ITO, CHENNAI v. M/s Prasad Productions Ltd., CHENNAI

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH B BEFORE SHRI PRADEEP PARIKH VICE-PRESIDENT SHRI N.BARATHVAJA SANKAR VICE-PRESIDENT AND SHRI HARI OM MARATHA JUDICIAL MEMBER (SPECIAL BENCH CASE) I.T.A. NO.663/MDS/2003 ASSESSMENT YEAR : 2002-03 THE INCOME-TAX OFFICER INTERNATIONAL TAXATION CHENNAI 34. VS. M/S. PRASAD PRODUCTION LTD. 27-28 ARUNACHALAM ROAD SALIGRAMAM CHENNAI 73. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.B.SEKARAN CIT-DR RESPONDENT BY : S/SHRI R. VIJAYARAGHAVAN & R AJAN VORA INTERVENERS : SHRI L.V.SRINIVASAN SHRI T. BANUSEKAR SHRI H.PADAMCHAND KHINCHA SHRI ARVIND SONDE SHRI N.DEVNATHAN SHRI K. VENKATESH MS. RUPA O R D E R PER PRADEEP PARIKH V.P. THE HONBLE PRESIDENT VIDE HIS ORDER DATED 22-4-2 009 AND AS MODIFIED BY THE ORDER DATED 10-8-2009 HAS CONSTITUTED THIS SPECIAL BENCH UNDER SEC.255(3) THE INCOME- 2 ITA 663/03 TAX ACT 1961 (THE ACT) TO HEAR AND DECIDE THE FOLL OWING QUESTION IN ACCORDANCE WITH LAW : WHETHER FOR THE PURPOSES OF SECTIONS 201(1) AND 201(1A) WHEN AN ASSESSEE RESPONSIBLE FOR MAKING PAYMENT TO A NON-RESIDENT HAS NOT APPLIED TO THE ASSESSING OFFICER U/S.195(2) FOR DEDUCTION OF TAX AT A LOWER OR NIL RATE OF TAX HE IS UNDER STATUTORY OBLIGATION TO DEDUCT TAX AT SOURCE COMPUTED ON THE ENTIRE PAYMENT TO THE NON- RESIDENT TREATING THE SAME AS INCOME CHARGEABLE TO TAX IN THE LIGHT OF DECISION OF THE APEX COURT IN THE CASE OF TRANSMISSION CORPORATION OF A.P LTD V CIT (239 ITR 587)?. 2. ALL THE GROUNDS RAISED IN THIS DEPARTMENTAL APPE AL WHICH IS AGAINST THE ORDER OF THE LD. CIT(A) DATED 8.1.2003 ARE CONNECTED WITH THE ABOVE QUESTION AND ACCORDING LY THE SAME ARE REPRODUCED BELOW : 1. THE ORDER OF THE CIT(A) IS CONTRARY TO THE LAW FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) HAS ERRED IN HOLDING THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE ON THE REMITTANCE OF US$ 9 02 500/- (RUPEES EQUIVALENT 4 31 75 600 AT THE EXCHANGE RATE OF RS.47.84) MADE TO IMAX LTD. CANADA A COMPANY REGISTERED IN CANADA AND CANCELLING THE DEMAND RAISED U/S 201(1) AND 201(1A). 3. THE ASSESSEE HAS MADE PAYMENT FOR THE PROVISION OF THE VARIETY OF SERVICES BY M/S. IMAX CANADA. SINCE THE REMITTANCE OF US$ 9 02 500 WAS FOR THE PROVISION OF TECHNICAL SERVICES BY 3 ITA 663/03 IMAX WHICH FALLS UNDER SECTION 9(1)(VII) OF THE INCOME TAX ACT WHEREIN IT IS STATED IN EXPLANATION 2 TO SECTION 9(1)(VII) THAT FEES FOR TECHNICAL SERVICES MEANS ANY CONSIDERATION (INCLUDING ANY LUMPSUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) IT WOULD BE CHARGEABLE TO TAX U/S.44D R.W.S.115A. 4. THE CIT(A) HAS NOT CONSIDERED THE SUBMISSIONS FILED BY THE ASSESSEE VIDE LETTER NO.378 LD 372 DATED 19 TH NOVEMBER 2002 WHEREIN THE ASSESSEE FURNISHED THE DETAILS OF TECHNOLOGY TRANSFER AGREEMENT ENTERED INTO WITH IMAX CANADA GIVING DETAILS OF THE TECHNOLOGY TRANSFER KNOW-HOW PROVIDED BY IMAX. MANY OF THE SERVICES SUCH AS (I) TRAINING SERVICES FOR THEATRE MANAGER MAINTENANCE AND OPERATION TRAINING FOR PROJECTIONISTS (II) THEATRE MANAGEMENT AND MARKETING SERVICES FILM PROGRAMMING FILM PROGRAMME DEVELOPMENT. TICKETING SYSTEM AND REPORTING ETC. ARE NOT CONNECTED WITH THE SYSTEM (COST OF EQUIPMENT) AND HENCE CANNOT BE HELD AS PLANT FALLING UNDER ASSET. 5. HENCE THE DECISION OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. IN 239 ITR 587 WOULD BE APPLICABLE IN THIS CASE AND SINCE THE ASSESSEE HAS NOT OBTAINED ANY ORDER U/S.195(2) 195(3) OR SEC 197 FOR MAKING PAYMENT WITHOUT DEDUCTION OF TAX HE OUGHT TO HAVE DEDUCTED TAX ON THE GROSS SUM REMITTED (WHICH IS CHARGEABLE TO TAX). 4 ITA 663/03 6. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING IT IS PRAYED THAT THAT ORDER OF CIT(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED. 3. THE ASSESSEE COMPANY WAS AWARDED A CONTRACT BY T HE TOURISM DEPARTMENT OF THE GOVERNMENT OF ANDHRA PRADESH TO ESTABLISH IMAX THEATRE AT HYDERABAD. THE ASSESSEE ENTERED INTO AN AGREEMENT ON 20.12.2000 WITH IMAX LTD. CAN ADA FOR PURCHASE OF EQUIPMENT MAINTENANCE AND INSTALLATION . AS PER THE AGREEMENT THE TOTAL CONSIDERATION WAS TO BE US $ 13 65 000 FOR PURCHASE OF THE SYSTEM AND US$ 9 50 0 00 AS TECHNOLOGY TRANSFER FEE. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE REMITTED US$ 9 02 500 ( RUPEES EQUIVALENT RS.4 31 75 600/-) ON 25.12.2001 TO IMAX LTD. ON ACCOUNT OF TECHNOLOGY TRANSFER FEE WITHOUT DEDUCTIN G TAX AT SOURCE (TDS). THE ASSESSEE WAS REQUIRED TO SHOW CA USE AS TO WHY DEMAND SHOULD NOT BE RAISED UNDER SEC.201 OF THE INCOME-TAX ACT 1961 (THE ACT) FOR NON-DEDUCTION OF TAX. IN THE COURSE OF THESE PROCEEDINGS THE ASSESSEE FILED COPIES OF SCHEDULE C TO THE AGREEMENT FOR MAINTENANCE INSTAL LATION AND TRADE MARK GIVING SPECIFICATION OF SYSTEM INSTA LLATION TESTING AND TRAINING SERVICES. THE ASSESSING OFFIC ER ASKED FOR A DETAILED BREAK UP OF THE AMOUNT WHICH WAS REMITTE D TO IMAX. THE ASSESSEE COULD NOT PROVIDE THE SAID BREA K UP. ON THE BASIS OF LETTERS AND COPIES OF AGREEMENT ON REC ORD THE ASSESSING OFFICER FOUND THAT THE PAYMENT MADE BY TH E ASSESSEE IS FOR PROVISION OF A VARIETY OF SERVICES TO BE PROVIDED BY THE PERSONNEL OF IMAX IN INDIA. HE ALS O OBSERVED THAT THE SERVICES TO BE PROVIDED INCLUDED INSTALLATION CHARGES TESTING AND TRAINING FOR PROJ ECTIONISTS. THE TRAINING WAS TO BE PROVIDED WITH REGULAR SERVIC E VISITS. IT 5 ITA 663/03 WAS ALSO STATED IN THE AGREEMENT THAT IMAX PERSONNE L WILL BE PRESENT FOR SUPERVISION IN INDIA. THEREFORE THE A SSESSING OFFICER WAS OF THE VIEW THAT THE AMOUNT REMITTED BY THE ASSESSEE WAS FOR PROVISION OF TECHNICAL SERVICES BY IMAX WHICH FALLS UNDER SEC.9(1)(VII). THE ASSESSING OFF ICER ALSO RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF AP LTD. (239 ITR 587) A ND CONCLUDED THAT SINCE THE ASSESSEE HAS NOT OBTAINED ANY ORDER UNDER SEC.195(2) 195(3) OR UNDER SEC.197 THE GROS S SUM REMITTED BY THE ASSESSEE WAS LIABLE TO TAX UNDER SE C.195 OF THE ACT. ACCORDINGLY HE RAISED A DEMAND OF TAX AM OUNTING TO RS.64 76 340/- AND ALSO LEVIED INTEREST UNDER SE C.201(1A) AMOUNTING TO RS.6 47 634/-. 4. DETAILED SUBMISSIONS WERE MADE BY THE ASSESSEE BEFORE THE CIT(A). IT WAS POINTED OUT THAT WHERE D OUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) WAS ENTERED INT O BY INDIA THE PROVISIONS OF DTAA WOULD PREVAIL OVER TH E PROVISIONS OF THE ACT. REFERRING TO THE AGREEMENT IT WAS CONTENDED THAT PROVIDING FOR SUPERVISION OF INSTALL ATION WORK DID NOT AMOUNT TO HAVING A PERMANENT ESTABLISHMENT (PE). IT WAS ALSO CONTENDED THAT THE PROVISION OF VARIETY OF SERVICES AS POINTED OUT BY THE ASSESSING OFFICER RE LATED TO MAINTENANCE AGREEMENT FOR WHICH SEPARATE CONSIDERAT ION WAS PAYABLE IN COURSE OF TIME. ACCORDING TO THE AS SESSEE THE ASSESSING OFFICER CONFUSED THE PAYMENT FOR TECH NOLOGY TRANSFER ENVISAGED IN THE ORIGINAL AGREEMENT WITH T HAT OF SUBSEQUENT AGREEMENT PROVIDING FOR MAINTENANCE INSTALLATION AND TRADE MARK. IT WAS SUBMITTED THAT INSTALLATION ASSISTANCE AND INITIAL TRAINING ARE AU XILIARY AND SUBSTITUTORY TO THE SALE OF THE ORIGINAL EQUIPMENT AND WERE INEXTRICABLY AND ESSENTIALLY LINKED TO THE SALE OF EQUIPMENT. 6 ITA 663/03 THE SOPHISTICATED EQUIPMENT PURCHASED FROM IMAX WOU LD BE OF NO VALUE WITHOUT THESE SERVICES. IT WAS THEREFO RE CONTENDED THAT THE FEES FOR INSTALLATION ASSISTANCE AND INITIAL TRAINING WERE NOT THE FEES FOR INCLUDED SERVICES SI NCE THESE SERVICES WERE NOT THE PREDOMINANT PURPOSE FOR THE ARRANGEMENT. THE CIT(A) CONSIDERED THE VARIOUS TE RMS OF THE AGREEMENT AND THE SUBMISSIONS MADE BY THE ASSES SEE. HE WAS OF THE VIEW THAT THE IMPUGNED AMOUNT REPRESE NTS CONSIDERATION FOR INSTALLATION TESTING AND OPERATO R TRAINING BEFORE THE THEATRE IS READY FOR SCREENING. HE ALSO OBSERVED THAT THOUGH THE AGREEMENT PROVIDES FOR INSTALLATION AND TRAINING IN THE BEGINNING THE AMOUNT OF REMITTANCE REPRESENTS A PART OF SALE CONSIDERATION OF THE EQUI PMENT. ACCORDINGLY HE HELD THAT THERE IS NO AMBIGUITY IN REGARD TO THE PORTION WHICH IS TAXABLE AND THE PORTION WHICH IS NOT TAXABLE. ACCORDING TO HIM THE ENTIRE SUM IS NOT C HARGEABLE TO TAX AT ALL AND THEREFORE THE DECISION IN THE CA SE OF TRANSMISSION CORPORATION OF AP LTD. (SUPRA) WAS NOT APPLICABLE. HE THEREFORE CANCELLED THE ORDER PAS SED BY THE ASSESSING OFFICER UNDER SEC.201(1) AND 201(1A) OF T HE ACT. 5. THE LD. D.R. SUBMITTED THAT THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE ON THE GROUND THAT THE REMIT TANCE MADE TO IMAX WAS NOT INCOME CHARGEABLE TO TAX IN TH E HANDS OF IMAX. THE MAIN QUESTION THEREFORE ACCORDING T O THE LD. D.R. WAS WHETHER THE ASSESSEE HAS DISCRETION UNDER SEC.195(2) TO DECIDE WHETHER IT SHOULD OR IT SHOULD NOT DEDUCT TAX. THE LD. D.R. REFERRED TO THE JUDGMENTS OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATI ON (SUPRA) AND IN THE CASE OF CIT VS. ELI LILLY & CO. (INDIA) PVT. LTD. (312 ITR 225) TO CONTEND THAT THE DEDUCTION TO BE MADE IS TENTATIVE ONLY AND IS SUBJECT TO THE ASSESSMENT IN THE CASE 7 ITA 663/03 OF THE DEDUCTEE. IT WAS FURTHER SUBMITTED THAT THE VARIOUS CIRCULARS ISSUED BY THE BOARD WERE ON SPECIFIC ISSU ES AND THOUGH THEY WERE BENEFICIAL IN NATURE THEY COULD N OT NEGATE THE MAIN PROVISIONS OF THE ACT. THE LD. D.R. ALSO RELIED ON THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL I N THE CASE OF POOMPUHAR SHIPPING CORPORATION LTD. IN ITA NOS.2 841 & 2842/MDS/05 DATED 23.6.2006 AND ALSO IN THE CASE OF FRONTIER OFFSHORE EXPLORATION (INDIA) LTD. IN ITA NO.2037/MDS/06 DATED 28.2.2007. IT WAS CONTENDED THAT IF THE ASSESSEE IS GIVEN THE DISCRETION TO DECIDE WHET HER TO DEDUCT TAX OR NOT HE WILL SIT IN THE CHAIR OF THE ASSESSING OFFICER AND IN THAT CASE SEC.195 WILL BECOME TOTALL Y INOPERATIVE. 6. SHRI R.VIJAYARAGHAVAN LD. COUNSEL FOR THE ASSES SEE AT THE OUTSET AGREED THAT DEDUCTION UNDER SEC.195 WAS TENTATIVE BUT STILL THE ASSESSEE COULD CONTEST THE DEMAND RAISED UNDER SEC.201(1) OF THE ACT. IN THIS CONNE CTION HE REFERRED TO SECTIONS 4 & 5 OF THE ACT. REFERRING T O SEC.4(2) IN PARTICULAR HE POINTED OUT THAT TAX WAS TO BE DEDUC TED AT SOURCE OR PAID IN ADVANCE ONLY IF THE INCOME WAS CH ARGEABLE TO TAX UNDER ANY PROVISION OF THE ACT. IT WAS SUBM ITTED THAT THE OBLIGATION OF TDS WAS A VICARIOUS LIABILITY AND THE BASIC ASSESSABILITY WAS OF THE DEDUCTEE ONLY. THEREFORE IT WAS NECESSARY ALWAYS TO DETERMINE THE CORRECT TAX LIABI LITY OF THE RECIPIENT OF THE INCOME. REFERRING TO SEC.5(2) IN COME WAS CHARGEABLE TO TAX ONLY IF IT FOUND PART OF THE TOTA L INCOME AND NOT OTHERWISE. IT WAS FURTHER ARGUED THAT SEC.5(2) WAS TO BE READ WITH SEC.9 OF THE ACT AND THEN WITH THE DTAA. IF THE DTAA PROVIDED THAT THE INCOME IS NOT CHARGEABLE TH EN SUCH INCOME WOULD GO OUT OF THE PURVIEW OF SEC.195 ALSO. SHRI VIJAYARAGHAVAN THEN TOOK US TO SEC.195(1) TO LAY EM PHASIS 8 ITA 663/03 ON THE WORDS CHARGEABLE UNDER THE PROVISIONS OF TH IS ACT AND DEDUCT INCOME-TAX THEREON AT THE RATES IN FORC E. WE WERE THEN TAKEN TO CLAUSE (III) OF SEC.2(37A) WHICH PROVIDES THE MEANING OF THE EXPRESSION RATES IN FORCE. TH E SAID CLAUSE PROVIDES THAT THE EXPRESSION RATES IN FORCE WOULD MEAN TO BE THE RATE OF INCOME-TAX SPECIFIED IN THE FINANCE ACT OR IN THE DTAA ENTERED INTO BY THE GOVERNMENT U NDER SEC.90 OR AN AGREEMENT NOTIFIED BY THE GOVERNMENT U NDER SEC.90A OF THE ACT. THEREFORE IT WAS CONTENDED TH AT SINCE SEC.201(1) COVERS SEC.195 ALSO THE ASSESSING OFFIC ER CANNOT PROCEED ON A NOTIONAL BASIS TO RAISE DEMAND UNDER SEC.201(1) OF THE ACT. IT WAS CONTENDED THAT THE L IABILITY OF THE DEDUCTEE AND THE DEDUCTOR CANNOT BE DIFFERENT A ND SEC.201(1) DOES NOT CONTEMPLATE TO DETERMINE ANY SH ORT FALL BY THE DEDUCTOR. IN THIS CONNECTION REFERENCE WAS MADE TO SEC.191 AS ALSO TO THE EXPLANATION THEREUNDER. SHR I VIJAYARAGHAVAN REFERRED TO THE JUDGMENT OF THE SUPR EME COURT IN THE CASE OF CIT VS. WESMAN ENGG. CO. PVT. LTD. (188 ITR 327) TO CONTEND THAT THE ASSESSEE IS NOT DEBARR ED FROM DISPUTING THE LIABILITY RAISED UNDER SEC.201 OF THE ACT. IT WAS EVEN OPEN FOR THE DEPARTMENT TO TREAT THE ASSESSEE AS A REPRESENTATIVE ASSESSEE OF NON-RESIDENT UNDER SEC.1 60/163 OF THE ACT. THE NEXT ARGUMENT WAS THAT SEC.195(2) WAS NOT MEANT FOR THE LEGAL DETERMINATION OF THE CHARGEABIL ITY OF INCOME BUT IT WAS MEANT ONLY TO CONSIDER IF THERE W ERE ANY BROUGHT FORWARD LOSSES ON ACCOUNT OF WHICH TAX MAY NOT BE DEDUCTED OR BE DEDUCTED AT LOWER RATE. IN FACT IT WAS MEANT FOR PROCEDURAL RELIEF ONLY. BUT THE ASSESSEE WAS N OT PRECLUDED FROM SAYING THAT THE AMOUNT DETERMINED UN DER SEC.201(1) IS NOT CORRECT. FINALLY SHRI VIJAYARAG HAVAN REFERRED TO VARIOUS CIRCULARS OF THE BOARD AND JUDG MENTS TO WHICH WE SHALL ADVERT TO LATER. 9 ITA 663/03 7. SHRI RAJAN VORA C.A. ALSO APPEARED FOR THE ASSE SSEE. HE DREW OUR ATTENTION TO CIRCULAR NO.759 DATED 18.1 1.97 WHICH GIVES AN OPTION TO THE DEDUCTOR TO FURNISH AN UNDERTAKING TO THE RBI TO MAKE REMITTANCE WITHOUT O BTAINING A NO OBJECTION CERTIFICATE FROM THE ASSESSING OFFIC ER. IN THE LIGHT OF THIS CIRCULAR IT WAS CONTENDED THAT THE W HOLE QUESTION REFERRED TO THE SPECIAL BENCH BECOMES IRRE LEVANT WHEN THE DEPARTMENT ITSELF HAS DISPENSED WITH THE REQUIREMENT OF SEC.195(2) BY WAY OF THE ABOVE MENTI ONED UNDERTAKING. IT WAS CONTENDED THAT IN CASE AN INCO ME WHICH IS OBVIOUSLY NOT CHARGEABLE TO TAX THE DEDUCTOR NE ED NOT UNDERGO THE PROCEDURE PRESCRIBED IN SEC.195(2) OF T HE ACT. THIS IS THE FIRST OPTION AVAILABLE TO THE ASSESSEE. THE SECOND OPTION IS THAT IF THERE IS A DOUBT ABOUT THE CHARGE ABILITY OF THE AMOUNT TO BE REMITTED OR THERE IS A DOUBT ABOUT THE QUANTUM WHICH MAY BE CHARGEABLE TO TAX THEN THE DE DUCTOR CAN FURNISH THE UNDERTAKING AS PRESCRIBED IN THE AB OVE MENTIONED CIRCULAR. IT WAS ALSO CONTENDED THAT SEC .195(2) IS SUPPLEMENTARY TO SEC.195(1) AND THEREFORE IF THE D EDUCTOR HAS A BONA FIDE BELIEF THAT THE AMOUNT IS NOT CHARG EABLE TO TAX THEN HE NEED NOT UNDERGO THE PROCEDURE UNDER SEC.195(2) OF THE ACT. TO BUTTRESS THIS POINT FUR THER SHRI VORA REFERRED TO THE FOLLOWING OTHER CIRCULARS ALSO : (A) BOARD CIRCULAR NO.10 OF 2002 DATED 9.10.2002. (B) BOARD CIRCULAR NO. 4 OF 2009 DATED 29.6.2009. (C) RBI/2007 2008/100 A.P. (DIR SERIES) CIRCULAR NO. 03 DATED 19.7. 2007. (D) RBI CIRCULAR NO.FE.CO.FID.5759 DATED 11.9.2007 . REFERENCE WAS MADE TO THE DECISION OF THE CHENNAI B ENCH OF THE TRIBUNAL IN THE CASE OF VENKAT SHOES PVT. LTD. (ITA 10 ITA 663/03 NO.996/MDS/2008) DATED 6.3.2009 WHEREIN THE REFEREN CE TO CIRCULAR NO. 786 DATED 7.2.2000 HAS BEEN MADE AND I N WHICH IT HAS BEEN MENTIONED THAT DEDUCTION AT SOURCE UNDE R SEC.195 WOULD ARISE IF THE PAYMENT OF COMMISSION TO THE NON-RESIDENT AGENT IS CHARGEABLE TO TAX IN INDIA. SEVERAL OTHER DECISIONS WERE RELIED UPON BY SHRI VORA TO WH ICH WE SHALL ADVERT TO LATER. 8. SHRI L.V.SRINIVAS (PARTY IN PERSON) APPEARED AS INTERVENER ON BEHALF OF AREVA T & D INDIA LTD. HIS SUBMISSIONS ARE SUMMARISED AS FOLLOWS : (A) THE CHOICE WAS WITH THE DEDUCTOR WHETHER TO FO LLOW THE PROCEDURE UNDER SEC.195(2) OR TO APPROACH A C.A. AS PRESCRIBED IN THE BOARDS CIRCULAR. REFERRING TO T HE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) IT WAS CONTENDED THAT IN THAT CASE THE COURT DID NOT HAVE THE OCCASION TO CONSIDER THE ABO VE REFERRED CIRCULAR AS THE JUDGMENT WAS RENDERED MUCH PRIOR TO THE DATE OF ISSUE OF CIRCULAR. THEREFORE IT WAS C ONTENDED THAT CERTAIN OBSERVATIONS OF THE COURT IN THAT JUDG MENT CANNOT BE MADE APPLICABLE. IN SUPPORT OF THIS PROP OSITION RELIANCE WAS PLACED ON THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE INTERVENERS OWN CASE IN ITA NO.2235/MDS/2005 DATED 7.4.2006. IN ANY CASE REF ERRING TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. SUN ENGG. WORKS PVT. LTD. (198 ITR 297) IT WAS SUB MITTED THAT ONE SHOULD NOT PICK OUT A WORD OR A SENTENCE F ROM THE JUDGMENT OF THE SUPREME COURT WHICH IS DIVORCED FRO M THE CONTEXT OF THE QUESTION UNDER CONSIDERATION. ABOUT THE STATUS OF THE CIRCULARS ISSUED BY THE BOARD RELIAN CE WAS PLACED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF UCO BANK VS. CIT IN 237 ITR 889. 11 ITA 663/03 (B) THE NEXT SUBMISSION OF MR. SRINIVAS WAS AS TO H OW SEC.195 HAS EVOLVED OVER A PERIOD OF TIME AND HOW T HE BOARD ITSELF HAS BEEN KEEPING PACE WITH THE DEVELOPMENT. IN THIS CONNECTION REFERENCE WAS MADE TO THE BOARD CIRCULAR NOS. 695 & 10 DATED 29.11.1994 AND 9.10.2002 RESPECTIVEL Y TO SHOW THE ADDITIONS MADE BY THE BOARD IN THE INFORMA TION SOUGHT FOR IN THE CERTIFICATE ISSUED BY A C.A. (C) THE ARGUMENT WAS THAT IF SEC.195(2) WAS MANDAT ORY DOES IT MEAN THAT ALL THE CIRCULARS ISSUED BY THE B OARD ARE REDUNDANT? IN THIS CONNECTION REFERENCE WAS MADE T O THE BOARD CIRCULAR NO.4 DATED 29.6.2009. IT WAS EMPHAT ICALLY SUBMITTED THAT THERE WAS A CLEAR ALTERNATIVE BETWEE N THE CIRCULAR AND SEC.195(2) OF THE ACT. 9. SHRI T. BANUSEKAR C.A. APPEARED AS INTERVENER O N BEHALF OF ASIATIC COLOURCHEM INDUSTRIES LTD. HE RE FERRED TO THE EXPRESSION ...MAY MAKE AN APPLICATION... TO C ONTEND THAT IT WAS NOT OBLIGATORY ON THE PART OF THE DEDUC TOR TO UNDERGO THE PROCEDURE UNDER SEC.195(2) OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS . DCIT REPORTED IN 122 TTJ 577. RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF THE KERALA HIGH COURT IN THE CASE OF CI T VS. FERTILISERS & CHEMICALS TRAVANCORE LTD. (185 ITR 39 8). HE ALSO REFERRED TO THE BOARDS CIRCULAR NO.786 DATED 7.2.2000 AND POSED TO HIMSELF THE QUESTION WHETHER THE DEDUC TOR NEEDS TO APPROACH THE ASSESSING OFFICER IF THE INCO ME IS NOT CHARGEABLE TO TAX. AT THIS JUNCTURE THE LD. D.R. INTERVENED TO POINT OUT THAT THE SAID CIRCULAR HAS BEEN WITHDR AWN BY THE BOARD. THE SUBMISSION OF SHRI BANUSEKAR WAS THAT T HE CIRCULAR WAS WITHDRAWN BECAUSE IT WAS ABUSED BUT IT DID NOT 12 ITA 663/03 MEAN THAT THE BOARD HAD INTERPRETED THE LAW INCORRE CTLY. HE REFERRED TO CLAUSE (HA) OF SEC.246A(1) AND SEC.248 TO CONTEND THAT THESE PROVISIONS IMPLIED THAT IT WAS N OT OBLIGATORY FOR THE DEDUCTOR TO ALWAYS OBTAIN A CERT IFICATE UNDER SEC.195(2) OF THE ACT. 10. SHRI PADAMCHAND KHINCHA C.A. APPEARED AS INTERVENER ON BEHALF OF SASKEN COMMUNICATION TECHNO LOGIES LTD. HIS SUBMISSION WAS THAT PAYMENTS CAN BE CLAS SIFIED INTO THREE CATEGORIES VIZ. (A) PURELY CAPITAL PAY MENTS WHICH ARE NOT TAXABLE (B) PAYMENTS WHICH ARE OF REVENUE NATURE BUT ARE EXEMPT FROM TAX EITHER UNDER THE ACT OR UND ER DTAA AND (C) PAYMENTS WITH PURE INCOME CHARACTERISATION. IN THE LAST CATEGORY THERE MAY BE A PORTION WHICH MAY NOT BE TAXABLE AND THE PORTION WHICH IS TAXABLE IS GENERAL LY REFERRED TO AS TRADING RECEIPTS. IT WAS POINTED OUT THAT SU B-SEC.(2) OF SEC.190 WAS THE GUIDING PROVISION FOR ENTIRE CHAPTE R XVII OF THE ACT. IT PROVIDES THAT EITHER TDS OR ADVANCE PA YMENT OF TAX CANNOT PREJUDICE THE CHARGE OF TAX UNDER SEC.4( 1) OF THE ACT. RELYING ON THE JUDGMENT OF ELI LILLY (SUPRA) IT WAS ALSO POINTED OUT THAT TDS PROVISION WAS A MACHINERY PROV ISION. SHRI KHINCHA REFERRED TO CIRCULAR NO.786 DATED 7.2. 2000 (REFERRED TO BY SHRI BANUSEKAR ALSO) AND CONTENDED THAT IT IS ONLY THE CIRCULAR THAT IS WITHDRAWN AND PRINCIPLE E NUNCIATED THEREIN IS NOT WITHDRAWN. REFERENCE WAS MADE TO TH E JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF BAS F (INDIA) LTD. VS. CIT (280 ITR 136) TO CONTEND THAT RETROSPE CTIVE WITHDRAWAL OF CIRCULAR IS NOT PERMISSIBLE. 11. IN HIS COUNTER-REPLY THE LD. D.R. SUBMITTED THA T CIRCULARS CANNOT SUBSTITUTE A PROVISION AND CANNOT REDUCE THE RIGOURS OF ANY PROVISION. ACCORDING TO HIM SE C.195 WAS 13 ITA 663/03 VERY CLEAR IN SO FAR AS THAT ITS HEADING WAS OTHER SUMS AND THE PROVISION TALKED ABOUT PAYMENT OF A SUM. ON THE OTHER HAND SEC.190 AND ALL OTHER PROVISIONS FOLLOW ING THEREAFTER USES THE WORD INCOME AND NOT SUM. THEREFORE THE CONTENTION WAS THAT WHILE MAKING ANY REMITTANCE TO A NON-RESIDENT TAX HAD TO BE DEDUCTE D UNDER SEC.195 OF THE ACT. THE QUESTION HE POSED WAS AS T O WHO DECIDES THE TAXABILITY OF THE SUM REMITTED. IN THI S CONNECTION HE REFERRED TO THE DECISION OF THE DELH I BENCH OF THE TRIBUNAL IN THE CASE OF MILLENNIUM INFOCOM TECH NOLOGIES LTD. VS. ACIT (117 ITD 114). THIS DECISION WAS REF ERRED TO BY SHRI RAJAN VORA TO POINT OUT THAT THE BENCH HAS TAKEN NOTE ABOUT THE BOARDS CIRCULAR TO THE EFFECT THAT THE TASK OF DECIDING THE TAXABILITY HAS BEEN ENTRUSTED TO C.AS. AS AN ALTERNATIVE TO THE PROCEDURE UNDER SEC.195(2). AG AINST THIS THE ARGUMENT OF THE LD. D.R. WAS THAT AS PER THE SA ME DECISION IF ACCORDING TO THE ASSESSEE THE ENTIRE S UM WAS NOT CHARGEABLE THEN HE HAS TO APPROACH THE ASSESSING O FFICER. IT WAS CONTENDED THAT THE ASSESSEE CANNOT DECIDE AB OUT THE TAXABILITY IT CAN BE DECIDED EITHER BY THE ASSESSI NG OFFICER OR THE C.A. IT WAS ALSO CONTENDED THAT IF TDS IS NOT DONE THEN THE DEDUCTEE WILL BE OUT OF THE TAX NET AND SEC.195 WOULD BE RENDERED IRRELEVANT. 12. AT THIS JUNCTURE WE MAY POINT OUT THAT WHEN TH E MATTER HAD COME UP FOR HEARING ON 11.11.2009 THE LD. D.R. HAD SOUGHT AN ADJOURNMENT ON THE GROUND THAT KARNAT AKA HIGH COURT HAS PRONOUNCED A JUDGMENT IN THE CASE OF SAMSUNG ELECTRONICS LTD. IN I.T.A.NO.2808 OF 2005 I N FAVOUR OF THE REVENUE. IT WAS SUBMITTED THAT THE ADJOURNM ENT IS SOUGHT ONLY FOR A SHORT PERIOD TILL THE FULL TEXT O F THE JUDGMENT IS AVAILABLE. WE DID APPRECIATE THE CONTE NTION OF 14 ITA 663/03 THE LD. D.R. BUT PROCEEDED WITH THE HEARING FOR THE REASON THAT ABOUT THREE INTERVENERS AND ONE COUNSEL FOR TH E ASSESSEE HAD COME FROM OUT OF CHENNAI AND ACCORDING LY WE DID NOT WANT TO INCONVENIENCE THEM. WE ASSURED THE LD. D.R. THAT IF THE FULL TEXT OF THE JUDGMENT COMES WI THIN A REASONABLE TIME AND BEFORE THE ORDER IN THIS CASE I S PASSED WE SHALL CERTAINLY CONSIDER THE SAME. ON 20.11.200 9 THE LD. D.R. BROUGHT TO OUR NOTICE THAT THE FULL TEXT OF TH E JUDGMENT IS NOW AVAILABLE AND HE PLACED A COPY OF THE SAME O N RECORD. IT HAS SINCE BEEN REPORTED IN 320 ITR 209 ALSO. ACC ORDINGLY IN ORDER TO GIVE OPPORTUNITY TO BOTH THE PARTIES TO EXPLAIN THE JUDGMENT AND THEREBY ASSIST THE BENCH THE MATTER W AS REPOSTED FOR HEARING. THEREFORE THE CONTENTIONS OF THE PARTIES IN RELATION TO THE JUDGMENT OF THE KARNATAK A HIGH COURT ARE NARRATED IN THE PARAGRAPHS THAT NOW FOLLO W. 13. THE LD. D.R. RELIED ON THE JUDGMENT IN THE CASE OF SAMSUNG ELECTRONICS (SUPRA) IN PARTICULAR THE OBS ERVATIONS MADE AT PLACITUM 38 ONWARDS. IN HIS WRITTEN SUBMI SSIONS THE LD. D.R. HAS SUBMITTED THAT THE FACTS IN THE PR ESENT CASE ARE EXACTLY IDENTICAL TO THE FACTS IN THE CASE BEFO RE THE KARNATAKA HIGH COURT AND HENCE THE SAID JUDGMENT BE FOLLOWED. IT IS ALSO CONTENDED THAT THE INTERPRETA TION OF THE SUPREME COURT OF SEC.195 IN THE CASE OF TRANSMISSIO N CORPORATION (SUPRA) HAS BEEN FOLLOWED BY THE KARNAT AKA HIGH COURT AND SINCE THE LAW DECLARED BY THE SUPREME CO URT HAS TO BE FOLLOWED UNDER ARTICLE 141 OF THE CONSTITUTIO N IT BECOMES ALL THE MORE INCUMBENT FOR THE TRIBUNAL TO FOLLOW THE JUDGMENT OF THE KARNATAKA HIGH COURT. 14. SHRI VIJAYARAGHAVAN ADVOCATE ARGUED ON BEHALF OF THE ASSESSEE. FIRSTLY HE REFERRED TO THE JUDGMENT IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) AND SUBMITTED THAT THE 15 ITA 663/03 ISSUE BEFORE THE HIGH COURT WAS ONLY WHETHER TDS WA S TO BE MADE ON NET AMOUNT OR ON GROSS AMOUNT. IF AT ALL T HERE WAS A DEFAULT IT WAS HELD TO BE ONLY IN RESPECT OF INC OME WHICH WAS CHARGEABLE TO TAX OUT OF THE TOTAL AMOUNT REMIT TED. THUS THE UNDERLYING RATIO WAS THAT TDS HAS TO BE M ADE ONLY IN RESPECT OF INCOME WHICH IS CHARGEABLE TO TAX. T HE HIGH COURT NEVER SAID THAT TAX WAS DEDUCTIBLE ON GROSS A MOUNT. FURTHER IT WAS SUBMITTED THAT THE SUPREME COURT WH ILE DECIDING THE CASE OF TRANSMISSION CORPORATION (SUPR A) NEVER WENT INTO THE CONSEQUENCES OF NON-DEDUCTION. COMIN G TO THE JUDGMENT IN THE CASE OF SAMSUNG (SUPRA) SHRI VIJAYARAGHAVAN DREW OUR ATTENTION TO THE FOLLOWING OBSERVATIONS MADE BY THE COURT : PLACITUM 45 THE CONTENTIONS URGED ON BEHALF OF THE ASSESSEE ARE MORE IN THE CONTEXT OF THE DETERMINATION OF THE TAX LIABILITY OF THE NON-RESIDENT RECIPIENT OF THE PRICE/PAYMENT FOR THE SUPPLY OR SALE OF SHRINK-WRAPPED SOFTWARE PACKAGES AS THOUGH IT IS AN EXERCISE OF PASSING AN ASSESSMENT ORDER FOR DETERMINING THE TAX LIABILITY OF THE NON-RESIDENT ASSESSEE RECEIVING THE PAYMENT ALTHOUGH THE RESPONDENTS IN ALL THESE APPEALS ARE QUITE AWARE THAT IT IS NOT ACTUALLY AN EXERCISE FOR DETERMINATION OF THE TAX LIABILITY OF THE NON- RESIDENT BUT IS ONLY IN THE CONTEXT OF THE OBLIGATION OF A RESIDENT-ASSESSEE MAKING PAYMENTS TO THE NON-RESIDENT AS CONTEMPLATED UNDER SECTION 195 OF THE ACT. PLACITUM 57 16 ITA 663/03 AS WE HAVE ALREADY INDICATED THAT A QUESTION OF THE NATURE INVOLVING EXERCISE OF DETERMINING THE LIABILITY OF THE NON-RESIDENT ASSESSEE IN RESPECT O F THE PAYMENT RECEIVED BY THE NON-RESIDENT FROM A RESIDENT ASSESSEE CANNOT BE AN EXERCISE THAT CAN BE RESORTED TO EVEN FOR THE PURPOSE OF DETERMINING THE EXTENT OF OBLIGATION ON THE PART OF THE RESIDENT PAYER AND TO ASCERTAIN AS TO WHETHER THERE IS ANY SCOPE FOR RELIEVING THE RESIDENT PAYER TOTALLY FROM THE OBLIGATION OF DEDUCTION OR EVEN PARTIALLY AS AN ANSWER FOR THAT CAN BE OBTAINED ONLY BY GOING THROUGH THE PROCEDURE ENVISAGED UNDER SECTION 195(2) OF THE ACT ................ PLACITUM 58 ...........AS THEY ARE ALL VIRTUALLY EXERCISES TO BE EMBARKED ONLY AT THE TIME OF DETERMINATION OF THE ACTUAL TAX LIABILITY OF THE NON-RESIDENT ASSESSEE AND IN THE ABSENCE OF A RETURN BEING FILED BY THE NON-RESIDENT ASSESSEE EXAMINATION OF SUCH QUESTIONS DOES NOT ARISE WHILE THE ASSESSING OFFICER IS IN THE EXERCISE OF TAKING CONSEQUENTIAL ACTION ON AN ASSESSEE WHO HAS FAILED TO FULFIL HIS OBLIGATION UNDER SECTION 195(1 ) OF THE ACT AND THEREFORE GOES AGAINST THE ASSESSEES AND ARE ANSWERED ACCORDINGLY. PLACITUM 74 .....ALSO AN ERRONEOUS ORDER AND DEMAND BEING RAISED BY THE ASSESSING OFFICER UNDER SECTION 201 17 ITA 663/03 OF THE ACT SUCH AS AN INCORRECT DESCRIPTION OF THE RESIDENT PAYER OR INCORRECT COMPUTATION OF THE AMOUNT TO BE DEDUCTED FROM OUT OF THE PAYMENT MADE BY THE RESIDENT PAYER EITHER BY EMPLOYING A WRONG PERCENTAGE FOR DEDUCTION AT VARIANCE WITH THE RATE AS INDICATED IN THE FINANCE ACT OR SUCH ARITHMETICAL OR FACTUAL ERRORS COMMITTED BY THE ASSESSING OFFICER WITHOUT INVOLVING THE QUESTION OF ACTUAL DETERMINATION OF THE TAX LIABILITY OF THE NON-RESIDENT ETC. ALONE CAN CONSTITUTE THE SUBJECT-MATTER FOR APPEAL UNDER SECTION 246A OF THE ACT (CLAUSE (HA) OF SUB-SECTION (1) OF SECTION 246A OF THE ACT). BY DRAWING OUR ATTENTION TO THE ABOVE OBSERVATIONS IT WAS SOUGHT TO BE IMPRESSED UPON US THAT THE KARNATAKA H IGH COURT HAS MISINTERPRETED THE JUDGMENT IN THE CASE O F TRANSMISSION CORPORATION (SUPRA) AND HAS IGNORED TH E ULTIMATE CONCLUSION. IT WAS SUBMITTED THAT THE HIG H COURT HAS EXTENDED THE APPLICABILITY OF THE DECISION IN T RANSMISSION CORPORATION (SUPRA) TO CASES WHERE THE ENTIRE INCOM E MAY NOT BE TAXABLE. IT WAS REITERATED THAT IT IS CLEAR LY HELD IN TRANSMISSION CORPORATION (SUPRA) THAT TAX IS DEDUCT IBLE ONLY ON THAT PORTION OF REMITTANCE WHICH FORMS PART OF T AXABLE INCOME. IT WAS FURTHER SUBMITTED THAT THE KARNATAK A HIGH COURT HAS NOT CONSIDERED THE JUDGMENT OF THE SUPRE ME COURT IN THE CASE OF ELI LILLY (312 ITR 225) AND HA S NOT APPLIED THE JUDGMENT OF THE SUPREME COURT IN THE C ASE OF VIJAY SHIP BREAKING CORPORATION (314 ITR 309). FUR THER THE DELHI HIGH COURT HAS CLEARLY HELD IN THE CASE OF DE LHI DEVELOPMENT AUTHORITY VS. ITO (230 ITR 9) THAT AN O RDER UNDER SEC.201 IS AN ORDER OF ASSESSMENT AND THIS JU DGMENT 18 ITA 663/03 HAS BEEN AFFIRMED BY THE SUPREME COURT IN 252 ITR 772. IT IS ALSO SUBMITTED THAT THE KARNATAKA HIGH COURT HAS NOT FOLLOWED ITS OWN EARLIER JUDGMENT IN THE CASE OF JI NDAL THERMAL POWER CO. LTD. VS. DCIT (225 CTR 220). REL IANCE WAS ALSO PLACED ON THE JUDGMENT OF THE RAJASTHAN HI GH COURT IN THE CASE OF CIT VS. MANAGER STATE BANK OF INDIA IN 226 CTR 310. FINALLY IT WAS CONTENDED THAT IF AT ALL TWO INTERPRETATIONS WERE POSSIBLE THE ONE FAVOURABLE T O THE TAX PAYER SHOULD BE ADOPTED. FOR THIS PROPOSITION REL IANCE WAS PLACED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF PRADIP J. MEHTA VS. CIT (300 ITR 231). 15. SHRI RAJAN VORA ALSO ARGUED ON BEHALF OF THE AS SESSEE. HIS EFFORT WAS TO DRAW DISTINCTION BETWEEN COLLECTI ON AND RECOVERY OF TAXES ON THE ONE HAND AND CHARGEABILITY OF INCOME ON THE OTHER. IT WAS POINTED OUT THAT THE B OARD ISSUES CIRCULAR EVERY YEAR FOR THE PURPOSES OF DEDU CTION OF TAX AT SOURCE FROM SALARY UNDER SEC.192 OF THE ACT. THE ISSUANCE OF SUCH A CIRCULAR WOULD NOT HAVE BEEN NEC ESSARY IF TAX WAS TO BE DEDUCTED ON THE ENTIRE AMOUNT OF GROS S SALARY. DRAWING ANALOGY FROM THIS SHRI VORA ARGUED THAT AN Y PAYMENT IN ORDER TO ATTRACT DEDUCTION OF TAX AT SOU RCE MUST PARTAKE THE CHARACTER OF INCOME. HE REFERRED TO SE C.40(A)(I) OF THE ACT TO POINT OUT THAT THE WORDS USED WERE C HARGEABLE UNDER THIS ACT AND HENCE WHILE CONSIDERING ANY DIS ALLOWANCE UNDER THIS PROVISION THE ASSESSING OFFICER HAS TO CONSIDER WHETHER THE PAYMENT WAS CHARGEABLE TO TAX OR NOT. NEXT SHRI VORA REFERRED TO THE ALTERNATE PROCEDURE PRESC RIBED BY THE BOARD OF OBTAINING A CA CERTIFICATE IN LIEU OF THE PROCEDURE UNDER SEC.195(2) OF THE ACT. IT WAS CONT ENDED THAT THE KARNATAKA HIGH COURT HAS NOT REFERRED TO T HIS ASPECT AT ALL IN ITS JUDGMENT. FINALLY REFERRING TO CERT AIN DECISIONS 19 ITA 663/03 INCLUDING THAT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF VISVAS PROMOTERS PVT. LTD. VS. ITAT (30 DTR 65) IT WAS CONTENDED THAT DECISIONS OF NON-JURISDICTIONAL HIGH COURTS WERE NOT BINDING ON THE TRIBUNAL AND HENCE IN THIS CASE THE JUDGMENT IN THE CASE OF SAMSUNG ELECTRONICS (SUPRA) NEED NOT BE FOLLOWED. 16. SHRI L.V.SRINIVASAN INDIA TAX DIRECTOR OF AREV A T & D INDIA LTD. APPEARED AS INTERVENER FOR THE SAID COMP ANY. HIS ONLY CONTENTION WAS THAT IN THE CASE OF SAMSUNG (SU PRA) THERE IS NO DISCUSSION AT ALL ABOUT THE ALTERNATE P ROCEDURE OF OBTAINING THE CA CERTIFICATE. IT WAS CONTENDED THA T BY PRESCRIBING THE ALTERNATE PROCEDURE IT CLEARLY FOLL OWS THAT UNDERGOING THE PROCEDURE UNDER SEC.195(2) IS NOT MANDATORY. WITH REGARD TO THE JUDGMENT OF THE MADR AS HIGH COURT IN ITS OWN CASE DATED 11.2.2008 (T.C. APPEAL NO.1502 OF 2007) IT WAS SUBMITTED THAT THERE WAS NO QUESTI ON BEFORE THE HIGH COURT ABOUT THE MANDATORY APPLICATION OF SEC.195(2). 17. SHRI T. BANUSEKAR CA APPEARED AS INTERVENER FO R ASIATIC COLOURCHEM INDUSTRIES LTD. HE DREW OUR ATT ENTION TO THE OBSERVATIONS OF THE SUPREME COURT IN THE CASE OF ELI LILLY & CO.(SUPRA) AT PLACITUM 29 AND 30. ON THE QUESTIO N WHETHER THERE IS ANY INTER-LINKING OF THE CHARGING PROVISIONS AND THE MACHINERY PROVISIONS UNDER THE 1961 ACT TH E COURT MADE A REFERENCE TO ITS EARLIER JUDGMENT IN THE CAS E OF CIT VS. B.C. SRINIVASA SETTY (128 ITR 294) WHEREIN IT H AS BEEN HELD THAT THE CHARGING SECTION AND THE COMPUTATION PROVISIONS TOGETHER CONSTITUTE AN INTEGRATED CODE. IN THE CASE OF ELI LILLY (SUPRA) IT WAS VEHEMENTLY URGED THAT TDS PROVISIONS BEING MACHINERY PROVISIONS ARE INDEPENDE NT OF THE CHARGING PROVISIONS. IN ANSWER TO THIS CONTENTION THE COURT 20 ITA 663/03 HELD THAT SEC.4 IS THE CHARGING SECTION. UNDER SEC .4(1) TOTAL INCOME FOR THE PREVIOUS YEAR IS CHARGEABLE TO TAX. SEC.4(2) INTER ALIA PROVIDES THAT IN RESPECT OF INCOME CHAR GEABLE UNDER SUB-SEC.(1) INCOME-TAX SHALL BE DEDUCTED AT SOURCE WHERE IT IS SO DEDUCTIBLE UNDER ANY PROVISIONS OF T HE ACT . IN FACT IF A PARTICULAR INCOME FALLS OUTSIDE SEC.4(1) THEN THE TDS PROVISIONS CANNOT COME IN. SHRI BANUSEKAR THEN REFERRED TO THE JUDGMENT OF THE KARNATAKA HIGH COURT IN THE CASE OF JINDAL THERMAL POWER (SUPRA) IN WHICH IT HAS BEEN H ELD THAT ORDER UNDER SEC.201 IS CLEARLY APPEALABLE. ON THE OTHER HAND IN THE CASE OF SAMSUNG (SUPRA) IT HAS BEEN HE LD TO BE NOT APPEALABLE. TO RESOLVE THESE CONFLICTING VIEWS SHRI BANUSEKAR DREW OUR ATTENTION TO THE JUDGMENT OF THE ANDHRA PRADESH HIGH COURT IN THE CASE OF USHODAYA ENTERPRI SES LTD. VS. COMMISSIONER OF COMMERCIAL TAXES IN SPECIAL APP EAL NO.22 OF 1996 DECIDED ON 24.3.1998. AT PARAGRAPH 2 1 OF THE JUDGMENT IT HAS BEEN OBSERVED AS FOLLOWS : ......... WE CAN SAFELY EVOLVE THE PRINCIPLE THAT IN A CASE OF CONFLICT ARISING FROM THE DECISIONS OF CO - EQUAL BENCHES OF THE SUPREME COURT THE HIGH COURT IS FREE TO DISREGARD THE DECISION WHICH IS BASED ON AN OBVIOUS MISTAKE OF FACT OR THE ONE WHICH PURPORTS TO FOLLOW THE RATIO OF AN EARLIER DECISION THOUGH SUCH RATIO IS FOUND TO BE NON- EXISTENT......WE ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE VIEW THAT THE LATER DECISION SHOULD BE AUTOMATICALLY FOLLOWED DESPITE THE FACT THAT IT RESTS ON A CONCLUSION BASED ON AN ERRONEOUS IMPRESSION THAT AN EARLIER DECISION TOOK A PARTICULAR VIEW WHICH IN FACT IT HAS NOT TAKEN... 21 ITA 663/03 REFERENCE WAS THEN MADE TO THE JUDGMENT OF THE SUP REME COURT IN THE CASE OF SRI VENKATESWARA RICE GINNING & GROUNDNUT OIL MILL CONTRACTORS COMPANY VS. STATE OF ANDHRA PRADESH (2 SCC 650). OUR ATTENTION WAS DRAWN TO TH E OBSERVATIONS OF THE COURT AT PARAGRAPH 9 WHICH ARE REPRODUCED BELOW : 9. OUR APPROACH TO THE QUESTION BEFORE US IS SIMILAR TO THAT ADOPTED BY THE HIGH COURT IN THE DECISION UNDER APPEAL. WE ARE IN ENTIRE AGREEMENT WITH THE REASONING OF THE HIGH COURT. BUT OUR ATTENTION WAS INVITED TO A LATTER DECISION OF THE SAME HIGH COURT IN M. NADAR KHAN & CO. V. ASSISTANT COMMISSIONER (COMMERCIAL TAXES) ANANTPUR AND OTHER (27 STC 18) WHICH TOOK A VIEW CONTRARY TO THAT TAKEN IN THE DECISION UNDER APPEAL. IT IS STRANGE THAT A CO-ORDINATE BENCH OF THE SAME HIGH COURT SHOULD HAVE TRIED TO SIT ON JUDGMENT OVER A DECISION OF ANOTHER BENCH OF THAT COURT. IT IS REGRETTABLE THAT THE LEARNED JUDGE WHO DECIDED THE LATTER CASE OVERLOOKED THE FACT THAT THEY WERE BOUND BY THE EARLIER DECISION. IF THEY WANTED THAT THE EARLIER DECISION SHOULD BE RECONSIDERED THEY SHOULD HAVE REFERRED THE QUESTION IN ISSUE TO A LARGER BENCH AND NOT TO IGNORE THE EARLIER DECISION. SHRI BANUSEKAR ALSO PLACED BEFORE US CERTAIN EXTRAC TS OF SALMOND ON JURISPRUDENCE 12 TH EDITION. THE FOLLOWING OBSERVATIONS WERE PARTICULARLY REFERRED TO : (4) INCONSISTENCY WITH EARLIER DECISION OF HIGHER COURT. IT IS CLEAR LAW THAT A PRECEDENT LOSES ITS BINDING 22 ITA 663/03 FORCE IF THE COURT THAT DECIDED IT OVERLOOKED AN INCONSISTENT DECISION OF A HIGHER COURT. IF FOR E XAMPLE THE COURT OF APPEAL DECIDES A CASE IN IGNORANCE OF A DECISION OF THE HOUSE OF LORDS WHICH WENT THE OTHER WAY THE DECISION OF THE COURT OF APPEAL IS PER INCURIAM AND IS NOT BINDING EITHER ON ITSELF (B) O R ON LOWER COURTS (C); ON THE CONTRARY IT IS THE DECISI ON OF THE HOUSE OF LORDS THAT IS BINDING. THE SAME RULE APPLIES TO PRECEDENTS IN OTHER WORDS SUCH AS THE DIVISIONAL COURT (D). THUS THE CONTENTION OF SHRI BANUSEKAR WAS THAT THE JUDGMENT IN THE CASE OF SAMSUNG (SUPRA) SHOULD NOT BE FOLLOWED. 18. SHRI PADAMCHAND KHINCHA APPEARED AS INTERVENER ON BEHALF OF SASKEN COMMUNICATION TECHNOLOGIES LTD. BANGALORE. HIS CONTENTION WAS THAT IF ONE GOES ME RELY BY THE CONCLUSION WRITTEN AT THE END OF THE JUDGMENT I N THE CASE OF SAMSUNG (SUPRA) IT MAY APPEAR THAT THE DECISION IS WHOLLY AGAINST THE ASSESSEE AND THAT THE PROCEDURE UNDER SEC.195(2) MAY HAVE TO BE UNDERGONE EVEN IN CASES W HERE THE PAYMENTS ARE OF CAPITAL NATURE OR ARE OTHERWISE NOT TAXABLE. HOWEVER IT IS NOT PROPER TO READ THE CON CLUSION IN ISOLATION BUT THE SAME HAS TO BE READ IN CONJUNCTIO N OF WHAT HAS BEEN STATED BY THE COURT ITSELF IN THE EARLIER PART OF ITS JUDGMENT. SUCH HARMONIOUS READING OF THE JUDGMENT IS NECESSARY TO AVOID GETTING A DISTORTED VIEW OF THE JUDGMENT. FOR THIS PROPOSITION THE LEARNED COUNSEL REFERRED TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF GOODY EAR INDIA LTD. & OTHERS VS. STATE OF HARYANA & OTHERS ( 188 ITR 402). THE OBSERVATIONS OF THE KARNATAKA HIGH COURT ON WHICH SHRI KHINCHA RELIED UPON ARE REPRODUCED BELOW : 23 ITA 663/03 PLACITUM 50 : ......THE PRESENT SITUATIONS AND APPEALS ARE NOT APPEALS INVOLVING SUCH QUESTIONS BUT ONLY APPEALS INVOLVING THE QUESTION AS TO WHETHER THE PAYMENT OR ANY PART OF THE PAYMENT HAS A CHARACTER OF INCOME WITHIN THE MEANING OF SECTION 9 OF THE ACT READ WITH THE CHARGING SECTION AND THAT THE CONTENTION BEING THAT NO PART OF THE PAYMENT MADE TO THE NON-RESIDENT CAN BECOME INCOME EITHER UNDER THE INCOME-TAX ACT OR ENJOYS AN EXEMPTION UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENTS ..... AFTER REPRODUCING EXTENSIVELY THE OBSERVATIONS OF T HE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATI ON (SUPRA) FROM PAGES 594 TO 596 OF 239 ITR THE KARNA TAKA HIGH COURT OBSERVED AS FOLLOWS : PLACITUM 54 : IN THIS BACKGROUND THE PICTURE THAT EMERGES IS THAT WHILE UNDER SECTION 195(1) OF THE ACT THERE IS AN OBLIGATION ON THE PART OF THE PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT DOES ARISE IF AND ONLY IF THE PAYMENT PARTAKES OF THE CHARACTER OF INCOME PAYMENT IN THE SENSE THAT IF AN AMOUNT IS NOT IN THE NATURE OF INCOME PAYMENT AT ALL THEN SECTION 195(1) OF THE ACT DOES NOT OPERATE ........ PLACITUM 62 : 24 ITA 663/03 HOWEVER SEC.195(2) OF THE ACT PROVIDES FOR A LIMITED EXTENT OF A POSSIBLE REDUCTION IN THE ACTUA L AMOUNT TO BE DEDUCTED AT SOURCE BY THE RESIDENT PAYER IF THE RESIDENT PAYER IS ABLE TO DEMONSTRATE BEFORE THE ASSESSING OFFICER THAT THE ENTIRE PAYMENT DOES NOT BEAR THE CHARACTER OF INCOME BUT ONLY A PART OF THE PAYMENT BEARS THE CHARACTER OF INCOME..... PLACITUM 68 : THE ONLY LIMITED WAY OF EITHER AVOIDING OR WARDING OFF THE GUIDED MISSILE IS BY THE RESIDENT PAYER INVOKING THE PROVISIONS OF SEC.195(2) OF THE ACT AND EVEN HERE TO THE VERY LIMITED EXTENT OF CORRECTING AN INCORRECT IDENTIFICATION AND INCORRECT COMPUTATION OR TO CALL IN AID THE ACTUAL DETERMINATION OF THE TAX LIABILITY OF THE NON- RESIDENT WHICH IN FACT HAD BEEN DETERMINED AS PART OF THE PROCESS OF ASSESSING THE INCOME OF THE NON-RESIDENT...... THUS THE CONTENTION OF SHRI KHINCHA IS THAT KARNAT AKA HIGH COURT IN THE EARLIER PART OF ITS JUDGMENT PROPHESIE S TO FOLLOW THE JUDGMENT IN THE CASE OF TRANSMISSION CORPORATIO N (SUPRA) IT DOES FOLLOW THE JUDGMENT BUT ON ACCOUNT OF THE FACTS IN THE CASE OF SAMSUNG (SUPRA) THAT THE PAYME NTS WERE IN RESPECT OF MERCHANDISE IT MUST HAVE RESULTED IN SOME POSSIBLE INCOME IN THE HANDS OF NON-RESIDENT AND TH E ASSESSEE NOT HAVING INVOKED THE PROVISIONS OF SEC.1 95(2) THE TRIBUNAL SHOULD NOT HAVE MODIFIED THE ORDER OF THE CIT(A) WHILE EXERCISING ITS APPELLATE POWER. THUS ACCORDING TO MR. KHINCHA THE KARNATAKA HIGH COURT WENT A STEP FURTHER 25 ITA 663/03 IN ITS APPLICATION OF THE JUDGMENT IN THE CASE OF T RANSMISSION CORPORATION (SUPRA). 19. SHRI ARVIND SONDE ADVOCATE APPEARED FOR M/S. KPMG AS INTERVENER. AT THE OUTSET HE LAID FOUR PROPOSI TIONS BEFORE US. THEY ARE AS FOLLOWS : (A) THE DECISION IN SAMSUNG IS CONTRARY TO AT LEAST FOUR DECISIONS OF THE SUPREME COURT VIZ. - (I) CIT VS. ELI LILLY & CO. (INDIA) PVT. LTD. 312 ITR 225 (II) VIJAY SHIP BREAKING CORPORATION VS. CIT 314 ITR 309 (III) CIT VS. WESMAN ENGG. CO. PVT. LTD. 188 ITR 327 (IV) TRANSMISSION CORPORATION OF A.P. LTD. VS. CIT 239 ITR 587 (B) THE JUDGMENT IN SAMSUNG IS CONTRARY TO AT LEAST FIVE OTHER HIGH COURT DECISIONS AND ONE RULING OF THE AU THORITY FOR ADVANCE RULING (AAR) VIZ. (I) PORBANDAR STATE BANK VS. CIT 18 ITR 134 (BOM) (II) CIT VS. COOPER ENGG. LTD. 68 ITR 457 (BOM) (III) CZECHOSLOVAK OCEAN SHIPPING INTERNATIONAL JOINT STOCK COMPANY VS. ITO 81 ITR 162 (CAL) (IV) CIT VS. SUPERINTENDING ENGINEER UPPER SILERU 152 ITR 753 (AP) (V) CIT VS. STATE BANK OF INDIA 226 CTR 310 (RAJ) (VI) AL NISR PUBLISHING IN RE 239 ITR 879 26 ITA 663/03 (C) THE JUDGMENT IN SAMSUNG (SUPRA) IS CONTRARY TO SOME EARLIER DECISIONS OF THE KARNATAKA HIGH COURT ITSEL F VIZ. (I) HYDERABAD INDUSTRIES VS. ITO -188 ITR 749 (II) JINDAL THERMAL POWER CO. LTD. VS. DCIT 182 TAXMAN 252/225 CTR 220 (III) ACIT VS. MOTOR INDUSTRIES CO. 249 ITR 141 (IV) CIT VS. INFOSYS TECHNOLOGIES LTD. 293 ITR 14 6 (D) THE JUDGMENT IN SAMSUNG (SUPRA) IS CONTRARY TO THE FOLLOWING CIRCULARS ISSUED BY CBDT : (I) CIRCULAR NO.43 DATED 20.6.1970 (II) CIRCULAR NO.588 DATED 2.1.1991 (III) CIRCULAR NO.759 DATED 18.11.1997 (IV) CIRCULAR NO.767 DATED 22.5.1998 (V) CIRCULAR NO.786 DATED 7.2.2000 (VI) CIRCULAR NO.790 DATED 20.4.2000 (VII) CIRCULAR NO.10 DATED 9.10.2002 (VIII) CIRCULAR NO.7 DATED 23.10.2007 (IX) CIRCULAR NO.4 DATED 29.6.2009 THE ARGUMENT OF SHRI SONDE WAS THAT THE DECISION IN SAMSUNG (SUPRA) IS NOT BINDING BECAUSE : (I) IT IS INCONSISTENT WITH THE EARLIER DECISIONS O F THE COURTS OF THE SAME OR HIGHER RANK; (II) IT IS RENDERED SUB-SILENTIO IN SO FAR AS THAT IT DOES NOT REFER TO THE CIRCULARS OF THE BOARD AND DOES NOT DEAL WITH THE DECISIONS OF THE SUPREME COURT KARNATAKA HIGH COURT AND OTHER HIGH COURTS OF THE SAME RANK; AND 27 ITA 663/03 (III) IT IS RENDERED PER INCURIAM BECAUSE IT IS CONTRARY TO THE SUPREME COURT DECISIONS AND OTHER HIGH COURT DECISIONS INCLUDING THE DECISIONS OF THE DIVISION BENCH OF THE KARNATAKA HIGH COURT ITSELF. HE REFERRED TO THE JUDGMENT OF THE FULL BENCH OF TH E ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. B.R. CONS TRUCTIONS (202 ITR 222) TO CONTEND THAT A DIVISION BENCH OF H IGH COURT IS BOUND BY JUDGMENTS OF ANOTHER DIVISION BENCH AND A FULL BENCH. A SINGLE JUDGE OR BENCHES OF HIGH COURT CAN NOT DIFFER FROM THE EARLIER JUDGMENTS OF CO-ORDINATE JURISDICT ION MERELY BECAUSE THEY HOLD A DIFFERENT VIEW ON THE QUESTION OF LAW FOR THE REASON THAT CERTAINTY AND UNIFORMITY IN THE ADM INISTRATION OF JUSTICE ARE OF PARAMOUNT IMPORTANCE. HE THEN RE FERRED TO THE JUDGMENT OF THE SUPREME COURT IN PUNJAB LAND DEVELOPMENT AND RECLAMATION CORPORATION LTD. CHAND IGARH VS. PRESIDING OFFICER LABOUR COURT AND OTHERS IN ( 1990) 3 SCC 682 (SC). IT WAS PARTICULARLY POINTED OUT THAT AT PARAGRAPH 40 & 41 ON PAGE 705 OF THE JUDGMENT THE COURT HAS LAID DOWN THE DOCTRINE OF PRECEDENTS UNDER ARTI CLE 141 OF THE CONSTITUTION. THE SUPREME COURT HAS LAID DOWN THAT A HIGH COURT DECISION IS PER INCURIAM IF IT HAS ACTED IN IGNORANCE OF A DECISION OF ITS OWN OR ACTED IN IGNO RANCE OF THE DECISION OF THE SUPREME COURT. IN THE BACKGROU ND OF THESE FACTS SHRI SONDE VISUALISED TWO SITUATIONS A S FOLLOWS : (I) WHERE THERE ARE CONFLICTING VIEWS OF JURISDICTI ONAL HIGH COURT; AND (II)WHERE THERE ARE CONFLICTING VIEWS BETWEEN NON- JURISDICTIONAL HIGH COURTS. IN CASE OF THE FIRST SITUATION IT WAS SUBMITTED THA T THE TRIBUNAL SHOULD FOLLOW THE VIEW WHICH IS FAVOURABLE TO THE 28 ITA 663/03 ASSESSEE AS LAID DOWN BY THE SUPREME COURT IN CIT V S. VEGETABLE PRODUCTS LTD. IN 88 ITR 192. IN THE SECO ND SITUATION THE LEARNED COUNSEL SUBMITTED THAT THE T RIBUNAL MAY HAVE THE FOLLOWING OPTIONS : (I) FOLLOW THE VIEW IN FAVOUR OF THE ASSESSEE OR TH E VIEW WHICH APPEALS TO THE TRIBUNAL AS LAID DOWN BY THE S PECIAL BENCH IN THE CASE OF RISHI ROOP CHEMICAL COM. PVT. LTD. IN 36 ITD 35. (II) FOLLOW THE VIEW WHICH IS THE BETTER VIEW IN TH E OPINION OF THE TRIBUNAL AS LAID DOWN BY THE AHMEDABAD BENCH OF THE TRIBUNAL IN CHANDULAL VENICHAND VS. ITO IN 38 ITD 1 38. (III) FOLLOW AN EARLIER SPECIAL BENCH DECISION IF AVAILABLE ON THE SUBJECT AS LAID DOWN BY A THIRD MEMBER DECISION OF THE AHMEDABAD BENCH IN KANEL OIL & EXPORT INDUSTRIES LT D. VS. JCIT IN 121 ITD 596. WITH REGARD TO OPTION (III) ABOVE IT WAS POINTED O UT THAT THE MOST APPROPRIATE SPECIAL BENCH DECISION AVAILABLE O N THE SUBJECT IS THAT IN THE CASE OF MAHINDRA & MAHINDRA VS. DCIT 313 ITR 263 (AT MUM SB) 310. IN THIS DECISION IT WAS SUBMITTED THAT THE SPECIAL BENCH HAS CONCLUSIVELY D EALT WITH THE SUBJECT OF OBLIGATION TO DEDUCT TAX AT SOURCE F ROM PAYMENTS TO NON-RESIDENTS. IT HAS BEEN LAID DOWN T HAT THE PRE-REQUISITE OF APPLICABILITY OF SEC.195(2) SEC.1 97 AND SEC.201 OF THE ACT IS THAT THE AMOUNT PAID TO THE N ON- RESIDENT IS OTHERWISE CHARGEABLE TO TAX UNDER THE P ROVISIONS OF THE ACT. THUS IF THE AMOUNT PAID OR PAYABLE TO THE NON- RESIDENT IS NOT CHARGEABLE TO TAX UNDER THE REGULAR PROVISIONS OF THE ACT OR THE APPLICABLE DTAA THEN THE PROVISIO NS OF CHAPTER XVII ABOUT THE COLLECTION AND RECOVERY OF T AX ARE RULED OUT. IN THESE CASES THE PERSON RESPONSIBLE FOR PAYING SUCH NON-TAXABLE SUM CANNOT BE FASTENED WITH ANY LI ABILITY 29 ITA 663/03 FOR DEDUCTION OF TAX AT SOURCE AND CANNOT UNDER ANY CIRCUMSTANCE BE TREATED AS AN ASSESSEE IN DEFAULT. 20. SHRI DEVNATHAN ADVOCATE APPEARED ON BEHALF OF EAGLE PRESS PVT. LTD. AS AN INTERVENER. HIS SUBMISSIONS WERE MORE OR LESS THE SAME AS THOSE OF THE COUNSEL WHO ARGUED EARLIER. HIS EMPHASIS WAS THAT THE JUDGMENTS IN THE CASE OF ELI LILLY VIJAY SHIP BREAKING CORPORATION JINDAL THERMAL POW ER AND OTHERS SHOULD HAVE BEEN FOLLOWED BY THE KARNATAKA H IGH COURT. WHILE LAYING STRESS ON THE DOCTRINE OF PRE CEDENT HE SUBMITTED THAT IN A TRADITION-DOMINATED COUNTRY WH ERE CUSTOM AND TRADITION AND PRACTICES BASED ON THEM ARE RESPECTED FOR THEIR AUTHORITY THE ENGLISH DOCTRINE OF PRECEDENT IS NEITHER NEW NOR REVOLUTIONARY. IT WAS SUBMITTED THAT OUR DHARMA SASTRAS ARE REPLETE WITH INJUNCTIONS WHICH ORDAIN THAT WHAT IS LAID DOWN BY TRADITION OR IN TH E SHISHTAS SHOULD BE FOLLOWED UNQUESTIONINGLY. HE QUOTED THE FOLLOWING LINES FROM APASTHAMBA DHARMA SUTRAS: !' # $ % &' ( & HE SUMMARIZED HIS CONTENTIONS BY STATING THAT AT TH E HEART OF OUR APPELLATE SYSTEM WHICH IS STRUCTURED ON THE COMMON LAW PATTERN OF HIERARCHY OF COURTS THE DOCTRINE OF PRECEDENT EXISTS LIKE A VIGILANT OMNIPRESENCE. 21. SHRI VENKATESH AND MS. RUPA ADOPTED THE ARGUMEN TS OF SHRI VIJAYARAGHAVAN AND SHRI ARVIND SONDE. 30 ITA 663/03 22. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND THE MATERIAL ON RECORD. AFTER REPRODUCING THE QUESTION REFERRED TO THE SPECIAL BENCH IN THE FIRST PARAGRAPH WE HAV E CROSSED ALMOST THIRTY PAGES AND HENCE IT IS NECESSARY TO RE CAPITULATE AS TO WHAT IS THE ISSUE BEFORE THE SPECIAL BENCH. SIMPLY PUT THE QUESTION IS THAT IS IT OBLIGATORY FOR THE ASSES SEE TO DEDUCT TAX AT SOURCE ON THE ENTIRE PAYMENT IF HE HAS NOT A PPLIED TO THE ASSESSING OFFICER UNDER SEC.195(2) OF THE ACT F OR DEDUCTION OF TAX AT A LOWER OR NIL RATE OF TAX. T HE QUESTION IS BOTH EASY AS WELL AS DIFFICULT TO ANSWER. IT IS E ASY BECAUSE SCORES OF DECISIONS ARE AVAILABLE ON THE SUBJECT FR OM DIFFERENT JUDICIAL FORUMS INCLUDING SEVERAL DECISIONS FROM TH E SUPREME COURT ITSELF. IT IS DIFFICULT BECAUSE DESPITE SO MA NY AUTHORITIES AVAILABLE ON THE SUBJECT THE VOLCANO OF SEC.195 HA S BEEN SPORADICALLY ERUPTING. THE ISSUE SIMPLY REFUSES TO DIE DOWN OR AT LEAST GO INTO A DORMANT MODE FOR SOME TIME. THE KEY JUDGMENT IS THAT OF THE SUPREME COURT IN THE CASE O F TRANSMISSION CORPORATION (239 ITR 587). THE DIFFIC ULTY GETS COMPOUNDED BECAUSE BOTH THE SIDES RELY ON THIS JUDG MENT HEAVILY ACCORDING TO THEIR RESPECTIVE UNDERSTANDING AND INTERPRETATION OF THE JUDGMENT. THE LATEST JUDGMEN T ON THE ISSUE THAT BY THE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG (320 ITR 209) HAS ADDED A NEW DIMENSION TO THE CONTROVERSY. BEWILDERED AS WE ARE IN THE MAZE OF M ULTIPLE AUTHORITIES AND ARE CAUGHT IN THE CAULDRON WE SHAL L TRY OUR BEST TO RESOLVE THE DISPUTE. THE KEY DECISION AS MENTIONED EARLIER IS THAT OF TRANSMISSION CORPORATION (SUPRA ) AND HENCE OUR EFFORT WILL BE TO CONCENTRATE ON THIS JU DGMENT IN SPITE OF THE FACT THAT SEVERAL AUTHORITIES HAVE BEE N CITED BEFORE US. HOWEVER WHEREVER NECESSARY WE SHALL A DVERT TO OTHER AUTHORITIES AS WELL. 31 ITA 663/03 23. TO BEGIN WITH WE REPRODUCE THE ENTIRE SEC.195 FOR IMMEDIATE REFERENCE : 195. [(1) ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMP ANY ANY INTEREST [***] OR ANY OTHER SUM CHARGEABLE UNDER TH E PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD SALARIES [***]) SHALL AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME O F PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE WHICHEVER IS EARLIER DEDUCT INCOME- TAX THEREON AT THE RATES IN FORCE : [ PROVIDED THAT IN THE CASE OF INTEREST PAYABLE BY THE GOVERNMENT OR A PUBLIC SECTOR BANK WITHIN THE MEANI NG OF CLAUSE (23D) OF SECTION 10 OR A PUBLIC FINANCIAL IN STITUTION WITHIN THE MEANING OF THAT CLAUSE DEDUCTION OF TAX SHALL BE MADE ONLY AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE :] [ PROVIDED FURTHER THAT NO SUCH DEDUCTION SHALL BE MADE IN RESPECT OF ANY DIVIDENDS REFERRED TO IN SECTION 115 -O.] EXPLANATION.-FOR THE PURPOSES OF THIS SECTION WHER E ANY INTEREST OR OTHER SUM AS AFORESAID IS CREDITED TO A NY ACCOUNT WHETHER CALLED INTEREST PAYABLE ACCOUNT OR SUSPE NSE ACCOUNT OR BY ANY OTHER NAME IN THE BOOKS OF ACCO UNT OF THE PERSON LIABLE TO PAY SUCH INCOME SUCH CREDITIN G SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT O F THE PAYEE AND THE PROVISIONS OF THIS SECTION SHALL APPL Y ACCORDINGLY.] (2) WHERE THE PERSON RESPONSIBLE FOR PAYING ANY SUC H 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 T HE 32 ITA 663/03 RECIPIENT HE MAY MAKE AN APPLICATION TO THE [ASSES SING] OFFICER TO DETERMINE [BY GENERAL OR SPECIAL ORDER] THE APPROPRIATE PROPORTION OF SUCH SUM SO CHARGEABLE A ND UPON SUCH DETERMINATION TAX SHALL BE DEDUCTED UNDER SUB -SECTION (1) ONLY ON THAT PROPORTION OF THE SUM WHICH IS SO CHARGEABLE. [***] (3) SUBJECT TO RULES MADE UNDER SUB-SECTION (5) AN Y 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 [ASSESSING] OFFICER FOR THE GRANT OF A CERTIFICATE AUTHORISING HIM TO RECEIVE SUCH INTEREST OR OTHER SUM WITHOUT D EDUCTION OF TAX UNDER THAT SUB-SECTION AND WHERE ANY SUCH C ERTIFICATE IS GRANTED EVERY PERSON RESPONSIBLE FOR PAYING SUC H INTEREST OR OTHER SUM TO THE PERSON TO WHOM SUCH CERTIFICATE IS GRANTED SHALL SO LONG AS THE CERTIFICATE IS IN FOR CE MAKE PAYMENT OF SUCH INTEREST OR OTHER SUM WITHOUT DEDUC TING TAX THEREON UNDER SUB-SECTION (1). (4) A CERTIFICATE GRANTED UNDER SUB-SECTION (3) SH ALL REMAIN IN FORCE TILL THE EXPIRY OF THE PERIOD SPECIFIED TH EREIN OR IF IT IS CANCELLED BY THE [ASSESSING] OFFICER BEFORE THE EXP IRY OF SUCH PERIOD TILL SUCH CANCELLATION. (5) THE BOARD MAY HAVING REGARD TO THE CONVENIENCE OF ASSESSEES AND THE INTERESTS OF REVENUE BY NOTIFICA TION IN THE OFFICIAL GAZETTE MAKE RULES SPECIFYING THE CASES I N WHICH AND THE CIRCUMSTANCES UNDER WHICH AN APPLICATION MAY BE MADE FOR THE GRANT OF A CERTIFICATE UNDER SUB-SECTI ON (3) AND THE CONDITIONS SUBJECT TO WHICH SUCH CERTIFICATE MA Y BE GRANTED AND PROVIDING FOR ALL OTHER MATTERS CONNECT ED THEREWITH.] 33 ITA 663/03 [(6) THE PERSON REFERRED TO IN SUB-SECTION (1) SHAL L FURNISH THE INFORMATION RELATING TO PAYMENT OF ANY SUM IN S UCH FORM AND MANNER AS MAY BE PRESCRIBED BY THE BOARD.] 24. LET US TAKE SUB-SECTIONS (1) AND (2) TOGETHER F IRST. IN THIS SUB-SECTION THE CRUCIAL EXPRESSION IS ANY OT HER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT. THIS EXPRESSION HAS BEEN EXPLAINED BY THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) IN THE FOLLOWING W ORDS : CONSIDERATION WOULD BEWHETHER PAYMENT OF SUM TO NON-RESIDENT IS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT OR NOT? THAT SUM MAY BE INCOME OR INCOME HIDDEN OR OTHERWISE EMBEDDED THEREIN. IF SO TAX IS REQUIRED TO BE DEDUCTED ON THE SAID SUM-WHAT WOULD BE THE INCOME IS TO BE COMPUTED ON THE BASIS OF VARIOUS PROVISIONS OF THE ACT INCLUDING PROVISIONS FOR COMPUTATION OF THE BUSINESS INCOME IF THE PAYMENT IS TRADE RECEIPT. HOWEVER WHAT IS TO BE DEDUCTED IS INCOME-TAX PAYABLE THEREON AT THE RATES IN FORCE. UNDER THE ACT TOTAL INCOME FOR TH E PREVIOUS YEAR WOULD BECOME CHARGEABLE TO TAX UNDER SECTION 4. SUB-SECTION (2) OF SECTION 4 INTER ALIA PROVIDES THAT IN RESPECT OF INCOME CHARGEABLE UNDER SUB-SECTION (1) INCOME-TAX SHALL BE DEDUCTED AT SOURCE WHERE IT IS SO DEDUCTIBLE UNDER ANY PROVISION OF THE ACT. IF THE SUM THAT IS TO BE PAID TO THE NON-RESIDENT IS CHARGEABLE TO TAX TAX IS REQUIRED TO BE DEDUCTED. 34 ITA 663/03 IF THE ABOVE ANALYSIS BY THE SUPREME COURT IS PROPE RLY CONSTRUED AND UNDERSTOOD IT WOULD MEAN THAT THE PE RSON MAKING PAYMENT TO THE NON-RESIDENT WOULD BE LIABLE TO DEDUCT TAX IF THE PAYMENT SO MADE IS CHARGEABLE TO TAX UNDER THE ACT. IMPLIEDLY IF THE PAYMENT IS NOT CH ARGEABLE TO TAX UNDER THE ACT THE PAYER WOULD NOT BE LIABLE TO DEDUCT TAX AT SOURCE. THE CHARGEABILITY TO TAX MENTIONED IN THE ABOVE PROVISION IS DIRECTLY LINKED WITH SEC.4 OF TH E ACT WHICH IS THE MAIN CHARGING SECTION. IN OTHER WORDS IF T HE CHARGE UNDER SEC.4 FAILS AUTOMATICALLY SEC.195 WOULD BE INAPPLICABLE. THIS IS VERY CLEAR FROM THE PROVISIO NS OF SUB- SECTION (2) OF SEC.4. IT PROVIDES THAT INCOME WHIC H IS CHARGEABLE TO INCOME-TAX UNDER SUB-SECTION (1) OF S EC.4 THE PROVISIONS OF TDS AND ADVANCE TAX SHALL APPLY. IMP LIEDLY IF THE INCOME IS NOT CHARGEABLE TO TAX PROVISIONS OF TDS AND ADVANCE TAX WILL NOT APPLY. THIS ASPECT HAS BEEN A GAIN CLARIFIED BY THE SUPREME COURT IN THE CASE OF ELI LILLY & CO. (312 ITR 225). IN THIS CASE IT WAS ARGUED THAT TD S PROVISIONS ARE INDEPENDENT OF THE CHARGING PROVISIO NS WHICH ARE APPLICABLE TO THE RECIPIENT OF INCOME WHEREAS T HE TDS PROVISIONS ARE APPLICABLE TO THE PAYER OF INCOME. I N REPLY TO THIS CONTENTION THE COURT OBSERVED AT PLACITUM 30 AS FOLLOWS: TO ANSWER THE CONTENTION HEREIN WE NEED TO EXAMINE BRIEFLY THE SCHEME OF THE 1961 ACT. SECTION 4 IS THE CHARGING SECTION. UNDER SEC.4(1) TOTAL INCOME FOR THE PREVIOUS YEAR IS CHARGEABLE TO TAX. SEC.4(2) INTER ALIA PROVIDES THAT IN RESPEC T OF INCOME CHARGEABLE UNDER SUB-SECTION (1) INCOME-TAX SHALL BE DEDUCTED AT SOURCE WHETHER IT IS SO DEDUCTIBLE UNDER ANY PROVISION OF THE 1961 ACT WHICH INTER ALIA BRINGS IN THE TDS PROVISIONS 35 ITA 663/03 CONTAINED IN CHAPTER XVII-B. IN FACT IF A PARTICUL AR INCOME FALLS OUTSIDE SEC.4(1) THEN THE TDS PROVISIONS CANNOT COME IN. (UNDERLINE BY US). FROM THE ABOVE TWO DECISIONS OF THE SUPREME COURT IT IS ABUNDANTLY CLEAR THAT SEC.195 WILL BE APPLICABLE ON LY IF THE PAYMENT MADE TO THE NON-RESIDENT IS CHARGEABLE TO T AX. LET US REVERT TO THE CASE OF TRANSMISSION CORPORATION ( SUPRA). IN THAT CASE THE ARGUMENT OF THE ASSESSEE WAS THAT SEC.195 WOULD BE APPLICABLE ONLY IF THE WHOLE OF THE PAYMEN T CONSTITUTES INCOME CHARGEABLE TO TAX. THIS ARGUMEN T OF THE ASSESSEE IS ON PAGE 591 OF 239 ITR. THE SUPREME COURT NEGATIVED THIS ARGUMENT. AT PAGE 594 OF THE REPORT THE SUPREME COURT OBSERVED THAT THE SCHEME OF TAX DEDUC TION AT SOURCE APPLIES NOT ONLY TO THE AMOUNT PAID WHICH WH OLLY BEARS INCOME CHARACTER SUCH AS SALARIES DIVIDEND S INTEREST ON SECURITIES ETC. BUT ALSO TO GROSS SUMS THE WH OLE OF WHICH MAY NOT BE INCOME OR PROFITS OF THE RECIPIENT SUCH AS PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORS AND THE PAYMENT OF INSURANCE COMMISSION. IT FURTHER OBSERV ED THAT A RECEIPT MAY CONTAIN A FRACTION OF THE SUM AS TAXA BLE INCOME BUT IN OTHER CASES SUCH AS INTEREST COMMIS SION TRANSFER OF RIGHTS OF PATENTS GOODWILL OR DRAWINGS FOR PLANT AND MACHINERY AND SUCH OTHER TRANSACTIONS IT MAY C ONTAIN A LARGE SUM AS TAXABLE INCOME UNDER THE PROVISIONS OF THE ACT. WHATEVER MAY BE THE POSITION IF THE INCOME IS FROM PROFITS AND GAINS OF BUSINESS IT WOULD BE COMPUTED UNDER T HE ACT AS PROVIDED AT THE TIME OF REGULAR ASSESSMENT. THE PU RPOSE OF SUB-SECTION (1) OF SEC.195 IS TO SEE THAT THE SUM W HICH IS CHARGEABLE UNDER SEC.4 OF THE ACT FOR LEVY AND COLL ECTION OF INCOME-TAX THE PAYER SHOULD DEDUCT INCOME-TAX THER EON AT THE RATES IN FORCE IF THE AMOUNT IS TO BE PAID TO A NON- 36 ITA 663/03 RESIDENT. THUS THE REPLY OF THE SUPREME COURT HA S TO BE CONSIDERED IN THE LIGHT OF THE ASSESSEES CONTENTIO N THAT SEC.195 IS APPLICABLE ONLY WHEN WHOLE OF THE PAYMEN T IS INCOME CHARGEABLE TO TAX. ACCORDING TO OUR UNDERST ANDING WHAT THE COURT MEANT IS THAT EVEN IF A FRACTION OF INCOME IS EMBEDDED IN THE TOTAL PAYMENT SEC.195(1) WILL APPL Y AND TAX WILL HAVE TO BE DEDUCTED AT SOURCE. THIS OBSER VATION OF THE COURT IS BASED ON THE INTERPRETATION OF SUB-SEC TION (2). SUB-SECTION (2) PROVIDES THAT IF THE PAYER CONSIDE RS THAT THE WHOLE OF SUCH SUM WOULD NOT BE INCOME CHARGEABLE IN THE CASE OF THE RECIPIENT ..... THE PAYER MAY MAKE AP PLICATION FOR DEDUCTION OF TAX AT APPROPRIATE RATES. THE EXP RESSION THE WHOLE OF SUCH SUM WOULD NOT BE INCOME CHARGEAB LE IS TO BE UNDERSTOOD AS * THAT ONLY PART OF SUCH SUM HAS INCOME CHARACTER AND IT IS NOT TO BE UNDERSTOOD TO MEAN - * THAT THE ENTIRE PAYMENT IS WITHOUT INCOME CHARACT ER. IF THE PAYER FAILS TO MAKE AN APPLICATION UNDER SEC .195(2) THEN THE PAYER WILL HAVE TO DEDUCT TAX FROM THE ENT IRE PAYMENT. WE REPEAT THAT THIS RULING OF THE SUPRE ME COURT IS APPLICABLE ONLY WHERE THE ENTIRE PAYMENT BEARS I NCOME CHARACTER AND ALSO WHERE PART OF THE PAYMENT BEARS INCOME CHARACTER. TO PUT IT DIFFERENTLY IF THE PAYER HAS A BONA FIDE BELIEF THAT NO PART OF THE PAYMENT HAS INCOME CHARA CTER THEN SEC.195(1) WILL NOT APPLY BECAUSE AS WE HAVE O BSERVED EARLIER SEC.195 WILL APPLY ONLY IF THE PAYMENT IS CHARGEABLE TO INCOME-TAX EITHER WHOLLY OR PARTLY. 25. WE NOW TAKE UP THE DISCUSSION WITH REGARD TO SU B- SECTIONS (2) AND (3) OF SEC.195 TOGETHER. IN PARA 24 ABOVE ON THE BASIS OF THE JUDGMENT IN THE CASE OF TRANSMI SSION 37 ITA 663/03 CORPORATION (SUPRA) IT IS OBSERVED THAT WHERE ONLY A PART OF THE PAYMENT BEARS INCOME CHARACTER THE PAYER MAY M AKE AN APPLICATION UNDER SEC.195(2) FOR DEDUCTION OF TA X AT APPROPRIATE RATES. THIS IS THE PURPORT OF SUB-SECT ION (2). SUB-SECTION (3) IS MATERIALLY DIFFERENT FROM SUB-SE CTION (2) IN TWO WAYS. FIRSTLY UNDER SUB-SECTION (2) IT IS TH E PAYER WHO APPLIES TO THE ASSESSING OFFICER FOR DEDUCTION OF T AX AT LOWER RATES. UNDER SUB-SECTION (3) IT IS THE PAYEE WHO MAKES AN APPLICATION TO THE ASSESSING OFFICER. THE SECOND A ND THE MORE IMPORTANT DIFFERENCE BETWEEN THE TWO SUB-SECTI ONS IS THAT UNDER SUB-SECTION (2) THE PAYER CAN MAKE APPL ICATION ONLY FOR DEDUCTION OF TAX AT A LOWER RATE WHEREAS UNDER SUB- SECTION (3) THE PAYEE CAN MAKE APPLICATION TO RECE IVE THE PAYMENT WITHOUT ANY DEDUCTION OF TAX. THE QUESTIO N THAT ARISES IS THAT WHY IT IS ONLY THE PAYEE WHO CAN MAK E AN APPLICATION TO RECEIVE PAYMENT WITHOUT DEDUCTION OF TAX AND WHY NOT THE PAYER CAN MAKE AN APPLICATION TO MAKE P AYMENT WITHOUT DEDUCTION OF TAX. THE REPLY IS VERY OBVIO US THAT WHEN THE PAYER HAS A BONA FIDE BELIEF THAT NO PART OF THE PAYMENT BEARS INCOME CHARACTER SEC.195(1) ITSELF W OULD BE INAPPLICABLE AND HENCE NO QUESTION OF GOING INTO TH E PROCEDURE PRESCRIBED IN SEC.195(2) OF THE ACT. SUB -SECTION (3) IS ENACTED TO DEAL WITH A SITUATION WHERE THE P AYER WANTS TO DEDUCT TAX FROM THE PAYMENT BUT THE PAYEE BELIEV ES THAT HE IS NOT CHARGEABLE TO TAX IN RESPECT OF THAT PAYM ENT AND HENCE SUB-SECTION (3) PROVIDES AN OPPORTUNITY TO T HE PAYEE TO SEEK APPROVAL TO RECEIVE THE PAYMENT WITHOUT DED UCTION OF TAX. 26. A PERTINENT QUESTION WAS RAISED BY THE LD. D.R. AS TO WHO DECIDES WHETHER THE PAYMENT BEARS ANY INCOME CHARACTER OR NOT. IN HIS VIEW IT COULD BE EITHER THE 38 ITA 663/03 ASSESSING OFFICER OR A CHARTERED ACCOUNTANT AS PRES CRIBED BY THE BOARD BUT CERTAINLY NOT THE ASSESSEE (THE PAYE R). THE ROLE OF THE CHARTERED ACCOUNTANT COMES INTO PLAY IN THE ALTERNATIVE PROCEDURE PRESCRIBED BY THE BOARD AND T O WHICH WE SHALL ADVERT TO IT A LITTLE LATER. HOWEVER WE ARE NOT IN AGREEMENT WITH THE LD. D.R. THAT THE ASSESSEE (I.E. THE PAYER) HAS NO ROLE TO PLAY. THE INCOME-TAX ACT IS ENACTED TO LEVY TAXES ON INCOME EARNED BY A PERSON. IT IS THE STATUTORY OBLIGATION OF THE PERSON EARNING INCOME TO PREPARE HIS TAX RETURN DETERMINE HIS TAX LIABILITY PAY THE SAME A ND FURNISH THE RETURN. HE ALSO PAYS TAX IN ADVANCE DURING THE FINANCIAL YEAR AS HE EARNS INCOME. ALL THESE OBLIGATIONS ARE ON THE PERSON EARNING THE INCOME AND HE IS TO FULFILL THES E OBLIGATIONS ACCORDING TO HIS UNDERSTANDING OF THE V ARIOUS PROVISIONS OF THE ACT. THE QUESTION IS IF HE IS E XPECTED TO KNOW WHAT INCOME IS TAXABLE OR NOT TAXABLE IN HIS O WN CASE WHY CANT HE DECIDE IN RESPECT OF THE PAYMENT HE IS MAKING TO NON-RESIDENT. IT IS TO BE APPRECIATED THAT THE PAYER HAS NOT TO DETERMINE THE TAX LIABILITY OF THE TOTAL INC OME OF THE PAYEE. HE HAS TO CONSIDER THE CHARGEABILITY ONLY I N RESPECT OF THE PAYMENT HE IS MAKING TO THE PAYEE. FURTHER SUB- SECTION (2) STATES WHERE THE PERSON RESPONSIBLE F OR PAYING (EMPHASIS SUPPLIED) ANY SUCH SUM CHARGEABLE UNDER T HIS ACT TO A NON-RESIDENT CONSIDERS (EMPHASIS SUPPLIED) THAT THE WHOLE OF SUCH SUM WOULD NOT BE INCOME CHARGEABLE IN THE CASE OF THE RECIPIENT ... (EMPHASIS SUPPLIED). CONSIDER THE WORDS WHICH ARE UNDERLINED BY US. THEY CLEARLY IND ICATE THAT IT IS THE PAYER WHO WILL FIRST CONSIDER WHETHER THE PAYMENT OR ANY PART OF IT BEARS INCOME CHARACTER. THEREFORE IN OUR VIEW IT IS THE PAYER WHO IS THE FIRST PERSON TO DE CIDE WHETHER THE PAYMENT HE IS MAKING BEARS ANY INCOME CHARACTER OR 39 ITA 663/03 NOT. NOW WE CAN VISUALISE VARIOUS SITUATIONS THAT CAN ARISE FOR THE APPLICABILITY OF SEC.195: (A) IF THE BONA FIDE BELIEF IS THAT NO PART OF THE PAYMENT HAS ANY PORTION CHARGEABLE TO TAX SEC.195 WOULD BE TOT ALLY INAPPLICABLE. (B) IF THE PAYER BELIEVES THAT WHOLE OF THE PAYMENT IS INCOME CHARGEABLE TO TAX HE WILL BE LIABLE TO DEDUCT TAX UNDER SEC.195(1) OF THE ACT. (C) IF HE BELIEVES THAT ONLY A PART OF THE PAYMENT IS CHARGEABLE TO TAX HE CAN APPLY UNDER SEC.195(2) F OR DEDUCTION AT APPROPRIATE RATES. (D) IF THE PAYER BELIEVES THAT A PART OF THE PAYMEN T IS INCOME CHARGEABLE TO TAX AND DOES NOT MAKE AN APPLICATION UNDER SEC.195(2) HE WILL HAVE TO DEDUCT TAX FROM THE ENT IRE PAYMENT. (E) IF THE PAYER BELIEVES THAT THE ENTIRE PAYMENT O R A PART OF IT IS INCOME CHARGEABLE TO TAX AND FAILS TO DEDUCT TAX AT SOURCE HE WILL FACE ALL THE CONSEQUENCES UNDER THE ACT. (F) IF THE PAYER BELIEVES THAT HE HAS TO DEDUCT TAX AND EXPRESSES THIS DUTY OF HIS TO THE PAYEE IT IS FOR THE PAYEE THEN TO APPLY UNDER SEC.195(3) TO RECEIVE THE PAYME NT WITHOUT ANY DEDUCTION AT SOURCE. (G) IF THE PAYEE FAILS TO OBTAIN CERTIFICATE UNDER SEC.195(3) THE PAYER BASED ON HIS BELIEF WILL CERTAINLY WITHH OLD THE TAX. THUS IN OUR OPINION THESE ARE THE VARIOUS SITUATI ONS WHICH ONE CAN VISUALISE FOR THE APPLICATION OF THE ENTIRE PROVISION OF SEC.195. THE ABOVE DISCUSSION GOES TO SHOW THAT I N CASE OF A BONA FIDE BELIEF BY THE PAYER THAT NO PART OF THE PAYMENT BEARS INCOME CHARACTER IT IS NOT MANDATORY FOR HIM TO UNDERGO THE PROCEDURE OF SEC.195(2) BEFORE MAKING A NY PAYMENT TO A NON-RESIDENT. 40 ITA 663/03 27. HAVING VISUALISED THE VARIOUS SITUATIONS LET U S CONSIDER THE FALLOUT OF EACH SITUATION AND HOW THE INTERESTS OF BOTH THE TAX PAYER AS WELL AS THE TAX COLLECTOR ARE SAFE -GUARDED UNDER THE ACT. (A) IF THE BONA FIDE BELIEF OF THE PAYER IS THAT NO PART OF THE PAYMENT HAS ANY PORTION CHARGEABLE TO TAX HE WILL NOT ENTER INTO ANY PROCEDURE UNDER SEC.195. HOWEVER IF THE DEPARTMENT IS OF THE VIEW THAT THE PAYER OUGHT TO H AVE DEDUCTED TAX AT SOURCE IT WILL HAVE RECOURSE UNDER SEC.201 OF THE ACT. THUS HERE THE INTEREST OF THE REVENUE IS PROTECTED. IN THE PROCEEDINGS UNDER SEC.201 THE A SSESSING OFFICER WILL DETERMINE THE PORTION CHARGEABLE TO TA X ACCORDING TO THE PROVISIONS OF THE ACT AND DETERMINE THE TAX PAYABLE BY THE PAYER. THE ASSESSING OFFICER IS BOUND TO DETER MINE THE INCOME CHARGEABLE TO TAX IN ACCORDANCE WITH THE PRO VISIONS OF THE ACT FOR TWO REASONS. FIRSTLY BECAUSE IT IS THE MANDATE OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) AS OBSERVED AT PAGE 595 OF 239 ITR. SECONDLY THE DELHI HIGH COURT HAS HELD IN THE CASE OF D.D.A. VS. ITO (230 ITR 9) THAT AN ORDER PASSED UND ER SEC.201(1) IS AN ASSESSMENT ORDER AND THE SAID DECI SION HAS BEEN AFFIRMED BY THE SUPREME COURT IN 252 ITR 772. IN ANY CASE THE LIABILITY OF THE PAYER CANNOT EXCEED THAT OF THE PAYEE. AND IF THE PAYER IS DISSATISFIED WITH THE O RDER UNDER SEC.201 HE WILL HAVE RECOURSE TO APPEAL AGAINST TH E SAID ORDER. THUS INTERESTS OF BOTH THE PARTIES ARE PRO TECTED. (B) IF THE PAYER BELIEVES THAT WHOLE OF THE PAYMENT IS CHARGEABLE TO TAX AND IF HE DEDUCTS AND PAYS THE TA X NO PROBLEM ARISES. (C) IF THE PAYER BELIEVES THAT ONLY A PART OF THE PAYMENT IS CHARGEABLE TO TAX HE CAN APPLY UNDER SEC.195(2) FO R 41 ITA 663/03 DEDUCTION AT APPROPRIATE RATES AND ACT ACCORDINGLY. NO INTEREST IS JEOPARDISED. (D) IF THE PAYER BELIEVES THAT A PART OF THE PAYME NT IS INCOME CHARGEABLE TO TAX AND DOES NOT MAKE AN APPL ICATION UNDER SEC.195(2) HE WILL HAVE TO DEDUCT TAX FROM T HE ENTIRE PAYMENT. THIS IS THE MANDATE OF THE JUDGMENT IN TH E CASE OF TRANSMISSION CORPORATION (SUPRA) AND THE RELEVANT OBSERVATION IS ON PAGE 595 OF THE REPORT. THUS TH E INTEREST OF THE REVENUE STANDS PROTECTED. (E) IF THE PAYER BELIEVES THAT THE ENTIRE PAYMENT O R A PART OF IT IS INCOME CHARGEABLE TO TAX AND FAILS TO DEDUCT TAX AT SOURCE HE WILL FACE ALL THE CONSEQUENCES UNDER THE ACT. THE CONSEQUENCES CAN BE THE RAISING OF DEMAND UNDER SEC .201 DISALLOWANCE UNDER SEC.40(A)(I) PENALTY PROSECUTI ON ETC. THE INTEREST OF THE REVENUE STANDS PROTECTED. (F) IF THE PAYEE WANTS TO RECEIVE THE PAYMENT WITHO UT DEDUCTION OF TAX HE CAN APPLY FOR A CERTIFICATE TO THAT EFFECT UNDER SEC.195(3) AND IF HE GETS THE CERTIFICATE NO ONE IS ADVERSELY AFFECTED. (G) IF THE PAYEE FAILS TO GET THE CERTIFICATE HE W ILL HAVE TO RECEIVE PAYMENT NET OF TAX. NO INTEREST IS JEOPARD ISED. THUS IN ALL THE POSSIBLE SITUATIONS DESCRIBED ABOV E THE INTERESTS OF ALL THE PARTIES ARE PROTECTED. FURTHE R ONE CANNOT LOSE SIGHT OF ONE UNDERLYING PRINCIPLE IN THE ABOVE PROCESSES THAT THE ENTIRE EXERCISE IS TENTATIVE AS HAS BEEN H ELD IN THE CASE OF TRANSMISSION CORPORATION (SUPRA). FROM THE ABOVE DISCUSSION ONE IMPORTANT POINT WE ARE TRYING TO DR IVE HOME IS THAT IF THE PAYER IS UNDER A BONA FIDE BELIEF TH AT NO PART OF THE PAYMENT IS CHARGEABLE TO TAX HE WILL HAVE THE RIGHT TO DEFEND THAT BELIEF IN THE PROCEEDINGS UNDER SEC.201 OF THE ACT. NUMBER OF SUCH PROCEEDINGS HAVE TAKEN PLACE A ND HAVE 42 ITA 663/03 BEEN ADJUDICATED UPON BY VARIOUS HIGH COURTS AS WEL L AS BY THE SUPREME COURT. TO REPEAT THE PAYER IS AN ASSE SSEE UNDER THE ACT AND THE ORDER UNDER SEC.201 IS AN ASS ESSMENT ORDER. THEREFORE THE PAYER HAS THE RIGHT TO GET H IS LIABILITY DETERMINED AS PER THE PROVISIONS OF THE ACT DESPITE THE ENTIRE EXERCISE BEING TENTATIVE IN NATURE. THE ULTIMATE R ESULT WOULD DEPEND ON WHAT IS DETERMINED IN THE ASSESSMENT OF T HE RECIPIENT. THE ULTIMATE RESULT IN THE CASE OF THE RECIPIENT WILL DETERMINE WHETHER THE PAYER CAN BE TREATED AS AN AS SESSEE IN DEFAULT OR NOT. YET THE ENTIRE TENTATIVE EXERC ISE DESCRIBED ABOVE MAY HAVE TO BE UNDERGONE. THIS HAS BEEN HELD IN A RECENT DECISION (SO FAR UNREPORTED) OF THE DELHI HI GH COURT IN THE CASE OF VAN OORD ACZ INDIA (P) LTD. (ITA NO.439 OF 2008) DECIDED ON 15.3.2010. 28. WE NOW COME TO THE ALTERNATIVE PROCEDURE PRESCR IBED BY THE BOARD. LET US FIRST CONSIDER THE ORIGIN OF THE ALTERNATIVE PROCEDURE. THIS PROCEDURE WAS FIRST AN NOUNCED BY THE BOARD BY ITS CIRCULAR NO.759 DATED 18.11.199 7. FIRST TWO PARAGRAPHS OF THE SAID CIRCULAR ARE RELEVANT AN D WE REPRODUCE THE SAME BELOW : 1. SECTION 195 OF THE INCOME-TAX ACT 1961 PROVIDES THAT ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT ANY SUM CHARGEABLE UNDER THE ACT 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 CHEQUE OR DRAFT OR ANY OTHER MODE WHICHEVER IS EARLIER DEDUCT INCOME-TAX THEREON AT THE RATES IN FORCE. (UNDERLINE BY US). 43 ITA 663/03 2. THE RESERVE BANK OF INDIA HAVE PROVIDED IN THEIR OFFICE MANUAL THAT NO REMITTANCE SHALL BE ALLOWED UNLESS A NO OBJECTION CERTIFICATE HAS BEEN OBTAINED FROM THE INCOME-TAX DEPARTMENT. IT HAS SINCE BEEN DECIDED THAT HENCEFORTH REMITTANCES MAY BE ALLOWED BY THE RESERVE BANK OF INDIA WITHOUT INSISTING UPON A NO OBJECTION CERTIFICATE FROM THE INCOME-TAX DEPARTMENT AND ON THE PERSON MAKING THE REMITTANCE FURNISHING AN UNDERTAKING (IN DUPLICATE) ADDRESSED TO THE ASSESSING OFFICER ACCOMPANIED BY A CERTIFICATE FROM AN ACCOUNTANT (OTHER THAN AN EMPLOYEE) AS DEFINED IN THE EXPLANATION BELOW SECTION 288 OF THE INCOME-TAX ACT 1961 IN THE FORM ANNEXED TO THIS CIRCULAR. THE PERSON MAKING THE REMITTANCE SHALL SUBMIT THE UNDERTAKING ALONG WITH THE SAID CERTIFICATE OF THE ACCOUNTANT TO THE RESERVE BANK OF INDIA WHO IN TURN SHALL FORWARD A COPY THEREOF TO THE ASSESSING OFFICER. (UNDERLINE BY US). TWO IMPORTANT ASPECTS ARE NOTEWORTHY IN THE ABOVE C IRCULAR. FIRSTLY IN THE FIRST PARAGRAPH THE BOARD CONFIRMS THAT THE PAYER HAS TO DEDUCT TAX AT SOURCE ONLY WHEN HE IS P AYING ANY SUM CHARGEABLE UNDER THE ACT. SECONDLY IT WAS THE OFFICE MANUAL OF RBI WHICH COMPELLED THE PAYER TO OBTAIN A NO OBJECTION CERTIFICATE FROM THE DEPARTMENT. THE BOA RD MUST HAVE APPRECIATED THE DIFFICULTY FACED BY THE REMITT ERS THAT EVEN WHERE THE SUMS PAID TO THE NON-RESIDENT WERE N OT CHARGEABLE UNDER THE ACT THE RBI MANUAL COMPELLED THE REMITTER TO OBTAIN THE NO OBJECTION CERTIFICATE. T O MITIGATE THIS HARDSHIP THE BOARD EVOLVED THE PROCEDURE OF F ILING AN UNDERTAKING BY THE REMITTER AND A CERTIFICATE OBTAI NED FROM A 44 ITA 663/03 CHARTERED ACCOUNTANT. CONSIDERING THE CIRCUMSTANCE S IN THE BACKGROUND OF WHICH THE PROCEDURE WAS EVOLVED IT I S CLEAR INDICATION THAT AS PER BOARDS INTERPRETATION ALSO THE PAYER NEED NOT ENTER INTO THE PROCEDURE OF SEC.195 IF NO PART OF THE PAYMENT WAS CHARGEABLE TO TAX. AGAIN IT NEEDS TO BE APPRECIATED THAT THE PROCEDURE PRESCRIBED IS ONLY T O COMPLY WITH THE PROVISIONS OF THE RBI MANUAL AND NOT THAT OF THE STATUTE BECAUSE STATUTORY COMPLIANCE WOULD BE NECES SARY ONLY WHEN THE ENTIRE PAYMENT OR A PART OF IT IS CHA RGEABLE TO TAX UNDER THE ACT. THEREFORE THERE IS NO GAINSAYI NG THAT THE PAYER OUGHT TO UNDERGO THE PROCEDURE OF SEC.195 IRR ESPECTIVE OF THE FACT WHETHER THE PAYMENT IS CHARGEABLE TO TA X OR NOT. THE FACT THAT THE PROCEDURE OF OBTAINING C.A. CERTI FICATE IS ALTERNATIVE TO THE PROCEDURE UNDER SEC.195(2) IS CL EAR FROM WHAT IS STATED IN PARAGRAPH 4 OF CIRCULAR 767 DATED 22.5.1998 WHICH IS REPRODUCED BELOW : 4. IT IS ALSO CLARIFIED THAT CIRCULAR NO.759 WILL COVER THOSE REMITTANCES FOR WHICH THE RESERVE BANK OF INDIA HAS PRESCRIBED THE PRODUCTION OF A NO OBJECTION CERTIFICATE FROM THE INCOME-TAX AUTHORITIES UNDER ITS EXCHANGE CONTROL MANUAL. FURTHER IF AN ORDER UNDER SECTION 195(2) HAS BEEN OBTAINED BY A PERSON RESPONSIBLE FOR REDUCING TAX THE NEW PROCEDURE OF FILING AN UNDERTAKING ALONG WITH A CERTIFICATE PRESCRIBED IN CIRCULAR NO.759 WOULD NOT BE APPLICABLE. 29. THE UNDERTAKING TO BE FURNISHED BY THE PAYER AN D THE FORMAT OF THE C.A. CERTIFICATE WERE AMENDED BY THE BOARD BY ITS CIRCULAR NO.10/2002 DATED 9.10.2002. CONSIDERI NG THE AMENDMENTS MADE IT IS INTERESTING TO NOTE THAT IT COVERS ANY 45 ITA 663/03 TYPE OF PAYMENT VIZ. BE IT PURELY CAPITAL OR REV ENUE IN NATURE BUT EXEMPT EITHER UNDER THE ACT OR THE RELEV ANT DTAA OR PAYMENTS BEARING PURE INCOME CHARACTER. SO FAR AS THE UNDERTAKING BY THE ASSESSEE IS CONCERNED EXCEPT FO R SOME MORE DETAILS THE SUBSTANTIAL REQUIREMENT REMAINS T HE SAME AS IT WAS IN THE EARLIER UNDERTAKING. HOWEVER THE CERTIFICATE TO BE GIVEN BY THE C.A. HAS BEEN MADE MORE ELABORAT E. IT IS ELABORATE ALMOST TO THE EXTENT OF DETERMINING WHETH ER THE SUM PAID IS CHARGEABLE TO TAX OR NOT. IT COVERS RE MITTANCES FOR ROYALTIES FEES FOR TECHNICAL SERVICES ETC. IT ALSO COVERS REMITTANCE FOR SUPPLY OF ARTICLES OR THINGS COMPUT ER SOFTWARE AND SO ON. IT ALSO NECESSITATES AN ENQUIRY WHETHE R THE BENEFICIARY OF THE REMITTANCE HAS A PERMANENT ESTAB LISHMENT (PE) IN INDIA OR NOT AND THE REMITTANCE ATTRIBUTABL E TO SUCH PE. COLUMN NO.8 IN THE CERTIFICATE IS WITH REGARD TO BUSINESS INCOME AND ASKS A QUESTION AMONGST OTHERS WHETHER IT IS LIABLE TO TAX IN INDIA OR NOT AND IF NOT THE REAS ONS THEREOF. FINALLY COLUMN NO.9 REQUIRES THE C.A. TO STATE THE REASONS FOR NON-DEDUCTION OF TAX AT SOURCE IF NO TAX IS DED UCTED. THE NEW FORMAT OF THE C.A. CERTIFICATE CLEARLY ESTABLIS HES THE LEGAL POSITION OF SEC.195 THAT THE PAYER NEED NOT U NDERGO THE PROCEDURE OF SEC.195 AT ALL IF HE IS OF THE BONA FI DE BELIEF THAT NO PART OF THE PAYMENT IS CHARGEABLE TO TAX IN INDI A. IF AT ALL THE PAYER BELIEVES THAT THE ENTIRE PAYMENT IS CHARG EABLE TO TAX HE HAS TO DEDUCT TAX AT SOURCE UNDER SEC.195(1 ) OF THE ACT. IF HE IS OF THE BONA FIDE BELIEF THAT ONLY PA RT OF THE PAYMENT IS CHARGEABLE TO TAX HE MAY APPLY FOR DEDU CTION AT APPROPRIATE RATES UNDER SEC.195(2) OF THE ACT. WE JUST MENTIONED ABOVE THAT THE PAYER NEED NOT UNDERGO THE PROCEDURE OF SEC.195 AT ALL IF HE IS OF THE BONA FI DE BELIEF THAT NO PART OF THE PAYMENT IS CHARGEABLE TO TAX. IN TH IS SITUATION THE PAYER HAS THE OPTION TO FURNISH THE UNDERTAKING 46 ITA 663/03 AND THE C.A. CERTIFICATE. HE MAY ALSO FURNISH THES E DOCUMENTS IN CASE THE TAX IS DEDUCTED AT LOWER RATE S. HOWEVER WE MAY CLARIFY THAT IN OUR CONSIDERED VIEW IF THE PAYER HAS A BONA FIDE BELIEF THAT NO PART OF THE PA YMENT IS CHARGEABLE UNDER THE ACT - (A) HE MAY NOT UNDERGO THE PROCEDURE UNDER SEC.195 AT ALL AND (B) HE MAY NOT FURNISH THE C.A. CERTIFICATE ALSO EX CEPT FOR COMPLYING WITH THE RBI MANUAL FOR THE PURPOSE OF MA KING REMITTANCE. THIS IS SO BECAUSE AS MENTIONED EARLIER THE UNDER TAKING AND THE C.A. CERTIFICATE ARE NOT THE CONDITIONS OF THE STATUTE BUT ARE ONLY FOR THE PURPOSE OF COMPLYING WITH THE RBI MANUAL. IT MAY BE NOTED THAT EVEN IN THE ABSENCE OF AN UNDE RTAKING BY THE PAYER THE DEPARTMENT WILL HAVE THE POWER UN DER THE ACT TO PROCEED AGAINST THE PAYER IF LATER IT IS FOU ND THAT THE PAYMENT MADE WAS CHARGEABLE TO TAX. THE PAYER IN T HAT EVENT WILL FACE ALL THE CONSEQUENCES UNDER THE ACT DEPENDING ON THE FACT WHETHER ENTIRE PAYMENT WAS CHARGEABLE O R ONLY A PART OF IT WAS CHARGEABLE. 30. FROM THE DETAILS TO BE FURNISHED IN THE C.A. CE RTIFICATE IT IS EVIDENT THAT THE PAYER THROUGH HIS CHARTERED ACCOUNTANT WOULD BE ALMOST DETERMINING WHETHER THE PAYMENT IS CHARGEABLE TO TAX OR NOT. SINCE THE UND ERTAKING IS TO BE FURNISHED TO THE ASSESSING OFFICER HAVING JURISDICTION OVER THE REMITTER HE TOO WOULD BE MAKING ALMOST AN ASSESSMENT ABOUT THE CHARGEABILITY OF THE PAYMENT M ADE BY THE PAYER. OF COURSE THIS ENTIRE EXERCISE BOTH B Y THE PAYER AS WELL AS BY THE ASSESSING OFFICER WOULD BE TENTAT IVE IN NATURE. HOWEVER IF THE ASSESSING OFFICER COMES TO THE 47 ITA 663/03 CONCLUSION THAT THE PAYMENT OR A PART OF IT IS CHAR GEABLE TO TAX IT WILL CULMINATE INTO AN ORDER UNDER SEC.201 OF THE ACT. IT IS NOTEWORTHY THAT BECAUSE OF THE EXERCISE THAT PRECEDES THE MAKING OF THE ORDER UNDER SEC.201 OF THE ACT T HE SUPREME COURT HAS HELD IT TO BE AN ASSESSMENT ORDER . AND SINCE QUITE AN INTENSE EXERCISE PRECEDES THE ORDER UNDER SEC.201 THE PAYER HAS EVERY REASON TO BE AGGRIEVED IF THE ORDER IS ADVERSE TO HIM AND HENCE THE SAME IS APPEA LABLE UNDER SEC.246A OF THE ACT. WE MAY REPEAT THAT WHAT EVER MAY BE THE FINAL OUTCOME OF THE PROCEEDINGS UNDER S EC.201 THE ULTIMATE LIABILITY OF THE ASSESSEE INCLUDING TH E CONSEQUENCES PROVIDED UNDER SEC.40(A)(I) WOULD DEPE ND ON THE ASSESSMENT IN THE CASE OF THE PAYEE. THIS IS T HE RATIO LAID DOWN BY THE DELHI HIGH COURT IN VAN OORD ACZ I NDIA (P) LTD. REFERRED TO BY US EARLIER IN PARAGRAPH 27. TH IS IS SO FAR AS THE ALTERNATIVE PROCEDURE IS CONCERNED. 31. WE NOW REFER TO CERTAIN JUDICIAL PRONOUNCEMENTS CITED AT THE BAR. THOUGH SCORES OF DECISIONS HAVE BEEN C ITED BY THE APPELLANT AND THE INTERVENERS WE SHALL BE REFE RRING ONLY TO A FEW OF THEM. IN THE CASE OF VIJAY SHIP BREAK ING CORPORATION VS. CIT (314 ITR 309) THE QUESTION BEF ORE THE SUPREME COURT WAS WHETHER USANCE INTEREST PARTAKES THE CHARACTER OF PURCHASE PRICE AND THEREFORE TDS IS NO T DEDUCTIBLE. OF COURSE WHEN THE SUPREME COURT DEL IVERED ITS JUDGMENT THE ACT HAD BEEN AMENDED BY ADDING EXPLANATION 2 TO SEC.10(15)(IV)(C) EXEMPTING THE SA ID INCOME FROM INDIAN TAXATION. NONETHELESS THE COUR T DID OBSERVE THAT SINCE TAX WAS NOT ASSESSABLE IN INDIA THERE WAS NO QUESTION OF TDS BEING DEDUCTED BY THE ASSESSEE. IT HAS BEEN ARGUED BY THE DEPARTMENT THAT SINCE THE TDS PROVISIONS ARE TENTATIVE IN NATURE AND HENCE NOT P REJUDICIAL 48 ITA 663/03 TO THE INTERESTS OF THE PAYER IT IS MANDATORY FOR THE LATTER TO UNDERTAKE THE EXERCISE UNDER SEC.195 OF THE ACT. I N THIS CONNECTION THE SUPREME COURT HAS HELD IN THE CASE OF BHAWANI COTTON MILLS LTD. VS. STATE OF PUNJAB (AIR 1967 SC 1616) THAT IF A PERSON IS NOT LIABLE FOR PAYMENT OF TAX AT ALL AT ANY TIME THE COLLECTION OF TAX FROM HIM WITH A POSSIBLE CONTINGENCY OF REFUND AT A LATER STAGE WILL NOT MA KE THE ORIGINAL LEVY VALID; BECAUSE IF PARTICULAR SALE OR PURCHASE ARE EXEMPT FROM TAXATION ALTOGETHER THEY CAN NEVER BE TAKEN INTO ACCOUNT AT ANY STAGE FOR THE PURPOSE OF CALC ULATING OR ARRIVING AT THE TAXABLE TURNOVER AND FOR LEVYING TA X. IN THE CASE OF CIT VS. MANAGER STATE BANK OF INDIA (13 DT R [RAJ] 294) THE RAJASTHAN HIGH COURT HELD THAT WHEN INTER EST INCOME RECEIVED BY THE DEPOSITORS UNDER TDR/STDR AR E NOT SUBJECT TO TAX AS PER SEC.10(15)(IV)(FA) THE QUEST ION OF DEDUCTION OF TAX AT SOURCE DOES NOT ARISE. BOMBAY HIGH COURT HAS HELD IN THE CASE OF CIT VS. COOPER ENGINE ERING LTD. (68 ITR 457) THAT UNLESS ANY PAYMENT OF INTERE ST IS SUCH THAT THAT INTEREST IS CHARGEABLE UNDER THE ACT THE LIABILITY UPON THE PERSON RESPONSIBLE FOR PAYING IT TO DEDUCT THE TAX AT SOURCE IS NOT THERE. IN THE CASE OF CIT VS. WESMAN ENGINEERING CO. PVT. LTD. (188 ITR 327) IT WAS ARG UED ON BEHALF OF THE DEPARTMENT THAT UNDER SEC.248 A PERS ON COULD DENY HIS LIABILITY TO MAKE DEDUCTION OF TAX AT SOUR CE BUT THERE WAS NO POWER TO DETERMINE THE QUANTUM AND TO SAY AS TO WHAT EXTENT THE SAID REMITTANCE WILL BE TAXED. THE SUPREME COURT NEGATIVED THIS ARGUMENT AND HELD THAT ONCE AN APPEAL HAS BEEN PREFERRED TO THE AAC ON THE MATT ER OF LIABILITY OF THE COMPANY TO DEDUCT TAXES THE AAC I S WELL WITHIN HIS COMPETENCE TO PASS AN ORDER ON THE QUANT UM ALSO. THIS JUDGMENT TAKES CARE OF THE ARGUMENT OF THE DEP ARTMENT 49 ITA 663/03 MADE BEFORE US ALSO THAT THE PAYER CANNOT CHALLENGE ON MERITS THE ORDER UNDER SEC.201 OF THE ACT. 32. THE DEPARTMENT HAS RELIED MAINLY ON THE JUDGMEN T IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) AND OF THE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRO NICS (SUPRA). THE FORMER HAS BEEN DEALT WITH BY US ELAB ORATELY IN THE EARLIER PART OF THE ORDER. SO FAR AS SAMSUNG E LECTRONICS IS CONCERNED THERE ARE OTHER JUDGMENTS OF THE SAME HIGH COURT TO THE CONTRARY. IN THE CASE OF JINDAL THERM AL POWER CO. LTD. VS. DCIT (225 CTR 220) THE KARNATAKA HIGH COURT AFTER REFERRING TO THE JUDGMENT IN THE CASE OF TRAN SMISSION CORPORATION (SUPRA) STATED THAT THE DECISION DOES N OT LAY DOWN THAT THE PERSON WHO IS OBLIGED TO EFFECT TDS U NDER SEC.195 HAS NO RIGHT TO QUESTION THE ASSESSMENT OF TAX LIABILITY. THE CONJOINT READING OF SECTIONS 195 2 01 READ WITH SEC.246(1)(I) AND 248 MAKES IT CLEAR THAT JINDAL AS A PAYER HAS EVERY RIGHT TO QUESTION THE TAX LIABILITY OF IT S PAYEE TO AVOID THE VICARIOUS CONSEQUENCES. THEREFORE THE C ONTENTION THAT JINDAL HAS NO RIGHT OF APPEAL IS TO BE REJECTE D. IN THE CASE OF CIT VS. INFOSYS TECHNOLOGIES LTD. (293 ITR 146) THE KARNATAKA HIGH COURT HELD THAT THE STOCK OPTION DID NOT AMOUNT TO PERQUISITE AND DID NOT COME UNDER SALARY AND HENCE THE ORDER UNDER SEC.201(1) WAS NOT VALID. IN THE CASE OF ACIT VS. MOTOR INDUSTRIES CO. (249 ITR 141) THE KARNATAKA HIGH COURT HELD THAT THE ASSESSEE WAS NOT OBLIGED TO DEDUCT TAX AT SOURCE IN RESPECT OF THE AMOUNTS C REDITED TO THE SUSPENSE ACCOUNT IN ITS BOOKS OF ACCOUNT AS AT THAT POINT OF TIME THE COLLABORATION AGREEMENT WAS NOT IN FORC E. 33. ONLY TWO DECISIONS OF THE JURISDICTIONAL HIGH C OURT HAVE BEEN CITED BEFORE US. ONE IS IN THE CASE OF CIT VS . INDIA PISTONS LTD. (282 ITR 632). IN THAT CASE THE ASSE SSING 50 ITA 663/03 OFFICER HAD DISALLOWED INTEREST PAID ON FOREIGN BIL LS UNDER SEC.40(A)(I) ON THE GROUND THAT NO TDS WAS DEDUCTE D. THE HIGH COURT GAVE A FINDING THAT SINCE THE AMOUNT WAS NOT A LOAN AND THE AMOUNT OF INTEREST PAID WAS NOT INTERE ST ON LOAN DEDUCTION OF TAX AT SOURCE IS NOT ATTRACTED. THE SECOND DECISION IS IN THE CASE OF AREVA T & D INDIA LTD. V S. ITO (299 ITR 76). THIS MATTER AROSE FROM THE ORDER OF THE T RIBUNAL IN ITA NO.408/MDS/04 DATED 15.5.2007. IN THIS DECISI ON THE TRIBUNAL HELD THAT IT IS NOT OPEN FOR A PERSON WHIL E MAKING PAYMENTS TO A NON-RESIDENT TO TAKE UNILATERAL DECIS ION THAT THE PAYMENTS MADE BY HIM ARE THE SUM NOT CHARGEABL E TO TAX. IT ALSO OBSERVED THAT IT WAS SINE QUA NON TO HAVE THE CONCURRENCE OF THE ASSESSING OFFICER AS PROVIDED IN SEC.195(2) OF THE ACT. ON THE SUBMISSION OF THE AS SESSEE THE HIGH COURT OBSERVED THAT THOUGH THE TERMS OF CO NTRACT BETWEEN THE ASSESSEE AND THE NON-RESIDENT PAYEE WER E PLACED ON RECORD TRIBUNAL FAILED TO CONSIDER THE S AME AND ACCORDINGLY REMANDED THE MATTER TO THE TRIBUNAL FOR FRESH DECISION. THUS IT CAN BE SEEN THAT THERE IS NO DI RECT DECISION OF THE JURISDICTIONAL HIGH COURT ON THE ISSUE WHICH IS BEFORE THE SPECIAL BENCH IN THIS CASE. THE SCENE THEREFO RE BEFORE US IS THAT THERE ARE CERTAIN SUPREME COURT JUDGMENT S ON THE ISSUE AND QUITE A NUMBER OF NON-JURISDICTIONAL HIGH COURT DECISIONS. THE UNEQUIVOCAL VIEW OF THE SUPREME COU RT IN ALL ITS JUDGMENTS IS THAT SEC.4 CANNOT BE DELINKED FROM SEC.195 AND THAT THE LATTER PROVISION WILL APPLY ONLY IF TH E PAYMENT MADE TO THE NON-RESIDENT BEARS INCOME CHARACTER EI THER WHOLLY OR IN PART. THIS IS ALSO THE VIEW OF SEVERA L HIGH COURTS INCLUDING THAT OF THE KARNATAKA HIGH COURT IN ITS D ECISIONS PRIOR TO THE JUDGMENT IN THE CASE OF SAMSUNG ELECTR ONICS (SUPRA). THE PREDICAMENT BEFORE US THEREFORE IS SIMILAR TO THE ONE FACED BY THE SPECIAL BENCH (DEL) IN THE CAS E OF 51 ITA 663/03 LALSONS ENTERPRISES VS. DCIT (89 ITD 25). THE SPEC IAL BENCH HAS PROVIDED EXCELLENT GUIDANCE AS TO HOW A LOWER T RIBUNAL SHOULD DEAL WITH SUCH A SITUATION. WE CANNOT RESIS T THE TEMPTATION TO REPRODUCE THOSE WORDS OF WISDOM CONTA INED IN PARAGRAPH 14 OF THE ORDER. THEY ARE AS FOLLOWS : THE GENERAL ARGUMENT (RAISED BY ALL THE LEARNED COUNSEL AND LEARNED REPRESENTATIVES FOR THE ASSESSEES AND INTERVENERS) THAT THERE IS NO DIRECT JUDGMENT OF THE DELHI HIGH COURT ON THE ISSUE (IN FACT ON ALL THE THREE ISSUES BEFORE US) WHICH IS BINDING ON THE SPECIAL BENCH SITTING AT DELHI AND HENCE WE ARE FREE TO TAKE A VIEW DIFFERENT FROM THE VIEW TAKEN BY OTHER HIGH COURTS PUTS US IN CONSIDERABLE PREDICAMENT AS IT CANNOT BE POSTULATED AT ALL THAT A LOWER COURT OR TRIBUNAL CAN TAKE A VIEW INCONSISTENT WITH OR UNGUIDED BY A JUDGMENT OF A SUPERIOR COURT OR TRIBUNAL ALBEIT OF A DIFFERENT STATE IN THE ABSENTE OF ANY JUDGMENT OF THE JURISDICTIONAL HIGH COURT ON THE POINT. THE GOLDEN RULE OF INTERPRETATION OF TAXING STATUTES THAT WHERE TWO REASONABLE VIEWS ARE POSSIBLE THE VIEW IN FAVOUR OF THE TAXPAYER MUST BE ADOPTED IS A SIMPLE RULE WHICH COULD BE FOLLOWED BY A DIVISION BENCH OF THE TRIBUNAL WHEN CONFRONTED WITH JUDGMENTS OF HIGH COURTS OTHER THAN THOSE OF THE JURISDICTIONAL HIGH COURT BUT THAT RULE MAY NOT ALWAYS WORK EFFECTIVELY WHEN A SPECIAL BENCH IS CONSTITUTED TO DECIDE THE ISSUE FOR IF THE 52 ITA 663/03 SPECIAL BENCH IS MERELY TO ADOPT THE RULE THE SAME CAN BE DONE WITH EQUAL EASE BY A DIVISION BENCH ALSO AND A REFERENCE TO A SPECIAL BENCH CAN TURN INTO AN ACADEMIC EXERCISE. THEREFORE THERE IS A DUTY CAST ON THE SPECIAL BENCH TO EXAMINE THE ISSUE IN THE LIGHT OF THE VARIOUS VIEWS EXPRESSED BY THE HIGH COURTS OF OTHER STATES AND TAKE GUIDANCE FROM THEM WITH UTMOST RESPECT AND HUMILITY. BUT EVEN SO SUCH AN EXAMINATION CAN COVER ONLY A LIMITED SPHERE FOR AS ALREADY POINTED OUT NO LOWER TRIBUNAL CAN AFFORD TO TAKE THE WEIGHT OF THE JUDGMENTS OF HIGH COURTS THOUGH OF DIFFERENT STATES LIGHTLY AND PROCEED TO CONSIDER THE ENTIRE ISSUE AFRESH AS IF FOR THE FIRST TIME IN A SPIRIT OF JUDICIAL ADVENTURISM. PERFORCE THE ENQUIRY INTO THE PROBLEM WILL HAVE TO BE CIRCUMSCRIBED BY THE PARAMETERS OF JUDICIAL DECORUM DISCIPLINE AND PROPRIETY. BUT THE PROBLEM GETS COMPOUNDED BECAUSE ANY ATTEMPT AT A SOLUTION TO THE QUESTIONS POSED BEFORE THE SPECIAL BENCH WHICH ARE CONCLUDED ONE WAY OR THE OTHER BY JUDGMENTS OF HIGH COURTS OF OTHER STATES (STATES OTHER THAN THE STATE WHERE THE SPECIAL BENCH IS SITTING) WOULD NECESSARILY INVOLVE THE MAKING OF A CONSCIOUS CHOICE TO FOLLOW ONE VIEW OR THE OTHER WHICH IN TURN INVOLVES THE GIVING OF REASONS FOR THE CHOICE. THE SPECIAL BENCH IS THUS PLACED IN A SOMEWHAT TRICKY POSITION WHERE IT MUST ACT 53 ITA 663/03 WITH GREAT CIRCUMSPECTION AND RESPONSIBILITY. THE REASONS GIVEN FOR MAKING THE CHOICE AND THE LANGUAGE USED SHOULD NOT BE ADVENTURISTIC OR ATTEMPT TO CROSS THE FRONTIERS THAT ARE NEVER TO BE CROSSED. THE SPECIAL BENCH HAS TO GUARD AGAINST ANY SUCH TENDENCY. HOWEVER HAVING BEEN CONSTITUTED IT HAS TO DECIDE THE ISSUE TAKING GUIDANCE FROM THE JUDGMENTS AND GIVING COGENT AND ACCEPTABLE REASONS TEMPERED WITH JUDICIAL DIGNITY DISCIPLINE AND DECORUM AND WITHOUT CROSSING THE WELL-DEMARCATED FRONTIERS IF IT FEELS JUDICIALLY INCLINED TO PREFER ONE DECISION OVER THE OTHER. FOR INSTANCE IF THE PROVISIONS OF LAW CONSIDERED IN THOSE JUDGMENTS WERE DIFFERENT OR IF THERE HAS BEEN AN AMENDMENT OF THE LAW THEREAFTER OR IF THE JUDGMENT WAS RENDERED PER INCURIAM WITHOUT REFERENCE TO EARLIER JUDGMENTS OF THE SUPREME COURT OR BINDING JUDGMENTS OF THE SAME HIGH COURT OR IF THE FACTS OF THE CASE OR THE CONTEXT OR THE CONTROVERSY WERE DIFFERENT OR IF THE CORRECT LEGAL POSITION DOES NOT APPEAR TO HAVE BEEN BROUGHT TO THE NOTICE OF THE COURT-IN SUCH CASES (WHICH ARE ONLY ILLUSTRATIVE) IT IS ONLY BY EXPLAINING THE JUDGMENTS PROPERLY AND BY GIVING REASONS AS TO WHY IT PREFERS ONE JUDGMENT OVER THE OTHER THAT THE SPECIAL BENCH HAS TO COME TO ONE OR THE OTHER CONCLUSION. WE FELT THE NEED TO MAKE THESE OBSERVATIONS BECAUSE IN THIS CASE WE HAVE PREFERRED THE VIEW TAKEN BY 54 ITA 663/03 THE BOMBAY HIGH COURT IN DECIDING THE FIRST QUESTION THOUGH A CONTRARY VIEW HAS BEEN EXPRESSED BY THE KERALA HIGH COURT WHICH IS IN FAVOUR OF THE ASSESSEE AND IN DOING SO HAVE DEPARTED FROM THE RULE THAT IF THERE ARE TWO VIEWS POSSIBLE THE VIEW IN FAVOUR OF THE TAXPAYER MUST BE ADOPTED. KEEPING THE ABOVE GUIDANCE IN VIEW WE HAVE CHOSEN N OT TO FOLLOW THE DECISION IN THE CASE OF SAMSUNG ELECTRON ICS (SUPRA). FURTHER IN SUBSTANCE WE HAVE FOLLOWED THE SUPREME COURT JUDGMENTS DISCUSSED ABOVE AND ALSO THE OTHER HIGH COURT JUDGMENTS DISCUSSED EARLIER. AS MENTIONED IN THE CASE OF LALSONS (SUPRA) EVEN THE DIVISION BENCHES COUL D HAVE FOLLOWED THOSE DECISIONS. HOWEVER BEING CONSCIOUS OF THE FACT THAT THIS IS A SPECIAL BENCH WE HAVE TRIED TO EXAMINE AND EXPLAIN THE ISSUE IN THE LIGHT OF VARIOUS VIEWS EXPRESSED BY VARIOUS HIGH COURTS AND HAVE TAKEN GUIDANCE FROM THEM WITH RESPECT AND HUMILITY. IN OUR EXAMINATION OF T HE VARIOUS VIEWS WE FOUND IT NECESSARY TO EXPLAIN THE PRACTIC AL APPLICATION OF THE PRINCIPLES LAID DOWN BY THE SUPE RIOR COURTS. TWO SPECIFIC ISSUES IN OUR OPINION REQUIRED SUCH EXPLANATION. ONE ISSUE IS AS TO WHO DECIDES WHETHE R THE PAYMENT MADE TO THE NON-RESIDENT IS CHARGEABLE TO T AX OR NOT. BASED ON THE LANGUAGE USED IN SEC.195(2) (EXP LAINED BY US IN PARAGRAPH 26) AND ON THE BASIS OF THE PRIN CIPLES LAID DOWN BY THE SUPERIOR COURTS WE HAVE COME TO THE CON CLUSION THAT AT THE FIRST INSTANCE IT IS THE PAYER WHO DECI DES WHETHER THE PAYMENT HAS ANY INCOME CHARACTER OR NOT. THE S ECOND ISSUE IS WHETHER THE PAYER CAN ENTER INTO AN EXERCI SE WHICH ALMOST AMOUNTS TO DETERMINING THE TAX LIABILITY OF THE PAYEE WHICH FURTHER ENTAILS ACTION ON THE PART OF THE ASS ESSING 55 ITA 663/03 OFFICER TO ENTER INTO THE SAID EXERCISE. ON THE BA SIS OF THE ALTERNATIVE PROCEDURE (EXPLAINED BY US IN PARAGRAPH 29) AND ON THE BASIS OF VARIOUS JUDGMENTS WE HAVE COME TO THE CONCLUSION THAT THE ASSESSEE AND THE ASSESSING OFFI CER BOTH MAY ENTER INTO SUCH AN EXERCISE. 34. WHILE WE ARE ALMOST APPROACHING THE END OF THIS ORDER WE CANNOT LOSE SIGHT OF ANOTHER ORDER ON THE ISSUE BY AN EARLIER SPECIAL BENCH IN THE CASE OF MAHINDRA & MAH INDRA LTD. VS. DCIT REPORTED IN 313 ITR (AT) 263. AS A MATTER OF FACT WE HAVE LARGELY FOLLOWED THE FINDINGS GIVEN THEREIN . WE HAVE NOT IN ANY MANNER DEVIATED FROM THE PRINCIPLES LAID DOWN THEREIN. AT THE MOST AS MENTIONED EARLIER WE MAY HAVE ONLY EXPLAINED THEM AS TO HOW THE PROVISIONS WOULD OPERA TE PRACTICALLY. THE FINDINGS WHICH WE HAVE FOLLOWED A RE FIRSTLY THAT THE ORDER UNDER SEC.201(1) IS TO BE TREATED AS AN ORDER OF ASSESSMENT OR ATLEAST AKIN TO THE ASSESSMENT ORD ER. IN THE CASE OF MAHINDRA & MAHINDRA (SUPRA) THIS FINDI NG IS GIVEN AT PARAGRAPH 16.5 OF THE ORDER. AT PARAGRAPH 18.4 THE SPECIAL BENCH HAS HELD THAT IF THE AMOUNT PAID OR PAYABLE TO THE NON-RESIDENT IS NOT CHARGEABLE TO TA X UNDER THE REGULAR PROVISIONS OF THIS ACT OR SUCH AMOUNT I S NOT TAXABLE BY VIRTUE OF THE PROVISIONS OF DTAA THEN T HE PROVISIONS OF CHAPTER XVII ABOUT THE COLLECTION AND RECOVERY OF TAX ARE RULED OUT AND THE PERSON RESPONSIBLE FOR PAYING SUCH SUM CANNOT BE FASTENED WITH ANY LIABILITY FOR DEDUCTION OF TAX AT SOURCE AND CANNOT UNDER ANY CIRCUMSTANCE BE TREATED AS ASSESSEE IN DEFAULT. BASED ON THIS CONC LUSION WE HAVE HELD THAT IT IS THE PAYER WHO IS THE FIRST PER SON TO DECIDE WHETHER THE PAYMENT OR A PART OF IT IS TAXAB LE OR NOT. ALSO ON THIS BASIS WE HAVE CONCLUDED THAT IF THE P AYER HOLDS A BONA FIDE OPINION THAT NO PART OF THE PAYMENT BEA RS INCOME 56 ITA 663/03 CHARACTER HE NEED NOT ENTER INTO THE ARENA OF SEC. 195 AT ALL. A QUESTION MAY ARISE AS TO WHY THE DECISION OF THE SPECIAL BENCH IS PREFERRED OVER THE JUDGMENT OF THE KARNATA KA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS (SUPRA). THIS SITUATION HAS BEEN EXPLAINED BY THE AHMEDABAD BENCH OF THE TRIBUNAL IN A THIRD MEMBER DECISION IN THE CASE OF KANEL OIL & EXPORT INDUSTRIES LTD. (121 ITD 596). IN THAT CASE THE TRIBUNAL WAS CONFRONTED WITH A SPECIAL BENCH DECISI ON AND A DECISION OF A NON-JURISDICTIONAL HIGH COURT. THE T HIRD MEMBER OBSERVED THAT SIMPLE ANSWER WOULD BE TO FOLL OW THE JUDGMENT OF THE HIGH COURT THOUGH NOT OF THE JURIS DICTIONAL HIGH COURT ON THE GROUND THAT IT IS ABOVE THE TRIB UNAL IN THE JUDICIAL HIERARCHY. HOWEVER THE THIRD MEMBER TOOK NOTE OF TWO EXCEPTIONS TO THIS SIMPLE VIEW. ONE IS THAT WH EN THERE ARE SEVERAL DECISIONS OF NON-JURISDICTIONAL HIGH CO URTS EXPRESSING CONTRARY VIEWS IT HAS BEEN RECOGNISED T HAT THE TRIBUNAL IS FREE TO CHOOSE TO ADOPT THAT VIEW WHICH APPEALS TO IT. FOLLOWING THIS PRINCIPLE THE AHMEDABAD BENCH IN THE CASE OF CHANDULAL VENICHAND (38 ITD 138) WHICH WAS ALSO CITED BEFORE US CHOSE THE DECISION OF A PARTICULAR HIGH COURT BECAUSE IT APPEALED TO THEM THE MOST. THE SECOND E XCEPTION MENTIONED BY THE THIRD MEMBER IS WHEN A JUDGMENT IS RENDERED PER INCURIAM. IN THE PRESENT CASE AS MEN TIONED EARLIER WE DO NOT HAVE ANY DIRECT DECISION OF THE JURISDICTIONAL HIGH COURT. AMONGST THE NON-JURISDI CTIONAL HIGH COURTS WE HAVE CONTRARY DECISIONS FROM KARNAT AKA HIGH COURT ITSELF. SINCE THE DECISIONS RENDERED BY THE SAID HIGH COURT RENDERED PRIOR TO THE DECISION IN SAMSUN G ELECTRONICS (SUPRA) APPEAL TO US MORE WE HAVE TRIE D TO FOLLOW THE SAME. MOREOVER FROM THE JUDGMENT IN TH E CASE OF SAMSUNG ELECTRONICS (SUPRA) IT APPEARS THAT PERHAP S THE ALTERNATIVE PROCEDURE WAS NOT BROUGHT TO THE NOTICE OF THE 57 ITA 663/03 COURT. SINCE THE CONCLUSION IN THE CASE OF MAHINDR A & MAHINDRA (SUPRA) THAT THE PROVISIONS OF CHAPTER XVI I ARE RULED OUT IF THE PAYMENT IS NOT CHARGEABLE TO TAX IS IN CONSONANCE WITH THE ALTERNATIVE PROCEDURE WE HAVE HELD THAT THE ASSESSEE AND THE ASSESSING OFFICER MAY HAV E TO ENTER INTO THE EXERCISE OF DETERMINING THE TAX LIAB ILITY OF THE NON-RESIDENT TO A LIMITED EXTENT. WE NEED NOT REIT ERATE THAT THIS ENTIRE EXERCISE IS TENTATIVE AND THE ULTIMATE LIABILITY OF THE PAYER WILL DEPEND ON AS TO WHAT HAPPENS IN THE ASSESSMENT OF THE PAYEE. WE ALSO NEED TO STATE VER Y EMPHATICALLY THAT WHEN THE PAYER IS OF THE VIEW THA T NO PART OF THE PAYMENT BEARS INCOME CHARACTER SUCH A VIEW HAS TO BE BONA FIDE. IF THE BONA FIDES ARE DOUBTFUL THE PAYER WILL HAVE TO FACE ALL THE CONSEQUENCES UNDER THE ACT. 35. IN THE FINAL ANALYSIS OUR ANSWER TO THE QUESTI ON PLACED BEFORE US IS THAT IF THE ASSESSEE HAS NOT APPLIED T O THE ASSESSING OFFICER UNDER SEC.195(2) FOR DEDUCTION OF TAX AT A LOWER OR NIL RATE OF TAX UNDER A BONA FIDE BELIEF T HAT NO PART OF THE PAYMENT MADE TO THE NON-RESIDENT IS CHARGEAB LE TO TAX THEN HE IS NOT UNDER ANY STATUTORY OBLIGATION TO DEDUCT TAX AT SOURCE ON ANY PART OF THE PAYMENT. 36. WE MAY NOW DEAL WITH THE ISSUE ON MERITS IN THE APPEAL BEFORE US. OF COURSE THE QUESTION REFERRED TO THE SPECIAL BENCH IS WORDED IN GENERAL TERMS AND THE OR DER OF THE HONBLE PRESIDENT ALSO DOES NOT CONTAIN A SPECI FIC DIRECTION TO DISPOSE OF THE APPEAL ON MERITS. HOWE VER SUCH A SPECIFIC DIRECTION IS NOT NECESSARY PARTICULARLY WHEN THERE IS A SINGLE GROUND OF APPEAL PERTAINING TO THE QUESTIO N REFERRED TO THE SPECIAL BENCH. IN THE CASE OF NATIONAL THER MAL POWER VS. IAC (24 ITD 1)(SB) AN OBJECTION WAS RAISED BY THE LD. D.R. ABOUT THE QUESTION FRAMED FOR THE CONSIDERATIO N OF THE 58 ITA 663/03 LARGER BENCH VIZ. IT WAS DIFFERENT FROM THE ASSESS EES GROUND OF APPEAL NO.2 WHICH MERELY STATED THAT THE SUM OF RS.1 07 29 848/- WAS NOT INCOME AT ALL. HE SUBMITT ED THAT IN THAT GROUND THERE WAS NEITHER ANY REFERENCE TO T HERE BEING NO SURPLUS FUND NOR TO THE TAXABILITY OF INTEREST I NCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THE SPECIAL BENCH CONSISTING OF FIVE MEMBERS HELD THAT THE OBJECTION OF THE LD. D.R. IS BASED ON A MISUNDERSTANDING ABOUT THE SCOPE OF THE CONTROVERSY WHICH EXISTED AT THE BACK OF THE BRIEF GROUND OF APPEAL. IT FURTHER HELD AS FOLLOWS (PAGE 10 OF 24 ITD): THE QUESTION REFERRED FOR THE CONSIDERATION OF THE LARGER BENCH HIGHLIGHTS THE VARIOUS ASPECTS INCLUDING ITS FACTUAL BACKGROUND ON WHICH THE ASSESSEE BASED ITS CLAIM THAT THE SUM OF RS.1 07 29 848 WAS NOT INCOME AT ALL. THE STAND OF THE REVENUE IS ALSO REFLECTED IN THE QUESTION WHEN REFERENCE IS MADE TO THE ASSESSABILITY OF THE AFOREMENTIONED AMOUNT UNDER THE HEAD INCOME FROM OTHER SOURCES. THE QUESTION IS FRAMED IN ORDER TO ENABLE THE POSSIBLE INTERVENERS TO UNDERSTAND THE ISSUE OR THE RANGE OF CONTROVERSY GOING TO BE CONSIDERED BY THE SPECIAL BENCH SO THAT THEY COULD ASSIST THE BENCH BY PLACING THEIR VIEWS ON THE ISSUE CONCERNED. HOWEVER THE ENTIRE APPEAL IS OPEN BEFORE THE SPECIAL BENCH AND IS NOT CONFINED TO THE QUESTION FRAMED LIKE A QUESTION OF LAW FRAMED AND REFERRED TO THE HIGH COURT U/S 256 OF THE INCOME-TAX ACT 1961. WE OVERRULE THE PRELIMINARY OBJECTIONS OF THE REVENUE. (UNDERLINE BY US). 59 ITA 663/03 IN THE PRESENT CASE THE GRIEVANCE OF THE DEPARTMEN T REFLECTED IN THE GROUNDS OF APPEAL IS COVERED BY TH E QUESTION REFERRED TO THE SPECIAL BENCH. WE HAVE MENTIONED T HIS FACT IN PARAGRAPH 2 OF THIS ORDER. FURTHER SEC.255(3) ALSO PROVIDES THAT THE PRESIDENT MAY FOR THE DISPOSAL O F ANY PARTICULAR CASE CONSTITUTE A SPECIAL BENCH CONSIST ING OF THREE OR MORE MEMBERS. THEREFORE IN THE LIGHT OF THE DE CISION OF THE SPECIAL BENCH IN THE CASE OF NATIONAL THERMAL P OWER (SUPRA) AND ALSO IN THE LIGHT OF THE STATUTORY PROV ISION WE PROCEED TO DISPOSE OF THE APPEAL ON MERITS. 37. THE FACTS OF THE CASE ARE MENTIONED IN PARAGRAP HS 3 AND 4 OF THIS ORDER AND HENCE ARE NOT REPEATED. TH E AGREEMENT ENTERED INTO BY THE ASSESSEE WITH IMAX IS VERY CLEAR. THE TOTAL PURCHASE PRICE FOR THE SYSTEM AN D THE TECHNOLOGY TRANSFER FEE IS STATED TO BE US$ 23 15 0 00. IT ALSO SPECIFIES THAT OUT OF THE ABOVE SUM US$ 13 65 000 ARE FOR THE PURCHASE OF THE SYSTEM AND US$ 9 50 000 IS THE FEE FOR TRANSFER OF TECHNOLOGY. SCHEDULE C TO THE AGRE EMENT IS ALSO VERY CLEAR TO POINT OUT THAT IMAX IS TO INSTAL L THE EQUIPMENT TEST IT AND ALSO PROVIDE TRAINING FOR UP TO FOUR PROJECTIONISTS. THE ASSESSING OFFICER HAS MISTAKEN THESE SERVICES TO BE AS PAYMENT OF TECHNOLOGY TRANSFER WH EREAS THEY ARE AUXILIARY TO THE SALE OF THE EQUIPMENT. T HE DEPARTMENT HAS NOT BEEN ABLE TO SHOW THAT THESE SER VICES ARE INDEPENDENT OF THE EQUIPMENT. THE MAINTENANCE AGREEMENT WHICH PROVIDED FOR PROVISION OF VARIETY O F SERVICES AND FOR WHICH SEPARATE CONSIDERATION WAS PAYABLE IN THE COURSE OF TIME WAS DIFFERENT FROM THE MAIN PURCHASE AGREEMENT. HOWEVER THE PAYMENT OF US$ 9 02 500 IS A PART OF THE EQUIPMENT PRICE WHICH INCLUDES THE SERVICES OF INSTALLATION AND TRAINING. THEREFORE IT FOLLOWS T HAT THE SAID 60 ITA 663/03 SUM OF US$ 9 02 500 IS NOT CHARGEABLE TO TAX IN IND IA AND HENCE THE ASSESSEE WAS JUSTIFIED IN NOT DEDUCTING A NY TAX AT SOURCE. ACCORDINGLY WE UPHOLD THE ORDER OF THE CI T (A) CANCELLING THE DEMAND RAISED BY THE ASSESSING OFFIC ER UNDER SEC.201(1) AND 201(1A) OF THE ACT. 38. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS DISMISSED. 39. WE THANK THE LEARNED DEPARTMENTAL REPRESENTATIV ES AS WELL AS ALL THE LEARNED COUNSEL BOTH FOR THE ASSES SEE AND THE INTERVENERS FOR THEIR EXCELLENT ASSISTANCE TO THE B ENCH. THE ORDER WAS PRONOUNCED IN THE COURT ON 9 .4.2010. SD/- SD/- SD/- (HARI OM MARATHA) (N.BARATHVAJA SANKAR) (PRADEEP PARIKH) JUDICIAL MEMBER VICE-PRESIDENT VICE-PR ESIDENT CHENNAI DATED THE 9 TH APRIL 2010 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR