Income Tax Appellate Tribunal - Hyderabad
Sol Pharmaceuticals Ltd. vs Income Tax Officer on 21 November, 2001
Equivalent citations: [2002]83ITD72(HYD), (2003)79TTJ(HYD)319
ORDER
M.V.R. Prasad, A.M.
1. There is a delay of one day in filing of this appeal. The delay was because the assessee met with scooter accident during the relevant period. The assessee has filed an affidavit, dt. 23rd October, 2001, explaining the delay. The delay is condoned.
2. This appeal is directed against the order of the CIT(A)-n, Hyderabad, dt. 22nd Nov., 1995, for the asst. yr. 1994-95, confirming but for a small relief, the order under Section 201 of the IT Act, passed by the AO holding the assessee as an assessee In default for non-deduction of tax at source on certain payments made by it to its employees and to its foreign agents.
3. The assessee is a widely held pharmaceutical company, engaged in the business of manufacture and sale of bulk drugs and pharmaceutical formulations like capsules, tablets, syrups, etc. It made payment by way of various allowances to its employees as under:
1. Secretarial allowance.
2. Book allowance.
3. Taxi allowance.
4. Entertainment allowance.
5. Leave travel allowance.
6. Children educational allowance.
7. House rent allowance.
8. Medical allowance.
9. Daily allowance.
The AO observed that the assessee did not deduct tax at source as required under Section 192 of the IT Act in respect of the above allowances paid to the employees. So, he treated the assessee as an assessee in default under Section 201 of the IT Act and directed the assessee to pay, inter alia, the short deduction under the head "Salaries" of Rs. 2,47,547.
4. On appeal, the CIT(A) held that there was no short deduction in respect of the secretarial allowance. He, however, upheld the order under Section 201 passed by the AO in respect of short deduction on the other allowances mentioned hereinabove.
5. Before us, the assessee has taken the following two grounds :
"5. The learned CIT(A), on the facts and in the circumstances of the case, erred in upholding the order under Section 201 of the Act, insofar as it relates to (a) book allowance, (b) taxi allowance, (c) entertainment allowance, (d) daily allowance, (e) medical re-imbursement paid to the employees.
6. On the facts and in the circumstances of the case, CIT(A) ought to have held that all these were not liable to be taxable in the hands of the employee, and consequently the learned CIT(A) ought to have held that there was no liability to deduct tax thereon."
It is pleaded that six allowances mentioned in the above grounds are actually by way of reimbursement. The assessee has fixed ceilings in respect of various allowances and within those ceilings he made reimbursement of the expenses. In other words, if the claim of reimbursement is within the ceiling limit, it was allowed. Before us, the learned counsel for the assessee mentioned that the duty of an employer under Section 192 is only to make an honest estimate of the salaries payable to its employees and to deduct tax at source on such estimated salaries and simply because there was failure to deduct tax on such items, it cannot be held to be an assessee in default under Section 201 of the IT Act. In this context, he has relied upon the decision of the honourable High Court of Andhra Pradesh in the case of P.V. Rajgopal and Ors. v. Union of India (1998) 233 ITR 678 (AP), wherein it was held that there was no duty cast on an employer to deduct tax at source under Section 192 of the IT Act in respect of an interest subsidy allowed to its employees, as such subsidy is not part of the salary.
6. The learned Departmental Representative, on the other hand, relied on the orders of the Revenue authorities and has also mentioned that the issue is covered in favour of the Revenue by the decision of the Hyderabad Bench of the Tribunal in the case of Dr. Reddy Laboratories Ltd. v. ITO (1996) 56 TTJ (Hyd) 38 : (1996) 58 ITD 104 (Hyd). We are of the view that the assessee deserves to succeed on this issue, except in respect of the entertainment allowance. Admittedly, the entertainment allowance is exempt from tax only if it had been received by the employees from 1st April, 1955, in terms of Section 16(ii)(b) of the IT Act. Admittedly, this is not the case in respect of the employees to whom the assessee had paid the entertainment allowance in question. So, there is no reason for the assessee to have excluded the entertainment allowance from the purview of salary for the purpose of deduction of tax at source.
7. The same is not the position with regard to the other allowances paid by the assessee, which are in issue before us. The claim of the assessee is that it made the payments in question by way of reimbursement of expenses under the various allowances. It is also pleaded that, where an employee makes a declaration about expenses incurred, .an employer cannot go behind such declarations in view of the decision of the honourable Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT (1999) 236 ITR 281 (P&H).
8. In the light of the decision of the honourable Madhya Pradesh High Court in the case of Gwalior Rayon Silk Co. Ltd v. CIT (1983) 140 ITR 832 (MP), the duty of the employer to deduct tax is on the basis of an honest estimate of salaries. As per the relevant portion of the headnote of this decision, it has been held as under:
"The provisions of Section 201 of the Act are attracted in the case of an employee only when that employer does not deduct tax at source or after deducting fails to pay the tax as required by the Act. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly.
Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employer".
From the decision of the honourable High Court of Andhra Pradesh in the case of P.V. Rajagopal and Ors. v. Union of India (supra) relied on by the learned counsel for the assessee, it is evident there can be items of income under the head "Salaries" which are controversial and in respect of which it is not possible to hold an assessee-as an assessee-in-default under Section 201 of the IT Act. We are of the view that, in the present case, the assessee seems to have honestly entertained the notion that the various allowances are exempt from tax, as they were by way of reimbursement of expenses within the ceilings fixed by it. As already mentioned, the assessee cannot plead any such extenuating circumstance in respect of the entertainment allowance, as it is not exempt unless received from 1955.
9. In this view of the matter the assessee cannot be held to be in default in terms of Section 201 of the IT Act. We, accordingly, set aside the orders of the Revenue on this issue, except as already mentioned in the case of entertainment allowance. The AO may modify the order under Section 201 of the IT Act accordingly.
10. The next issue raised in this appeal is with regard to the deduction of tax at source on certain payments of commission made by the assessee to certain foreign concerns. According to the AO, the said payments of commission were subject to deduction of tax at source under Section 195 of the IT Act and as the assessee failed to deduct the tax on the said payments, it must be regarded that the assessee is in default in terms of Section 201 of the IT Act. Before us, the learned counsel for the assessee explained that the said payments were made to foreign agents for obtaining export orders. The payments were made by cheques and the cheques were delivered to the post office on its own and 'not at the instance of the agents in question. It is claimed that the said payments are exempt from tax in view of the CBDT Circular No. 786, dt. 7th February, 2000. The relevant portion of which reads as under:
"The deduction of tax at source under Section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23, dt. 23rd July, 1969, is drawn where the taxability of 'Foreign agents of Indian exporters' was considered along with certain other specific situations. It had been clarified then that where the nonresident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. The relevant sections, namely, Section 5(2) and Section 9 of the IT Act, 1961, not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under Section 195 and consequently, the expenditure on export payable to a non-resident for services rendered outside India becomes allowable expenditure."
It is pleaded that the circular issued by the Board is binding on the AO in the light of the decision of the Supreme Court in the case of UCO Bank v. CIT (1999) 237 ITR 889 (SC). It is also mentioned that the AO erroneously held that the Post Office was the agent of the foreign company and so the payments in question were received by the foreign parties in India in terms of Section 5(2)(a) of the IT Act. It is pleaded that it is only in a case where the request is made by the addressee to despatch a cheque by post office that the post office becomes the agent of the sender. If there is no such request made by the addressee, the delivery of the cheque to the post office is tantamount to its delivery to the agent of the sender only. It is pleaded that the learned CIT(A) erroneously relied upon certain decisions without noticing that in the present case no such request had been made by the assessee. It is pleaded that it is for the Revenue to establish that the receipt of the cheques was within the taxable territory of India and in this context reliance is placed upon the following decisions :
1. S. Zoraster & Co. v. CTT (1968) 68ITR 770 (Del);
2. CIT v. Bikaner Trading Co. Ltd. (1970) 78 ITR 12 (SC); and
3. Dalmia Dadri Cement Ltd. v. CTT (1974) 94 ITR 303 (Bom).
It is pleaded that the Revenue has not discharged the onus lying on it of proving that the cheques were received by the foreign parties in India.
11. The learned Departmental Representative, on the other hand, pleaded that in terms of Section 195, there is a duty cast on the assessee to deduct tax at source on the payments to the non-residents and the assessee cannot unilaterally come to the conclusion that the said payment is non-taxable. If he was of the opinion that the commission was not taxable, he could have approached the AO for a certificate under Section 195(2) for authorising him to make payments without such deduction of tax at source. As admittedly the assessee did not approach for a certificate under Section 195(2) of the IT Act, it is contended that the assessee attracted the provisions of Section 201 as an assessee in default in view of the decision of the Hyderabad Bench of the Tribunal in the case of Shriram Refrigeration Industries v. ITO [ITA No. 1721 (Hyd) of 1996], for the asst. yr. 1994-95. It is also pleaded that this view of the Tribunal is in conformity with the decision of the honourable High Court of Andhra Pradesh in the case of CTT v. Superintending Engineer, Upper Sileru (1985) 152 ITR 753 (AP). It is also mentioned that the said decision of the honourable High Court of Andhra Pradesh has been affirmed by the apex Court in the case of Transmission Corporation of A.P. Ltd and Anr. v. CIT (1999) 239 ITR 587 (SC). So, it is pleaded that the orders of the Revenue on this issue deserve to be uphed.
12. We are of the view that the assessee deserves to succeed on this issue. Admittedly, the foreign parties have not made any request to the assessee to send the cheques by post office or any other mode. At any rate, there is no such evidence that they made such request. It is also evident from the case laws cited by the learned counsel for the assessee that the onus of proving, that the receipt of the cheques was within the territories of India, is on the Revenue for the said receipt to become taxable in terms of Section 5(2)(a) of the IT Act. It is also evident that as per the Board's Circular, dt. 7th February, 2000, which we have extracted herein above, the said payments are not taxable in India, since the payments were directly made abroad and the foreign agents have rendered their services only abroad. So, the question is whether even when a certain payment is totally non-taxable, the assessee has necessarily to approach the AO for a certificate under Section 195(2) to make itself free from liability under Section 201 of the IT Act. What is to be considered is the correctness or otherwise of the proposition made by the learned Departmental Representative, that is, because there is a failure to approach the AO under Section 195(2), the assessee becomes liable under Section 201 notwithstanding the fact that the amount is non-taxable. We fail to see the logic of this proposition. If an amount admittedly is non-taxable, we do not see why an AO should be bothered for a certificate under Section 195(2) of the IT Act. If the assessee remitted a payment, which is taxable in India, without deduction of tax at source, he could always be rendered accountable under Section 201 of the IT Act. If, on the other hand, the amount is clearly non-taxable, we fail to see why the assessee should be saddled with the responsibility of approaching the AO for a certificate under Section 195(2). The case of the Revenue before us is that the stand is supported by the above decision of the Tribunal and also the superior Courts. We fail to see any support for their stand in decisions cited. Before we turn to them, we may reproduce the provisions of Section 195(1) and (2) while to the extent relevant for our purposes, read as under :
"195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the 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 of 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.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine (by general or special order), the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under Sub-section (1) only on that proportion of the sum which is so chargeable."
It is evident from the language of Section 195(2) that the said provision is attracted only in a case where "the whole of such sum would not be income chargeable in the case of the recipient". In other words, this provision is attracted only in a case where at least a portion is chargeable as income in the case of the recipient. If no portion is chargeable, we are of the view that Section 195(2) does not come into play at all.
13. Now let us turn to the decision of the 'apex Court in the case of Transmission Corpn. of A.P. Ltd. and Anr. (supra), the relevant portion of which reads as under:
"The scheme of sub-sections (1), (2) and (3) of Section 195 and Section 197 leaves no doubt that the expression 'any other sum chargeable under the provisions of this Act' would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The consideration would be--whether payment of the sum to the nonresident 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 a trade receipt. However, what is to be deducted is income-tax payable thereon at the rates in force. Under the Act, total income for the 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 provisions 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. The sum which is to be paid may be income out of different heads of income provided under Section 14 of the Act, that is to say, income from salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. The scheme of tax deduction at source applies not only to the amount paid which wholly bears 'income' character such as salaries, dividends, interest on securities, etc., but also to gross sums, the whole 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 has been contended that the sum which may be required to be paid to the non-resident may only be a trading receipt, and, may contain a fraction of the sum as taxable income. It is true that in some cases, a trading receipt may contain a fraction of the sum as taxable income, but in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions, it may contain 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 the Act as provided at the time of regular assessment. The purpose of Sub-section (1) of Section 195 is to see that the sum which is chargeable under Section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon at subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner adversely affected. Further, the rights of the payee or recipient are fully safeguarded under Sections 195(2), 195(3) and 197. The only thing which is required to be done by them is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient or for determination of the appropriate proportion of such sum so chargeable or for grant of certificate authorising the recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted, at source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source".
[Emphasis, italicised in print, supplied by us] In the light of the ratio of the decision, the provisions of Section 195(1) and (2) are attracted not only where the amount to be paid to the non-resident, wholly bears "income" character such as salaries, dividends, interest on securities, etc., but also to gross sums, the whole of which may not be the income or profits of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. It was the contention of the assessee in that case that where the whole of the amount was not taxable and only a portion of it was taxable, the provisions of Section 195 were not attracted. The Court held that, in such a situation, that is, where a portion is taxable, it is incumbent on the assessee to approach the AO under Section 195(2) for a certificate to determine the appropriate proportion of the amount on which tax is to be deducted, if the assessee does not want to deduct the tax on the entire amount. That is not the situation in the present case. In the present case, no portion of the payment made to the foreign parties are taxable in India in the hands of the recipient in the light of the Board's Circular, dt. 7th Feb., 2000, which we have extracted herein above.
14. On the other hand, it is clear to our mind that the apex Court stressed the fact that the tax is to be deducted at source under Section 195 when the amount is taxable and could be assessed to tax under the IT Act. The said decision is an authority for the proposition that when the amount is not taxable at all in India, there is no requirement of deduction of tax at source under Section 195 nor is there any requirement for approaching the AO for a certificate under s. .195(2) of the IT Act. This does not open the flood gates for tax evasion, as the accountability of the payer under Section 201 still remains. The same is the decision of the honourable High Court of Andhra Pradesh in the case of Superintending Engineer, Upper Sileru (supra). The Tribunal in its decision in the case of Shriram Refrigeration Industries (supra) made some comments which give the impression that it held that a certificate under Section 195(2) is a precondition for escaping liability from the provisions of Section 201 even when the entire amount paid is non-taxable. However, there are other remarks in the course of the order which indicate that the Tribunal has not taken this extreme decision. In this context, we may invite attention to the following observations of the Tribunal:
"In the present case before us, the assessee-company has not made any application to the ITO under Section 195(2) to determine whether the assessee was bound to deduct tax at source or not. The non-resident recipients also have not obtained a certificate of exemption from the AO under Section 195(3). In these circumstances, the assessee should have deducted tax at source before making the remittances to the non-residents as provided in Section 195(1). The assessee company had not done so. Therefore, at the outset itself, it is clear that the assessee has violated the provisions of Section 195(1) and has become an assessee-in default as provided in Section 201. When the assessee-company was heard by the ITO in the course of proceedings under Section 201, the assessee-company could have consolidated its position by providing appropriate evidence to the ITO. If it was the contention of the assessee-company that the remittances made by it to the non-residents were not incomes chargeable to Indian income-tax as far as the recipients are concerned, the assessee-company should have produced before the ITO evidence to the effect that those non-residents have already disclosed those receipts before the respective Tax authorities or those amounts were assessed in their respective countries. If this were the case, the ITO would have been frustrated in proceeding further. In the course of proceedings under Section 201, the ITO has found that the assessee-company has not deducted tax at source as provided in Section 195(1), the assessee has not made an application to the ITO under Section 195(3) and the assessee has not produced a certificate under the provisions of Section 195(1). The assessee-company has not produced any evidence either to prove that those payments were already subject-matter of tax in the respective countries of the non-residents, in order to enable the ITO to consider the case of the assessee afresh. Further, in the case of payments of sales commission, the assessee has not produced the agreements entered into with the concerned non-residents even in the course of the proceedings under Section 201."
It is evident from the above remarks that the Tribunal did not categorically hold that, under all circumstances, that is, even when the payment is totally non-taxable, a certificate under Section 195(2) is mandatory to escape liability under Section 201. However, if this decision is to be construed as holding the above mentioned extreme position, it is contradictory to the decisions of the honourable High Court of Andhra Pradesh in the case of Superintending Engineer, Upper Sileru (supra) and that of the apex Court in the case of Transmission Corpn. of A.P, Ltd. (supra). For these reasons we have to hold that there was no liability on the part of the assessee to have deducted the tax at source on the commission payments made to the foreign parties. We, accordingly, set aside the orders of the Revenue.
15. Subject to the above, the appeal of the assessee is allowed in part.