M/s Frontier Offshore Exploration (India) Ltd., CHENNAI v. DCIT, CHENNAI

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI BEFORE SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER AN D SHRI GEORGE MATHAN JUDICIAL MEMBER .. I.T.A. NO. 200/MDS/2009 ASSESSMENT YEAR : 2004-05 M/S. FRONTIER OFFSHORE EXPLORATION (INDIA) LTD. (FORMERLY KNOWN AS M/S.FRONTIER ABAN DRILLING (I) LTD.) NO.113 JANPRIYA CREST PANTHEON ROAD EGMORE CHENNAI-600 008. V. THE DEPUTY COMMISSIONER OF INCOME-TAX COMPANY CIRCLE-II(1) CHENNAI. (PAN: AABCA2927K) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.J. PARDIWALA AND SHRI R. MEENAKSHISUNDARAM RESPONDENT BY : SHRI P.B. SEKARAN O R D E R PER GEORGE MATHAN JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE LEARNED CIT(APPEALS)-III CHENNAI IN ITA NO. 646/06-07/A.II I DATED 23-12-2008 FOR THE ASSESSMENT YEAR 2004-05. 2. SHRI P. J. PARDIWALA SR. ADVOCATE AND SHRI R. M EENAKSHISUNDARAM ADVOCATE REPRESENTED ON BEHALF OF THE ASSESSEE AND THE LEARNED CIT-DR SHRI P.B. SEKARAN REPRESENTED ON BEHALF OF THE REVENUE. I.T.A. NO.200/MDS/2009 2 3. IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRE SENTATIVE THAT THE ASSESSEE IS A COMPANY WHICH IS IN THE BUSINESS OF P ROVIDING OIL FIELD SERVICES. THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH ONG C AND M/S. HARDY EXPLORATION & PRODUCTION (INDIA) TO DRILL OIL WELLS IN INDIAN WATERS. FOR THE PURPOSE OF ITS CONTRACT THE ASSESSEE HAD TAKEN TWO DRILLING UNITS OWNED BY TWO FOREIGN COMPANIES NAMELY M/S. FRONTIER DRILLING AS A BERGEN NORWAY AND M/S. FRONTIER ICE AS BERGAN NORWAY. THE ASSESSEE WAS TO PAY THE HIRE CHARGES FOR THE DRILLING UNITS AS BARE BOAT CHARGES AND EX-PAT C REW CHARGES. THE ASSESSEE HAD DEDUCTED TDS @ 4.1% OF THE BARE BOAT CHARGES. IT WAS SUBMITTED THAT THE 4.1% WAS ARRIVED AT IN THE FOLLOWING MANNER. AS PER THE PROVISIONS OF SEC. 44BB OF THE INCOME TAX ACT 1961 THE INCOME OF THE SERVICE PROVIDER WAS DEEMED TO BE 10% OF THE AGGREGATE AMOUNT AND THE RA TE OF TAX INCLUDING SURCHARGE CAME TO NEARLY 41%. THUS WHEN THE WHOLE AMOUNT OF THE BARE BOAT CHARGES IS CONSIDERED AS THE INCOME AS DONE BY THE ASSESSING OFFICER THE TDS AMOUNT COMES TO 4.1%. THE LEARNED AUTHORISED REPRE SENTATIVE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 44BB(1) AND 44BB(2). IT WAS THE SUBMISSION THAT AS PER THE PROVISIONS OF SECTION 44 BB(2) THE RECIPIENT COULD CLAIM TO BE TAXED AT A LOWER INCOME. MAXIMUM INCOME THAT CAN BE DEEMED ON THE RECIPIENT BEING A NON-RESIDENT IS 10% AS PER SECTIO N 44BB(1). HE FURTHER DREW OUR ATTENTION TO THE PROVISIONS OF SECTION195 TO SU BMIT THAT THE WORDS USED WERE THAT TAX WAS TO BE DEDUCTED ON THE SUM CHARGEABLE T O TAX AND THE SUM I.T.A. NO.200/MDS/2009 3 CHARGEABLE TO TAX WAS AS PER THE PROVISIONS OF SECT ION 44BB(1) AT 10% AND THE RATE OF TAX IN FORCE WAS 40% + SURCHARGE. IT WAS T HE SUBMISSION THAT THE ASSESSEE HAS DONE JUST THIS. HE FURTHER DREW OUR A TTENTION TO THE PROVISIONS OF SEC. 40(A)(I) OF THE ACT TO SUBMIT THAT THE WORDS T HEREIN WERE SUCH TAX HAS NOT BEEN DEDUCTED AND THIS POSTULATED AN ABSOLUTE FAILU RE AND NOT SHORT DEDUCTION. HE DREW OUR ATTENTION TO THE PROVISIONS OF SEC. 201 TO SHOW THAT THE WORDS USED THEREIN WERE THE WHOLE OR ANY PART OF THE TAX. I T WAS THE SUBMISSION THAT WHERE THE LEGISLATURE WANTED TO SPECIFY A VIOLATION OF A PART OF THE TAX IT DID USE THE WORDS ANY PART OF THE TAX AS SPECIFIED IN SEC . 201. THE LEARNED AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT SEC. 44BB WAS A SPECIFIC PROVISION AND WAS A SPECIAL PROVISION DEALING WITH A SPECIAL TYPE OF INCOME AND THE SAID PROVISION EXCLUDED THE GENERAL PROVISIONS DEALING WITH INCOME S ACCRUING OR ARISING OUT OF ANY BUSINESS CONNECTION AND CONSEQUENTLY A SPECIAL PROVISION OF SECTION 44BB HAD TO BE CONSIDERED. HE RELIED UPON THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. COPES VULCAN INC. REPOR TED IN 167 ITR 884. IT WAS THE FURTHER SUBMISSION THAT THE LEARNED CIT(A) HAD BLINDLY FOLLOWED THE DECISION IN THE ASSESSEES OWN CASE FOR THE IMMEDIATELY PREC EDING YEAR WHEREIN THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN ITA NO. 2037/MDS /2006 DATED 28-02-2007 BY FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF AP LTD. V. CIT REPORTED IN 239 ITR 5 87 HAD HELD THE ISSUE AGAINST THE ASSESSEE. IT WAS THE SUBMISSION THAT IN VIEW O F THE DECISION OF THE HON'BLE I.T.A. NO.200/MDS/2009 4 SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CEN TRE (P) LTD. V. CIT REPORTED IN 327 ITR 456 WHEREIN THE DECISION F THE HON'BLE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF AP LTD. REFERR ED TO SUPRA HAS BEEN EXPLAINED. THE DECISION OF THE CO-ORDINATE BENCH O F THIS TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2003-04 WAS NO MORE GOOD LAW. IT WAS THE SUBMISSION THAT AS PER THE DECISION OF THE HON' BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD. THE OBLIGATIO N TO DEDUCT TDS IS LIMITED TO THE APPROPRIATE PORTION OF THE INCOME CHARGEABLE UN DER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON-RESIDENT. IT WAS THE SUBMISSION THAT IN THE PRESENT CASE AS PER THE PROVISIONS OF SEC. 4 4BB THE MAXIMUM APPROPRIATED PORTION OF INCOME CHARGEABLE UNDER THE ACT TO THE N ORWAY COMPANIES WAS 10% OF THE GROSS SUM PAYABLE TO THE SAID TWO NORWAY COM PANIES AND THE ASSESSEE HAS DEDUCTED THE TDS ON THE SAID SUM OF 10%. IT WA S THE SUBMISSION THAT CONSEQUENTLY THE ACTION OF THE ASSESSING OFFICER IN INVOKING THE PROVISIONS OF SECTION 40(A)(I) FOR DISALLOWING THE PAYMENT MADE T O THE TWO NORWAY COMPANIES AND THE ACTION OF THE LEARNED CIT(A) IN CONFIRMING THE SAME WAS LIABLE TO BE REVERSED. 4. IN REPLY THE LEARNED DR SUBMITTED THAT THE DECIS ION OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CEN TRE (P) LTD. REFERRED TO SUPRA DID NOT CONSIDER THE PROVISIONS OF SEC. 44BB AND THE CO-ORDINATE BENCH OF I.T.A. NO.200/MDS/2009 5 THIS TRIBUNAL IN THE ASSESSEES OWN CASE HAD CONSID ERED THE PROVISIONS OF SECTION 44BB TO HOLD AS FOLLOWS IN PARAGRAPHS 24 TO 27: 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY IN THE LIGHT OF MATERIAL AVAILABLE ON RECO RD AS WELL AS DECISIONS CITED BY BOTH THE PARTIES. WE AGREE WITH THE FIRST SUBMISSION OF THE LD. DR THAT WE ARE CONCERNED IN THIS APPEAL WITH THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(APPEALS) U/S 40(A)(I) IN THE ASSESSMENT COMPLETED AGAINST THE ASSESSEE AGAINST WHICH THE ASSESSEE HAS COME IN APPEAL BEFORE US. WE ARE NOT CONCERNED WITH THE ISSUE WHETHER THE PROVISIONS OF SECTION 44BB ARE APPLICABLE TO THE NON-RESIDENT PARTY BECAUSE SUCH PARTY HAS NOT FILED ANY RETURN AND CONSEQUENTLY NO APPEAL IS PENDING BEFORE US. APPLICABILITY OF SECTION 44BB WOULD DEPEND ON THE CONTEXT LAID DOWN IN THAT SECTION. IT WOULD MEAN THAT IF A PARTICULAR NON-RESIDENT PARTY WHO IS ENGAGED IN THE BUSINESS OF PROVIDING SERVICES OR FACILITIES IN CONNECTION WITH OR SUPPLYING PLANT AND MACHINERY ON HIRE TO BE USED FOR EXPLORATION OF OIL ETC. THEN PROFITS HAVE TO BE ASSUMED ON A PARTICULAR PERCENTAGE WHAT IS IN COMMON PARLANCE KNOWN AS PRESUMPTIVE TAX. BUT FOR COMING TO THAT CONCLUSION OBVIOUSLY THE NATURE OF BUSINESS OF SUCH PARTY WHAT ARE THE SERVICES OR FACILITIES OR MACHINERY ETC. BEING USED OR PROVIDED ON HIRE AND VARIOUS OTHER FACTORS NEED TO BE EXAMINED IN DETAIL. THEN SUCH PARTY ALSO HAS A RIGHT UNDER SUB-SECTION (3) TO CLAIM LOWER PROFITS THAN PRESCRIBED AS PRESUMPTIVE PROFITS IN SUB-SECTION (2) OF SECTION 44BB. WE AGREE WITH THE LEARNED COUNSEL OF THE ASSESSEE THAT THE PURPOSE OF INTRODUCTION OF SECTION 44AB WAS SIMPLIFICATION OF TAXATION IN CASE OF NON-RESIDENTS WHO WERE ENGAGED IN THE BUSINESS OF PROVIDING SERVICES AND FACILITIES IN CONNECTION WITH OR SUPPLY OF PLANT A ND MACHINERY ON HIRE USED OR TO BE USED IN THE EXPLORATION OR FO R EXPLORATION OF MINERAL OILS BECAUSE SUCH TAXATION INVOLVED NUMBER OF COMPLICATIONS. HOWEVER WE HAVE TO AGREE WITH I.T.A. NO.200/MDS/2009 6 THE LEARNED DR THAT ANY PARTY CLAIMING BENEFIT OF S ECTION 44BB HAS TO FILE RETURN AND THEN ONLY THE INCOME-TA X AUTHORITIES CAN PRONOUNCE WHETHER SUCH PARTY IS ENT ITLED TO THE BENEFIT OF PROVISIONS OF S. 44BB OR NOT. THIS I SSUE CANNOT BE DECIDED BY A PARTY WHO IS SUPPOSED TO MAKE PAYME NT TO NON-RESIDENT WITHOUT FILING ANY DETAILS IN THE FORM OF RETURN BY SUCH NON-RESIDENT PARTY WITH THE TAX AUTHORITIES. T HEREFORE THE LD. DR IS CLEARLY RIGHT THAT THE ISSUE REGARDIN G APPLICATION OF SECTION 44BB TO THE NON-RESIDENT PARTY TO WHOM P AYMENTS WERE MADE BY THE ASSESSEE COMPANY CANNOT BE EXAMINE D IN THE CASE OF ASSESSEE ITSELF. WE ARE ALSO UNABLE TO AGREE WITH THE SUBMISSION OF THE LD. SR. COUNSEL OF THE A SSESSEE THAT THERE IS NO EXPRESSION SUCH AS 'EXISTING ASSES SEE' USED BY THE CIT(APPEALS) BY HOLDING THAT PROVISIONS OF S ECTION 44BB WERE APPLICABLE ONLY IN THE CASE OF EXISTING A SSESSEES. IN VIEW OF THE LEGAL SITUATION WHICH WE HAVE DISCUS SED PERHAPS WHAT THE LEARNED CIT(A) MEANT WAS APPLICABI LITY OF THESE PROVISIONS COULD BE EXAMINED ONLY WHEN SOMEBO DY HAD FILED RETURN AND WAS AN EXISTING ASSESSEE. NATU RALLY APPLICABILITY OF THIS PROVISION CANNOT BE EXAMINED IN A CASE OF A PERSON WHO HAS NEVER FILED ANY RETURN BECAUSE AFT ER ALL NATURE OF BUSINESS NATURE OF ACTIVITIES AND OTHER THINGS REQUIRE EXAMINATION BY THE TAX AUTHORITIES. WE ARE OF THE HUMBLE OPINION THAT THE OVERALL SCHEME OF THE ACT C ANNOT BE LOST SIGHT OF. SECTIONS 28 TO 44DA DEALS WITH COMPU TATION PROVISIONS UNDER THE HEAD INCOME FROM PROFITS AND G AINS OF BUSINESS OR PROFESSION. WHENEVER SOME INCOME IS ASSESSABLE UNDER THAT HEAD THE SAME HAS TO BE COMP UTED IN ACCORDANCE WITH THE CHAPTER IV I.E. SECTIONS 28 TO 44DA. BUT CHAPTER XVII DEALS WITH COLLECTION AND RECOVERY OF TAX AND PART A OF THIS CHAPTER CONSISTING OF SECTIONS19 0 AND 191 ARE OF GENERAL NATURE WITH REGARD TO DEDUCTION AT S OURCE AND ADVANCE PAYMENT AS WELL AS DIRECT PAYMENT. WHEREA S PART B SPECIFICALLY DEALS WITH THE DEDUCTION OF TAX AT S OURCE. THEREFORE THIS CHAPTER DEALS WITH THE MODE OF TAXE S BEING COLLECTED FROM THE ASSESSEE WHEREAS CHAPTER IV DEA LS WITH COMPUTATION OF INCOME AND ACCORDINGLY THE COMPUTATI ON OF TAX ON THE SAME. THEREFORE THE ISSUE PERTAINING TO ONE ASPECT OF TAXATION I.E. COMPUTATION OF TAXABLE INC OME AND TAX CANNOT BE MIXED WITH THE OTHER ASPECT I.E. CO LLECTION OF TAXES. THEREFORE FOR PROPER APPRECIATION OF THE IS SUE RAISED BEFORE US LET US EXAMINE WHAT SECTION 40(A)(I) PRE SCRIBES I.T.A. NO.200/MDS/2009 7 WHICH IS AS UNDER: ' AMOUNTS NOT DEDUCTIBLE .- 40.NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SEC TION 30 TO 38 THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND G AINS OF BUSINESS OR PROFESSION' - (A) IN THE CASE OF ANY ASSESSEE- (I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISS UED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL 1938). RO YALTY FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDE R THIS ACT WHICH IS PAYABLE - (A) OUTSIDE INDIA OR (B) IN INDIA TO A NON-RESIDENT NOT BEING A COMPAN Y OR TO A FOREIGN COMPANY ON WHICH TAX HAS NOT BEEN DEDUCTE D OR AFTER DEDUCTION HAS NOT BEEN PAID BEFORE THE EXPIR Y OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF S. 200 AND IN ACCORDANCE WITH OTHER PROVISIONS OF CHAPTER XVII-B : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM TAX HAS BEEN DEDUCTED UNDER CHAPTER XVII-B OR PAID IN ANY SUBSEQUENT YEAR SUCH SUM SHALL BE ALLOWED AS A DED UCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHI CH SUCH TAX HAS BEEN PAID.' 25. A PLAIN READING OF THE ABOVE PROVISION WOULD CLEARLY SHOW THAT NO DEDUCTION SHALL BE ALLOWED IN TERMS OF SECTION 28 TO 38 FOR ANY EXPENDITURE PAYMENT FOR WHICH HAS BEEN MADE TO A NON- RESIDENT ON WHICH TAX HAS NOT BEEN DEDUCTED IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B. A CAREFUL READING OF THE PROVISION WOULD SHOW THAT IT IS STARTING WITH NON OBSTANTE CLAUSE WHICH MEANS IT WOULD PREVAIL OVER SECTIONS 30 TO 38 WHICH ARE BASICALLY SECTIONS DEALING WITH DEDUCTIONS TO BE GIVEN FOR COMPUTING THE BUSINESS PROFITS UNDER VARIOUS SECTIONS. THIS IN TURN IN PLAIN WORDS MEANS IF SOME EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS WHERE PAYMENT FOR THE SAME HAS BEEN MADE TO A NON-RESIDENT AND TAX TO BE I.T.A. NO.200/MDS/2009 8 DEDUCTED IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B HAS NOT BEEN DEDUCTED THEN SUCH DEDUCTION CANNOT BE ALLOWED EVEN IF EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS. BECAUSE OF THE WORDINGS 'IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B' THE ARGUMENT OF THE LEARNED SENIOR COUNSEL OF THE ASSESSEE THAT THIS PROVISION WILL NOT BE APPLICABLE IF IT IS A CASE OF ONLY SHOR T DEDUCTION IN VIEW OF THE DECISION OF P.V. RAJAGOPAL & ORS. V. UOI (SUPRA) DOES NOT CARRY ANY WEIGHT BECAUSE IT WAS OBSERVED IN THAT DECISION THAT SECTION. 201 WAS A PENAL PROVISION AND THEREFORE THE PROVISION H AS TO BE CONSTRUED STRICTLY WHEREAS SECTION 40(A)(I) IS NOT A PENAL PROVISION AND THEREFORE THE RATIO OF THE DECISION C ANNOT BE MADE APPLICABLE TO THE CASE BEFORE US. IN ANY CASE SECTION 40(A)(I) VERY CLEARLY USES THE EXPRESSION 'IN ACCOR DANCE WITH THE OTHER PROVISIONS OF CHAPTER XVII-B'. WHICH WOUL D INCLUDE SECTION 201 ALSO AND WOULD INCLUDE THE EXPRESSION ' THE WHOLE OR ANY PART OF THE TAX' WHICH HAS BEEN INSERTED IN S. 201 BY THE FINANCE ACT 2001 WITH RETROSPECTIVE EFFECT FRO M 1ST APRIL 1962. THEREFORE WHATEVER MAY BE THE IMPACT OF THE ABSENCE OF THE EXPRESSION 'THE WHOLE OR ANY PART OF THE TAX ' IN SECTION 40(A)(I) IT WILL NOT AFFECT THE DISALLOWANCE U/S. 40(A)(I) BECAUSE THIS SECTION CLEARLY USES THE EXPRESSION 'I N ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B' WHICH WOULD INCLUDE SECTION 201 ALSO. 26. WE ALSO FIND NO FORCE IN THE SUBMISSION OF THE LD. SR.COUNSEL OF THE ASSESSEE THAT THE DEPARTMENT WAS DUTY-BOUND TO DISCHARGE THE BURDEN BEFORE DISALLOWING ANY PAYMENT BECAUSE FOR MAKING DISALLOWANCE BURDEN LAY ON THE DEPARTMENT. EVEN ASSUMING THAT ANY SUCH BURDEN LIES ON THE DEPARTMENT IT STANDS TO BE DISCHARGED ONCE IT IS PROVED THAT THE ASSESSEE HAS NOT DEDUCTED TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B. BECAUSE DISALLOWANCE U/S. 40(A)(I) ONLY ENVISAGES DISALLOWANCE OF ANY PAYMENT MADE TO NON-RESIDENT IF TAX HAS NOT BEEN DEDUCTED ON SUCH PAYMENT IN TERMS OF CHAPTER XVII-B. ONCE IT IS SHOWN TO THE ASSESSEE THAT SUCH TAXES HAVE NOT BEEN DEDUCTED THEN BURDEN WOULD SHIFT TO THE ASSESSEE TO PROVE I.T.A. NO.200/MDS/2009 9 THAT SUCH TAXES HAVE ALREADY BEEN DEDUCTED OR THE ASSESSEE WAS NOT REQUIRED TO DEDUCT ANY TAX. 27. WE ALSO FIND NO FORCE IN THE SUBMISSION THAT THE PROVISION OF S. 195(2) IS NOT MANDATORY IN THE SENS E THAT BEING A BENEFICIAL PROVISION THE ASSESSEE MAY OR MAY NOT CHOOSE TO MAKE APPLICATION UNDER THIS PROVISION. IN THE SAME BREATH A FURTHER ARGUMENT I N THIS RESPECT WAS RAISED THAT MERELY NON-MAKING OF APPLICATION UNDER S. 195(2) CANNOT ATTRACT DISALLOWANCE UNDER S. 40(A)(I). ON THE FACE OF IT THIS ARGUMENT MAY LOOK ATTRACTIVE BUT WHEN WE LOOK AT THE WHOLE OF S. 195 AND CHAPTER XVII-B THEN THE REAL PICTURE WOULD EMERGE. AS CONTENDED BY THE LD. DR CHAPTER XVII-B DEALS WITH COLLECTION OF TAXES AND PART B OF THIS CHAPTER SPECIFICALLY DEALS WITH THE PROVISIONS OF TAX TO BE DEDUCTED AT SOURCE. SEC. 19 5 READS AS UNDER : '195. (1) ANY PERSON RESPONSIBLE FOR PAYING TO A N ON-RESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMPANY ANY I NTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF TH IS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD 'SALARI ES' SHALL AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE WH ICHEVER IS EARLIER DEDUCT INCOME-TAX THEREON AT THE RATES IN FORCE: PROVIDED.. PROVIDED FURTHER.. EXPLANATION ..... (2) WHERE THE PERSON RESPONSIBLE FOR PAYING ANY SU CH SUM CHARGEABLE UNDER THIS ACT (OTHER THAN SALARY) TO A NON- RESIDENT CONSIDERS THAT THE WHOLE OF SUCH SUM WOULD NOT BE INCOME CHARGEABLE IN THE CASE OF THE RECIPIENT HE MAY MAKE AN APPLICATION TO THE ASSESSING OFFICER TO DETERMIN E BY GENERAL OR SPECIAL ORDER THE APPROPRIATE PROPORTIO N OF SUCH SUM SO CHARGEABLE AND UPON SUCH DETERMINATION TA X SHALL BE DEDUCTED UNDER SUB-SECTION (1) ONLY ON THAT PROP ORTION OF THE SUM WHICH IS SO CHARGEABLE. I.T.A. NO.200/MDS/2009 10 (3) SUBJECT TO RULES MADE UNDER SUB-SECTION (5) A NY PERSON ENTITLED TO RECEIVE ANY INTEREST OR OTHER SUM ON WH ICH INCOME-TAX HAS TO BE DEDUCTED UNDER SUB-SECTION (1) MAY MAKE AN APPLICATION IN THE PRESCRIBED FORM TO THE A SSESSING OFFICER FOR THE GRANT OF A CERTIFICATE AUTHORIZING HIM TO RECEIVE SUCH INTEREST OR OTHER SUM WITHOUT DEDUCTION OF TAX UNDER THAT SUB-SECTION; AND WHERE ANY SUCH CERTIFICATE IS GRANTED EVERY PERSON RESPONSIBLE FOR PAYING SUCH INTEREST O R OTHER SUM TO THE PERSON TO WHOM SUCH CERTIFICATE IS GRANT ED SHALL SO LONG AS THE CERTIFICATE IS IN FORCE MAKE PAYMEN T OF SUCH INTEREST OR OTHER SUM WITHOUT DEDUCTING TAX THEREON UNDER SUB-SECTION (1).' THE ABOVE PROVISION CLEARLY SHOWS THAT ANY PERSON RESPONSIBLE FOR MAKING PAYMENT TO NON-RESIDENT IN R ESPECT OF ANY INTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT HAS TO DEDUCT TAX AT THE RAT ES IN FORCE. NOW WHAT IS THE MEANING OF 'ANY OTHER SUM CHARGEABL E UNDER THE PROVISIONS OF THIS ACT'. OBVIOUSLY IT WOU LD MEAN THAT PORTION OF THE SUM ON WHICH TAX IS PAYABLE BY SUCH NON- RESIDENT. BUT HOW MUCH THAT PORTION IS ACTUALLY THE RE? THIS NEEDS INVESTIGATION AND THERE MAY BE SITUATIONS THA T 100% OF SUCH SUM IS CHARGEABLE TO TAX AND THERE MAY BE SITU ATIONS WHERE PRACTICALLY THE WHOLE OF SUCH SUM IS NOT CHAR GEABLE TO TAX. THIS WOULD DEPEND ON THE FACTS AND CIRCUMSTANC ES OF EACH CASE. NOW WHENEVER AN ASSESSEE MAKING PAYMENT TO A NON-RESIDENT FINDS THAT ONLY A PARTICULAR PORTION IS CHARGEABLE THEN OBVIOUSLY HE HAS BEEN GIVEN A RIGH T IN TERMS OF SUB-SECTION (2) WHICH THE LD. SR.COUNSEL OF THE ASSESSEE HAS CALLED A BENEFICIAL SECTION. WE HAVE N O QUARREL WHETHER THIS SECTION IS A CALLED A BENEFICIAL SECTI ON OR MACHINERY PROVISION BECAUSE FOR WORKING OUT THE AMO UNT OF TAX TO BE DEDUCTED ON A PARTICULAR PORTION OF SUM C HARGEABLE THIS PROVISION IS ABSOLUTELY NECESSARY. AS PER SUB- SECTION (2) WHENEVER A PERSON RESPONSIBLE FOR PAYING ANY SUM CHARGEABLE .CONSIDERS THAT WHOLE OF SUCH SUM WOULD NOT BE INCOME CHARGEABLE IN THE CASE OF RECIPIENT HE MAY MAKE AN APPLICATION TO THE ASSESSING OFFICER TO DETERMINE T HE APPROPRIATE PORTION OF SUCH SUM SO CHARGEABLE AND U PON SUCH DETERMINATION TAX SHALL BE DEDUCTED UNDER SUB -SECTION (1) ONLY ON THAT PROPORTION OF SUM WHICH IS SO CHAR GEABLE WHICH MEANS THE PERSON RESPONSIBLE FOR MAKING PAYM ENT I.T.A. NO.200/MDS/2009 11 ETC. CANNOT HIMSELF DECIDE WHAT IS THE APPROPRIATE PROPORTION WHICH IS CHARGEABLE TO TAX. THE EXPRESSION 'BY GENE RAL OR SPECIAL ORDER' AND THE 'APPROPRIATE PROPORTION' IN THIS SUB- SECTION ARE KEY WORDS TO UNDERSTAND THE MEANING IN THE SENSE THAT THERE MAY BE SITUATIONS WHERE ONLY ONE P ARTICULAR PORTION OF SUCH SUM IS TAXABLE IN CASE OF SIMILAR A SSESSEES AND THE INCOME-TAX AUTHORITIES MAY MAKE A GENERAL O RDER THAT IN SUCH TYPE OF ASSESSEES THAT A PARTICULAR PROPORT ION OF THE SUM HAS TO BE CONSIDERED AS INCOME CHARGEABLE TO TA X AND TAX CAN BE DEDUCTED ACCORDINGLY. IT SEEMS THE CENTR AL BOARD OF DIRECT TAXES HAS ALREADY ISSUED A CIRCULAR IN RE SPECT OF ADVERTISEMENT INCOME EARNED BY NON-RESIDENT TV CHAN NELS ETC. WHERE A PROPORTION OF INCOME HAS BEEN FIXED T O BE CONSIDERED AS INCOME. BOTH THE PARTIES HAD MENTIONE D ABOUT THIS CIRCULAR IN A CURSORY FASHION AND THE SAME WAS NOT PRODUCED BEFORE US SO WE ARE NOT GOING IN DETAIL. BUT SUFFICE IT TO SAY THAT THERE CAN BE SITUATIONS WHICH CAN BE GENERALIZED AND THE PROPORTION OF THE SUM CAN BE DETERMINED ON GENERAL BASIS. IN ALL OTHER SITUATIONS WHERE 'APPROPRIATE PROPORTION' IS REQUIRED TO BE DETERMINED THE ASSESSEE HAS TO GO BE FORE THE TAXING AUTHORITIES AND GET SUCH 'APPROPRIATE PROPOR TION' OF THE SAME ON WHICH TAX IS TO BE DEDUCTED DETERMINED AND ACCORDINGLY DEDUCT TAX. THEREFORE WHEREVER A GENER AL SITUATION EXISTS A GENERAL ORDER IS PASSED BY THE D EPARTMENT IN THE FORM OF CIRCULAR ETC. NO SUCH CIRCULAR HAS B EEN ISSUED BY THE CBDT WHICH MEANS SUCH PARTIES MUST APPLY UN DER S. 195(2) FOR SPECIAL ORDER SO AS TO GET THE 'APPROPRI ATE PROPORTION' DETERMINED. ALSO THE WORD 'APPROPRIATE PROPORTION' IS SIGNIFICANT. IF THE PAYER OF SUCH SU M WAS TO DECIDE THE PROPORTION OF AMOUNT WHICH WAS CHARGEABL E THEN THERE WAS NO NEED TO USE THE WORDS 'APPROPRIATE PRO PORTION'. THE USE OF THESE WORDS CLEARLY SUGGESTS THAT SOMEBO DY NEEDS TO DETERMINE SUCH APPROPRIATE PROPORTION AFTE R CONSIDERING ALL THE FACTS AND CIRCUMSTANCES OF THE CASE. NATURALLY THIS SOMEBODY CANNOT BE THE ASSESSEE HIMS ELF. THEREFORE ASSESSEE IS REQUIRED TO COME BEFORE THE INCOME- TAX AUTHORITIES IN THE FORM OF APPLICATION UNDER S. 195(2) AND MAKE A CLAIM THAT ONLY A PARTICULAR PROPORTION IS C HARGEABLE AND THE APPROPRIATENESS OF THE SAME IS TO BE DECIDE D BY THE ASSESSING OFFICER AND ONLY AFTER THAT SUCH SUM IS TO BE DETERMINED. THIS CLEARLY SHOWS THE REQUIREMENT OF A PPLICATION OF MIND BY THE TAXING AUTHORITIES AND THEREFORE THI S SUM I.T.A. NO.200/MDS/2009 12 CANNOT BE DECIDED BY THE PAYER OF SUCH SUM WHATEVE R MAY BE THE CIRCUMSTANCES. IF SUCH APPROPRIATE PROPORTIO N WAS TO BE DECIDED BY THE PAYER OR THE ASSESSEE THEN SECTI ON 195(2) WILL BECOME REDUNDANT. 5. IT WAS THE FURTHER SUBMISSION THAT THE PROVISIONS O F SECTION 44BB WERE APPLICABLE TO THE NON-RESIDENT COMPANY WHICH WAS LI ABLE TO FILE ITS INCOME-TAX RETURNS. IT WAS THE SUBMISSION THAT THE PROVISIONS OF SECTION 44BB WERE APPLICABLE FOR THE PURPOSE OF FILING THE INCOME-TAX RETURNS BY THE NON-RESIDENT COMPANY FOR THE PURPOSE OF ITS ASSESSMENT. HE VEHE MENTLY SUPPORTED THE ORDER OF THE LEARNED CIT(A) AND THE ASSESSING OFFICER. H E PLACED SUBSTANTIAL RELIANCE ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TR IBUNAL IN THE ASSESSEES OWN CASE REFERRED TO SUPRA. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT TH E OUTSET WE ARE PRIMARILY TO DECIDE AS TO WHETHER TO FOLLOW THE DECISION OF T HE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2003-04 SUPRA OR TO DIFFER FROM THE SAME. AFTER A PERUSAL OF THE DE CISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD. AS ALSO TAKING INTO CONSIDERATION THE VIEWS EXPRESSED BY THE HON'BLE JU RISDICTIONAL HIGH COURT IN THE CASE OF HI TECH ARAI REPORTED IN 321 ITR 477 (MAD) WE ARE OF THE VIEW THAT THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-043 WOULD NO MORE CONSTITU TE GOOD LAW. TO ERR IS HUMAN. TO CONTINUE THE ERROR IS NOT BRAVERY. IF WE ARE TO ACCEPT THE CONTENTION OF THE REVENUE THAT THE PROVISIONS OF SEC. 44BB IS RELATING ONLY TO THE NON- I.T.A. NO.200/MDS/2009 13 RESIDENT FOR THE PURPOSE OF HIS ASSESSMENT THEN ON E SHOULD ALSO KEEP IN MIND THAT THE NON-RESIDENTS ASSESSMENT COMES INTO PLAY WHEN HE FILES HIS RETURN. THE NON-RESIDENT WOULD FILE HIS RETURN ONLY WHEN THE AS SESSEE HAS MADE THE PAYMENT AND IF THE ASSESSEE HAS MADE THE PAYMENT TO THE NON -RESIDENT WHERE IS THE QUESTION THAT THE ASSESSEE IS TO DEDUCT TDS AT A LO WER RATE AFTER THE ASSESSMENT HAS BEEN DONE ON THE NON-RESIDENT? SECTION 44BB IS A SPECIAL PROVISION AS IT IS MENTIONED IN THE CAUSE TITLE TO THE SAID PROVISION ITSELF. AS PER THE PROVISIONS OF SEC. 44BB(1) A SUM EQUAL TO 10% OF THE AGGREGATE O F THE AMOUNT SPECIFIED IN SUB-SECTION (2) IS DEEMED TO BE THE PROFITS AND GAI NS OF SUCH BUSINESS CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IT IS BECAUSE THE PROVISION OF SEC.44BB HAS QUANTIF IED THE DEEMED INCOME OF THE NON-RESIDENT ASSESSEE AT 10% IT HAS OPENED WITH T HE CLAUSE NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 28 TO 41 AND SECTIONS 43 AND 43A. THE AGGREGATE AMOUNTS ARE QUANTIFIED IN SUB-S ECTION (2) OF SEC. 44BB TO BE THE AMOUNT PAID OR PAYABLE RECEIVED OR DEEMED T O BE RECEIVED ETC. AS PER THE SUB-SECTION (3) OF SEC. 44BB THE NON-RESIDENT C AN CLAIM A LOWER PROFIT. IT IS FOR THE PURPOSE OF CLAIMING LOWER PROFITS THAT THE NON-RESIDENT MUST FILE A RETURN AND PROVE THE SAME WITH SUPPORT OF HIS REGULAR BOOK S OF ACCOUNTS AND OTHER DOCUMENTS AND BY COMPLYING WITH OTHER CONDITIONS SP ECIFIED THEREIN. IF NO RETURN IS FILED SECTION 44BB(1) DEEMS THAT THE PRO FITS AND GAINS OF THE BUSINESS OF THE NON-RESIDENT AT 10% OF THE GROSS RECEIPTS. A PERUSAL OF THE DECISION OF I.T.A. NO.200/MDS/2009 14 THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TE CHNOLOGY CENTRE (P) LTD. REFERRED TO SUPRA CLEARLY SHOWS THAT THE HON'BLE S UPREME COURT HAS CATEGORICALLY HELD THAT THE OBLIGATION TO DEDUCT TDS IS LIMITED T O THE APPROPRIATE PORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUMS OF MONEY PAYABLE TO THE NON-RESIDENT. THE HON'BLE SUPREME C OURT WHILE DECIDING THE ISSUE HAD CATEGORICALLY RECOGNIZED THAT AS PER THE PROVISIONS OF SEC. 195 THE WORDS USED WERE ANY OTHER SUMS CHARGEABLE UNDER TH E PROVISIONS OF THIS ACT AS AGAINST THE TERM ANY SUM USED IN THE OTHER PROVIS IONS FALLING IN CHAPTER XVII OF THE INCOME TAX ACT 1961. OBVIOUSLY WHAT THE ASSE SSING OFFICER IS DEMANDING IS THAT TDS IS LIABLE TO BE MADE UNDER THE PROVISIO NS OF SECTION 195 OF THE ACT. IF THE PROVISIONS OF SEC. 195 ARE TO BE INVOKED IT IS ONLY SUCH SUM WHICH IS CHARGEABLE TO TAX UNDER THE INCOME-TAX ACT 1961 ON WHICH TDS CAN BE MADE. A QUESTION NOW ARISES AS TO HOW MUCH OF THE AMOUNTS PAID BY THE ASSESSEE TO THE NON-RESIDENT IS THE INCOME CHARGEABLE TO TAX UN DER THE INCOME TAX ACT 1961 FOR THE PURPOSE OF SECTION 195. IT IS TRUE TH AT THE ASSESSEE CANNOT QUANTIFY THE INCOME OF THE NON-RESIDENT. THIS IS WHERE THE SPECIAL PROVISION OF SEC. 44BB COMES INTO PLAY. WHERE THE STATUTE HAS PROVIDED A SPECIAL PROVISION FOR DEALING WITH A SPECIAL TYPE OF INCOME SUCH A PROVISION WOUL D EXCLUDE A GENERAL PROVISION DEALING WITH THE INCOME ACCRUING OR ARISING OUT OF ANY BUSINESS CONNECTION. THIS VIEW OF OURS FINDS SUPPORT FROM THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF COPES VULCAN INC. REFERRED TO SUPRA. SECTION 44BB IS A I.T.A. NO.200/MDS/2009 15 SPECIAL PROVISION TO THE EXCLUSION OF ALL THE CONTR ARY PROVISIONS PROVIDED IN SECTIONS 28 TO 41 AND 43 AND 43A OF THE ACT. ONCE THE PROVISIONS OF SECTIONS 28 TO 41 AND SECTIONS 43 & 43A STAND EXCLUDED THE MET HOD OF COMPUTING THE BUSINESS INCOME OF THE NON-RESIDENT ON THE BASIS OF THE BOOKS OF ACCOUNTS GOES OUT OF THE PICTURE. THEN IT IS ONLY THE PROVISIONS OF SECTION 44AD 44AE & 44AF WHICH COULD BE APPLIED AND THE SAME OBVIOUSLY DO NO T APPLY TO THE INCOME OF THE NON-RESIDENT COMPANIES. THE HON'BLE SUPREME COURT WHILE DEALING WITH ITS OWN DECISION IN THE CASE OF TRANSMISSION CORPORATION OF A.P. LTD. REFERRED TO SUPRA HAS CATEGORICALLY EXPLAINED THAT THE TAX WAS LIABLE TO BE DEDUCTED BY THE PAYER OF THE GROSS AMOUNT IF SUCH PAYMENT INCLUDED IN IT AN AMOUNT WHICH WAS EXIGIBLE TO TAX IN INDIA. THIS IS NOT SO IN THE PRESENT CASE. HERE ON ACCOUNT OF THE SPECIAL PROVISIONS OF SEC. 44BB 10% OF THE GROSS AMOUNT PA YABLE TO THE NON-RESIDENTS DEEMED AS THE INCOME CHARGEABLE TO TAX IN INDIA. I N THE PRESENT CASE IT IS NOTICED THAT THE ASSESSEE HAS DEDUCTED TAX AT THE S PECIFIED RATE ON THE 10% OF THE BARE BOAT CHARGES PAID TO THE NORWAY COMPANY WH O IS THE NON-RESIDENT COMPUTED AS PER THE PROVISIONS OF SEC. 44BB. IN TH E CIRCUMSTANCES WE ARE OF THE VIEW THAT THERE IS NO VIOLATION OF THE PROVISIO NS OF SECTION 195 IN THE ASSESSEES CASE WHICH CALLS FOR A DISALLOWANCE BY I NVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. IN THE CIRCUMSTANCES THE FINDING OF THE LEARNED CIT(A) AND THAT OF THE ASSESSING OFFICER STANDS REV ERSED. I.T.A. NO.200/MDS/2009 16 7. WE MAY ALSO MENTION HERE THAT WE ARE NOT IN AGRE EMENT WITH THE SUBMISSION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE PROVISIONS OF SEC. 40(A)(I) POSTULATES AN ABSOLUTE FAILURE AND NOT SHO RT DEDUCTION. THIS IS BECAUSE A READING OF SECTION 201 CLEARLY SHOWS THAT THE POR TION THE WHOLE OR ANY PART OF THE TAX IS IN CONNECTION WITH THE WORDS AFTER SO DEDUCTING FAILS TO PAY. IT IS NOT IN CONNECTION WITH THE WORDS DOES NOT DEDUCT. 8. IN THE CIRCUMSTANCES THE APPEAL OF THE ASSESSEE IS ALLOWED. 9. THE ORDER WAS PRONOUNCED IN THE COURT ON 04/02/2 011. SD/- SD/- (ABRAHAM P. GEORGE) (GEORGE MATHAN) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI DATED THE 04 TH FEBRUARY 2011. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE