ITA No.439 of 2008 Page 1 of 25 Reportable * IN THE HIGH COURT OF DELHI AT New Delhi ITA No. 439 of 2008 Reserved on : March 04, 2010. % Pronounced on : March 15, 2010. Van Oord ACZ India (P) Ltd. . . . Appellant through : Mr. Ajay Vohra with Ms. Kavita Jha and Ms. Akansha Aggarwal, Advocates. VERSUS Commissioner of Income Tax . . . Respondent through: Ms. Sonia Mathur, Advocate. CORAM :- THE HON’BLE MR. JUSTICE A.K. SIKRI THE HON’BLE MR. JUSTICE SIDDHARTH MRIDUL 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. 1. This appeal was admitted on the following substantial questions of law: (i) Whether on the facts and in the circumstances of the case the Tribunal erred in holding that the appellant was liable to deduct tax at source under Section 195(1) of the Act in respect of the mobilization and demobilization costs reimbursed by the appellant to VOAMC? (ii) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that in terms of the provisions of Section 195 of the Act, the payer is obliged to deduct tax at source in respect of any sum paid to a ITA No.439 of 2008 Page 2 of 25 non-resident and the payee was not required to determine whether the said sum is chargeable to tax or not under the provisions of the Act? (iii) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in not adjudicating the issue regarding non-applicability of Section 40(a)(i) of the Act in view of the provisions contained in Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty relating to non-discrimination? 2. Counsel for both the parties have made oral arguments, which are supplemented by the written submissions. We have considered the oral as well as written arguments filed by them and proceed to answer to the aforementioned questions of law. However, it would first be apposite to take note of the relevant facts, sans unnecessary details. 3. The appellant/assessee is a company incorporated in India and is a wholly owned subsidiary of Van Oord ACZ Marine Contractors BV, Netherlands, (VOAMC in brief), a company incorporated in the Netherlands. The assessee is engaged in the business of dredging, contracting, reclamation and marine activities. The case relates to the Assessment Year 2003-04. During the relevant previous year, the appellant executed inter alia dredging contract at Port Mundra for Gujarat Adani Port Ltd. In terms of the completed contract method, the appellant debited to its profit and loss account, inter alia, mobilization and demobilization cost of Rs.8,92,37,645/- reimbursed to VOAMC, out of which Rs.8,65,57,909/- pertained to the aforesaid dredging contract at Port Mundra which was completed during the relevant previous year. According to the appellant, the said cost ITA No.439 of 2008 Page 3 of 25 related essentially to transportation of dredger, survey equipment and other plant and machinery from countries outside India to the site in India and re-transportation of the same on completion of the contract, including fuel cost incurred on transportation. The aforesaid services were contracted by VOAMC and were provided by various non- resident parties. The appellant reimbursed the cost relating to mobilization and demobilization incurred by VOAMC on the basis of invoices received by VOAMC from the non-resident service providers. 4. The appellant had filed an application with DCIT, Circle 2(2), International Taxation, New Delhi (DCIT) for issuing NIL tax withholding certificate in respect of reimbursement of various costs required to be made by the appellant to VOAMC, on the ground that the amount represented pure reimbursement of expenses and thus, there was no income liable to tax in India in the hands of VOAMC. The DCIT held that the reimbursement of costs to VOAMC were liable to tax in India and determined 11% of the reimbursement amount as the profit arising to VOAMC in India and directed the appellant to deduct tax at source on the above basis. The appellant, in accordance with the aforesaid order, had deducted tax at source in respect of mobilization and demobilization charges of Rs.6,985,26,456/- reimbursed to VOAMC. 5. In the return filed by the appellant, it declared loss of Rs.1,94,87,912/- after claiming certain deductions. It included the deduction for the aforesaid mobilization and demobilization cost of Rs.8,65,57,909/-. The Assessing Officer (AO) in the assessment order passed under Section 143(3) disallowed the said claim, invoking provisions of ITA No.439 of 2008 Page 4 of 25 Section 40(a)(i) on the ground that the appellant had defaulted in deducting tax at source under Section 195 of the Act, while making payment to VOAMC. Aggrieved by the order of the AO, the appellant preferred an appeal before CIT(A). The CIT(A) upheld the disallowance made by the AO. 6. Still aggrieved, the appellant approached the higher forum, i.e., Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟). The Tribunal upheld, in principle, the disallowance of expenses to VOAMC, made under Section 40(a)(i) of the Act, for alleged non- deduction of tax at source. According to the Tribunal, since payment was made to a non resident, the appellant was mandatorily liable to deduct tax at source under Section 195 of the Act. The Tribunal has further held that it was not necessary to determine whether such payment was chargeable to tax in India in the hands of the non- resident. The Tribunal in detail took note of the nature of transaction in its impugned order. It found that VOAMC was originally awarded contract by Gujarat Adani Port. Subsequently, this contract was assigned to the assessee company on 13.07.2001. The reason for awarding the aforesaid contract to the foreign company was that it suited the contract requirements, technical competence and resources to complete the project, notwithstanding this assignment to the assessee company, i.e. VOAMC, which was executing the contract. 7. The AO had recorded the following findings: (i) The foreign company is executing the contract even after assigning the same to the assessee company, since the assessee company has neither the expertise nor the ITA No.439 of 2008 Page 5 of 25 resources, technical competence, machinery and the financial worth to carry out the aforesaid assignment. (ii) The assessee company is technically and economically dependent on the holding company inasmuch as the assessee has huge loan outstanding to the holding company. (iii) Mr. A.P. Srivastava, the Principal Officer of the Indian company, Power of Attorney holder of the foreign company and is empowered to conclude contracts on behalf of the foreign company. The contract with APL was signed by him as a representative of the Van Oord ACZ. (iv) The assessee company has a very few employees, who are not at all technically competent but are support staff. The manpower for the execution of the contract has been provided by Van Oord ACB BV. Technical details and know-how are also provided by them. (v) The Tribunal thus recorded the finding of fact to the effect that the assessee company was a dependent agent Permanent Establishment of the foreign company. Therefore, the reassessment of expenses in respect of Mob cost to the above said foreign company was to be subjected to payment of tax. 8. From the reading of the orders of the Tribunal, following discussion emerges: ITA No.439 of 2008 Page 6 of 25 The Tribunal was of the opinion that for resolving the issue, it was to be determined as to whether the tax authorities below were justified in disallowing a sum of Rs.8,65,57,909/- claimed by the assessee as mobilization and demobilization cost debited by the assessee under Profit & Loss account under Section 40(a)(i) of the Act. It then took note of the fact that the said provision of Section 40(a)(i) of the Act is substituted by the Finance Act 1988 with effect from 01.04.1989, which was relevant to the Assessment Year 2003-04 and concluded that the payment made by the assessee to VOAMC in respect of mobilization and demobilization charges was covered within the provisions of Section 40 (a) (i) of the Act. This provision further provided that if tax is not deducted at source or after deduction, payment is not made to the account of Central Government prescribed under Section 40(a)(i) of the Act, no deduction at source is allowed in computation of income on account of interest, royalty, fees for technical services or other sources, which is payable in India or in India to a non-resident or to a foreign company. For this conclusion, the Tribunal referred to certain case law including the judgment of the Supreme Court in the case of Transmission Corporation of AP Ltd. & Another Vs. Commissioner of Income Tax [239 ITR 387] and extensively quoting therefrom. It, then, summed up the legal position under the provisions of Section 195 of the Act by deducing the following principles: “a) Section 195deals with the deduction of tax at source by the payer i.e. assessee if the payments are to be made to a non- resident. b) The payer/assessee is required to deduct Income tax on such payments made to non-resident at the specified rates in force. ITA No.439 of 2008 Page 7 of 25 c) If the parties feel that either the deduction of tax at source by the payer is required to be at a rate lower than the prescribed rate or no deduction is required to be made they are required to file an application before the ITO for obtaining such certificate. In case no such application is filed before Assessing Officer for obtaining such certificate or such application is rejected by Assessing Officer and direction is issued by the Assessing Officer to deduct such tax at a particular rate the payer is duty bound to deduct tax as per the directions of Assessing Officer and in case no such application for obtaining the certificate was filed before the Assessing Officer then the payer is duty bound to deduct tax as per the prescribed rates in force at the relevant time. If the payer still fails to comply with the provisions there is no escape for the payer from suffering the consequences provided under the IT Act. d) Since the deduction of tax u/s 195 on such payments to non- residents is subject to regular assessments the rights of parties are not adversely affected in any manner whatsoever and is clearly indicative of a fact that such deductions are tentative. 27. From the above discussion we can further deduce that rights and duties of the payer now clearly stand demarcated and limited to the extent as laid down by the Apex Court in their order (Supra) i.e. that the payer/assessee is duty bound to deduct tax at source for the payments made to non-residents at the appropriate rates as provided under these provisions. The payer cannot escape the liability for doing so unless a certificate from ITO is obtained for the deduction of the tax either at a rate lower than the rate as prescribed or for non- deduction of tax at source and that the duty of the payer ends here only and he is not required to examine and look into other aspects beyond this like whether the payer received the services from the non-resident to whom such payments were made or from some other person through the non-resident; whether such receipt in the hands of the recipient non-resident would be his income or part of it would be his income on which he is liable to pay tax. The payer is not expected to step into the shoes of the Assessing Officer for examining whether the receipts in the hands of the recipient is income or not whether he is liable to pay thereon or not.” xxx 33. Thus, in view of our detailed discussions and applying the ratio of the decision of the Apex Court in the case of Transmission Corporation of AP Ltd. (Supra), we conclude that it is not for the assessee/payer to decide the taxability of payments made by it in the hands of non-resident recipient as the machinery for this purpose was provided in sub- section (2) of Section 195 itself, whereby the concerned Assessing Officer could have been approached to decide this aspect. That the chargeability of income in the hands of recipient non-resident to be taxed in India is a separate issue and in the absence of any certificate obtained from the concerned Assessing Officer u/s 195(2), it was obligatory on the part of the assessee to deduct tax at source from the ITA No.439 of 2008 Page 8 of 25 payments made to the concerned non-resident. That the payer/assessee having failed to deduct such tax as required by section – 195 the payments made to the recipient non- resident were liable to be disallowed as per the specific provisions contained in Section 40(a)(i). that while deciding the issue whether for such payments made to non-resident by the payer/assessee deduction u/s 10(a)(i) could be allowed to the payer or not. We are not required to look into whether such payments are income or part of the income in the hands of recipient non-resident taxable in India and many other relevant factors relating to taxability of the payments in the hands of recipient non-resident as its income in India. That having held so the detailed arguments of both the parties on the question of the nature of the payments made by the payer to the payee non-resident and the taxability of such payment as income in the hands of recipient non-resident is thus beyond the scope of provisions of Section 40(a)(i) where we are only required to consider the deduction of such payments claimed by the payer/assessee to the non-resident in case of non-compliance of provisions of section 195 of IT Act i.e. non-deduction of tax at source for the payments made to non-resident. 33.1 Hence for the reasons stated above, we are not considering the arguments of the parties on merits regarding the nature of payments and taxability of the same in the hands of recipient non-resident company as well as the related case laws relied upon by both the parties for deciding the issue u/s 40(a)(i) as being not relevant and so we are also not referring to the same in this order.” 9. In nutshell, the view of the Tribunal, while interpreting the provisions of Section 195 of the Act, is that under this provision the assessee is under obligation to deduct the income tax at source if the payments are to be made to a non-resident. In case the assessee feels that no such deduction is required or deduction is required at a rate lower than the prescribed rate, he is under obligation to move an application before the Assessing Officer for obtaining a certificate to this effect. In case such application is rejected or the assessee does not make any such application, he is duty bound to deduct the tax as per the prescribed rates in force at the relevant time. It is not for the assessee to decide the taxability of payments made by it in the hand of the non- resident recipient and that is a separate issue and in the absence of any certificate obtained from the concerned Assessing Officer under ITA No.439 of 2008 Page 9 of 25 Section 195(2), it is obligatory on the part of the assessee to deduct tax at source from the payments made to the concerned non-resident. If this is not done, the consequence enlisted under Section 40(a)(i) of the Act shall follow. The authorities would not even be required to look into whether such payments are income or part of income in the hands of the recipient non-resident taxable in India. Thus, in the opinion of the Tribunal, the assessee would be at fault if he did not deduct the tax at source on payments made to non-resident on the dismissal of application under Section 195(2) of the Act and it was of no consequence as to whether the non-resident was liable to pay tax or not on the payments received from the assessee. On this reasoning, the Tribunal dismissed the appeal of the assessee herein. 10. The basic premise of the submissions of the learned counsel for the assessee, while challenging the aforesaid approach of the learned Tribunal, is that the Tribunal did not deal with the arguments/submissions of the appellant to the effect that since on the facts of the case, the amount reimbursed to VOAMC was not chargeable to tax in India in the hands of VOAMC, the appellant was consequently not liable to deduct tax at source under Section 195 and the disallowance under Section 40(a)(i) of the Act was, therefore, not warranted. The Tribunal also did not deal with the alternate contention of the appellant that no disallowance under Section 40(a)(i) was called for, in view of the non-discrimination provision contained in Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty. His submission was that obligation to deduct tax at source under Section 195 of the Act was predicated on the condition that tax is ITA No.439 of 2008 Page 10 of 25 payable by the non-resident on the payments received by the said non- resident and once it was established that no such tax was payable by the non-resident, the assessee could not be treated to be in breach. 11. We shall take note of the detailed submissions while discussing each of the question of law, which we are required to answer. 12. Re: Question No. 1: Explaining the scheme of tax deduction at source under the Income Tax Act, Mr. Vohra, learned counsel appearing for the appellant submitted that the primary responsibility for payment of tax is on the recipient of income. Obligation is cast under the provisions of Chapter XVII-B of the Act on the remitter/payer of income to deduct tax at source out of the payment made to the recipient. In case of any failure on the part of the remitter to deduct tax at source in accordance with the provisions of the said Chapter, the recipient of income is not absolved from the liability to pay tax on its income chargeable under the provisions of the Act. The various sections in Chapter XVII-B, viz., Sections 192 to 194LA required deduction of tax at source by the payer at the time of making payment to the recipient or at the time of credit of income, whichever is earlier. According to him, the reason for fastening the obligation to deduct tax at source out of payment to non-resident only in a situation where such payment is chargeable to tax in India, is not far to seek. The deduction of tax at source is not an idle formality. It is not the intention of the law to fasten an absolute liability on the remitter to deduct tax at source from the payment made to the non-resident, notwithstanding that the payment is not chargeable to tax in India and then subject the non-resident to the rigorous process of (a) filing return of income in India to seek refund ITA No.439 of 2008 Page 11 of 25 of tax deducted at source and (b) assessment on the basis of such return. Where the remitter/non-resident is of the opinion that some part of the income may be chargeable to tax in India, the remitter/non-resident can approach the AO in terms of Section 195/197 of the Act to determine the appropriate proportion of the income that would be subject to tax in India and the rate on which the tax needs to be deducted at source. Relying upon the observations of the Supreme Court in Transmission Corporation of A.P. Ltd. (supra) itself, he argued that it was categorically laid down by the Court that the obligation to deduct tax at source is triggered only when the payment to be made to the non-resident is chargeable to tax in India in the hands of the non-resident recipient and it was so held in the following cases as well: (i) Commissioner of Income Tax Vs. Estel Communications (P) Ltd. [217 CTR 102]; (ii) Jindal Thermal Power Company Limited (Earlier Known as Jindal Tranctebel Power Company Ltd.) Vs. Dy. Commissioner of Income Tax, (TDS) [182 Taxman 252 (Kar.)]; (iii) Commissioner of Income Tax Vs. ICL Shipping Ltd. [315 ITR 165 (Mad.)]; (iv) Knowerx Education India Pvt. Ltd., In re [301 ITR 207 (ARR)]; (v) Cushman & Wakefield (S) Pte Ltd., In re [305 ITR 208 (ARR)]; and (vi) Mahindra & Mahindra Ltd. Vs. Dy. Commissioner of Income Tax [313 ITR (AT) 263 (Mum) (SB)]. He thus submitted that as a consequence, the payment must be chargeable to tax in India in the hands of the non-resident. Therefore, before such a provision is invoked, it needs to be examined whether ITA No.439 of 2008 Page 12 of 25 the payment was chargeable to tax in India in the hands of non- resident or not. His further submission was that no mileage could be taken from the fact that order under Section 195(2) of the Act had been passed directing the appellant to deduct the tax at source out of payment made to the VOAMC and failure on the part of the assessee to fully comply with the terms of such order or that the assessee‟s appeal under Section 249 of the Act against that order had been dismissed in limini for non-payment of tax directed to be deducted at source. According to him, this was only a tentative determination directing the remitter to deduct tax in accordance with such order. This tentative determination pales into insignificance in view of the Revenue having held that VOAMC did not have a „Permanent Establishment‟ in India and was thus not liable to tax in India and refunding the tax at source on reimbursement of mobilization and demobilization charges, to the extent of Rs.6.98 Crores. He, thus, submitted that once Revenue itself had come to the conclusion that the VOAMC was not liable to tax in India, the effect of order under Section 195(2) of the Act had been washed off. 13. Learned counsel for the respondent, on the other hand, reiterated and relied upon the reasons given by the Tribunal. She further pointed out the following points during the proceedings under Section 195(2): a) The assessee was asked to produce certain documents, which were absolutely necessary to determine as to whether or not any profit element is embedded in the remittance of the expenses. The DCIT, in absence of any documents proceeded to estimate the profit element on the basis of industry trend in general at 11% of the total receipt. In this view of the matter, the ITA No.439 of 2008 Page 13 of 25 statutory obligation of the assessee with regard to deduction of tax at source was fully crystallized and, therefore, there was no justification on the part of the assessee not to deduct tax at source particularly when the order passed under Section 195(2) had attained finality. b) The assessee itself has added block expenditure in respect of payments made and holding company on sister concerns as equipment rent as disallowable under Section 40a(i), as no TDS was deducted therefrom. c) The assessee deducted tax at source in respect of payment made to Van Oord ACZ Equipments BV at 40.72% on the basis of order under Section 195(2). No details were furnished to show as to how payments against leasing of equipment were different from the payment in issue. d) Section 195 only determines the proportion of liability. It presupposes existence of liability. The assessee himself had applied for determination of extent of liability. In any case, order under Section 195(2) dated 22.11.2002 partly complied by the assessee. 14. Since both the parties heavily relied upon the judgment of the Transmission Corporation