMENTS MADE TO THE NON RESIDENT WHICH HAVE NO ELEMENTS OF INCOME EMBEDDED IN THEM ARE NOT BE SUBJECTED TO WITHHOLDING OF TAX IN RESPECT OF SUCH PAYMENTS U/S 195 OF THE ACT. EVEN IN CASES OF COMPOSITE PAYMENTS THE COURTS HAVE HEL D THAT THE OBLIGATION TO DEDUCT THE TAX IS IN RESPECT OF THE ELEMENT OF I NCOME EMBEDDED OR INCORPORATED IN THEM. BUT IN RESPECT OF COMPOSITE PAYMENTS RECOURSE IS TO MADE U/S 195(2) OF THE ACT AND IN THE ABSENCE OF THE SAME TAX IS TO BE DEDUCTED ON ENTIRE PAYMENT. FOLLOWING THE SAME W E HOLD THAT WHERE THE ASSESSEE HAS REIMBURSED THE EXPENDITURE WHICH HAS B EEN ACTUALLY INCURRED BY THE PAYEE NO WITHHOLDING OF TAX U/S 195 OF THE ACT IS WARRANTED AS THE SAME HAS NO ELEMENT OF INCOME EMBEDDED IN THE SAME. 9. IN THE FACTS OF THE PRESENT CASE WE DIRECT THE ASSESSING OFFICER TO VERIFY THE STAND OF THE ASSESSEE VIS-A-VIS THE ACTU AL INCURRENCE OF THE EXPENDITURE AND IN CASE THE ASSESSEE IS ABLE TO SAT ISFY WITH EVIDENCE THAT THE AFORESAID PAYMENTS ARE IN FACT REIMBURSEMENT OF EXPENSES INCURRED BY THE OFFICIALS OF M/S JOINT COMMISSIONER RESOURCES ( INTERNATIONAL) THEN THE SAME FALLS OUTSIDE OF PURVIEW OF SECTION 195 OF THE ACT AND THERE IS NO LIABILITY TO DEDUCT TAX AT SOURCE OUT OF SUCH PAYME NT. IN THE ALTERNATIVE IN CASE THE ASSESSEE IS NOT ABLE TO ESTABLISH ITS CLAI M OF REIMBURSEMENT OF EXPENSES THE SAID PAYMENTS ARE TO BE SUBJECTED TO TAX DEDUCTION AT SOURCE AND IN CASE OF NON DEDUCTION OF TAX IT IS CHARGEAB LE U/S 201(1) AND INTEREST U/S 201(1A) OF THE ACT. THE ASSESSING OF FICER SHALL DECIDE THE 12 ISSUE IN LINE OUR OBSERVATION IN THIS REGARD AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS THUS ALLOWED FOR STATISTICAL PURPOS ES. 10. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF FEBRUARY 2010 SD/- SD/- (N.BARATHVAJA SANKAR) (SUSHMA CHOWLA) VICE PRESIDENT JUDICIAL MEMBER DATED : 25 TH FEBRUARY 2010 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR