Income Tax Appellate Tribunal - Hyderabad
Cheminor Drugs Ltd. vs Income Tax Officer on 22 December, 1999
Equivalent citations: (2001)70TTJ(HYD)936
ORDER
O.K. Narayanan, A.M. These two appeals are filed by the assessee-company. These two appeals arise out of the orders passed by the Income Tax Officer, Ward 5(6)(TDS), Hyderabad, under section 201, read with section 195 of the Income Tax Act, 1961, dated 16-3-1995. The Income Tax Officer treated the assessee-company as an assessee in default for its failure to deduct tax from the payments made to non-residents during the financial years 1992-93 and 1993-94.
2. The assessee is a public limited company having its registered office at Hyderabad. The assessee-company has been carrying on export sales to different countries including USA. In the course of its carrying on of the business, the assessee-company had made certain remittances by way of legal charges to its attorneys in USA and also to various non-residents towards commission against export sales. On perusal of the annual report and accounts of the assessee-company for the financial years 1992-93 and 1993-94, the Income Tax Officer found that the above foreign remittances were made by the assessee-company without deducting income-tax at source. On confrontation from the Income Tax Officer for non-deduction of income-tax, the assessee contended that the remittances made by the assessee were not chargeable under the Income Tax Act and, therefore, the company was not under any legal obligation to deduct income-tax as provided in section 195 of the Income Tax Act.
The Income Tax Officer field that the remittances made by the assessee-company under both the heads were chargeable to income-tax in India and, therefore, the assessee was duty-bound to deduct income-tax from the remittances made by it. Regarding the payments of commission made to various non-residents, the Income Tax Officer held that the payments are covered by section 5(2)(a). He found that the remittances towards sales commission were made to the non-residents by way of DDs and TTs. The assessee-company purchased the DDs from State Bank of India in Hyderabad and sent the DDs to the non-residents outside India through the medium of couriers. In other cases, the assessee-company remitted the money into their bank accounts in Hyderabad and telegraphic transfers were made to the branches of the bank abroad. The Income Tax Officer held that in all these cases it has to be held that the remittances were received by the non-residents in India by virtue of the deeming provisions contained in section 5(2)(a). According to the Income Tax Officer, the bank and the couriers acted as agents of the non-residents and received the remittances within India on behalf of those non-residents and, therefore, these remittances are deemed to be received in India on behalf of those non-residents. In respect of the legal fees remitted to attorneys in USA, the Income Tax Officer held that the remittances shall be deemed to be income accruing or arising in India by virtue of section 9(1)(vii)(b). According to the Income Tax Officer, the assessee has made the remittances to the attorneys in USA towards fees payable for technical services and Explanation 2 provided under that section states that "technical services" include "consultancy services" also. According to the Income Tax Officer, the services rendered by the attorneys in USA were in the nature of consultancy services and, therefore, the fees paid for those services will be deemed as income accruing or arising in India.
3. Apart from the findings on merits as discussed above, the Income Tax Officer also relied on the decision of the Calcutta High Court in the case of CIT v. Blackwood Hodge (India) (P) Ltd. (1971) 81 ITR 807 (Cal), where the court has held that the order passed under section 201 of the Income Tax Act is not an assessment order and, therefore, if the Income Tax Officer establishes prima facie that the assessee was liable to deduct tax at source and if the assessee does not deduct the tax so, he becomes an assessee in default and accordingly the Income Tax Officer would be justified in initiating proceedings under section 201 of the Income Tax Act. On the basis of a detailed order passed by the Income Tax Officer, he held that the remittances made by the assessee-company were covered by section 195 and, therefore, the company was liable to deduct tax and as tax was not deducted, the assessee was held to be an assessee in default. On the basis of the above finding, the Income Tax Officer passed orders under section 201 directing the assessee-company to pay the tax as per his orders.
4. The orders passed by the Income Tax Officer were taken in first appeal before the Commissioner (Appeals)-II, Hyderabad. The learned Commissioner (Appeals) discussed the issue at length in his order running to 12 pages and found that the Income Tax Officer was justified in passing the impugned orders under section 201 of the Income Tax Act. On going through the various case laws on the subject, the learned Commissioner (Appeals) held that the income derived by the Attorneys in USA by way of legal fees from the assessee was liable to be considered as an income accrued or arisen in India under the provisions of section 9(1)(vii)(b) and the assessee-company was liable to deduct tax at source therefrom under section 195 of the Income Tax Act at the time of remittance. Likewise, in the case of commission payments, the learned Commissioner (Appeals) held that the commission payments were received or deemed to have been received in India by virtue of the provisions of section 5(2)(a) and they were liable to tax in India and consequently the liability to deduct tax at source was equally existing by way of a statutory obligation. Therefore, he held that the Income Tax Officer was justified in treating the assessee-company as an assessee in default and thereby raising the demand as provided in section 201 of the Income Tax Act. It is against the above order of the Commissioner (Appeals) that the assessee- company has filed these two appeals before the Tribunal.
5. The issues involved in both the appeals are common and the ground are also common. Therefore, these appeals are heard together and disposed of together in this consolidated order.
6. The assessee-company has raised the following grounds in the appeals before us :
"1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in dismissing the appeal of the appellant and in upholding the order under the provisions of section 201 read with section 195 of the Income Tax Act, 1961, passed by the Income Tax Officer, Hyderabad.
2. The learned Commissioner (Appeals) erred in not appreciating the contentions urged before him and in rejecting the contentions urged before him in regard to the liability of the appellant to deduct tax : (a) with respect to the fees paid to the attorneys, admittedly for services rendered by them wholly outside India, and (b) with respect to the commission paid to the sales agents for the services rendered by them in respective countries in which they were situated.
3. The learned Commissioner (Appeals) erred in holding that in so far as the fees paid to the attorneys is concerned, the provision of section 9(1)(vii)(b) of the Income Tax Act, 1961, having regard to the nature of services rendered by the attorneys, the learned Commissioner (Appeals) ought to have held that the provisions of the said section have no application and ought to have held that no part of the fees paid to the attorneys accrued in India or can be deemed to have accrued in India, and consequently, the Commissioner (Appeals) ought to have held that there was no liability to deduct tax with respect to the said amount under the provisions of section 195 of the Act.
4. The learned Commissioner (Appeals) erred in holding that the provisions of double taxation avoidance agreement between India and United States of America did not apply to the facts of the case. In particular, the learned Commissioner (Appeals) grossly erred in holding that provisions of article 15 of the Double Taxation Avoidance Agreement was not applicable on the ground that attorneys admittedly did not perform any services in India. The Commissioner (Appeals) ought to have appreciated that the case of rendering of technical services outside India would have been worse than the case where technical services were rendered in India, and if the latter itself was exempt, then there was no ground to tax the former.
5. The learned Commissioner (Appeals) erred in holding that commission payments made to foreign concerns were to be subject to deduction of tax at source under section 195 of the Act.
6. The learned Commissioner (Appeals) erred in not following Circular No. 17 dated 17-7-1953 cited before.
7. The learned Commissioner (Appeals) erred in not applying ratio of judgment of the Supreme Court in the case of CIT v. Toshokit Ltd. (1980) 125 ITR 525 (SC). On a proper reading of the circular in the judgment of the Supreme Court, the agreement entered into between the appellant and its foreign agents, the Commissioner (Appeals) ought to have held that no part of the commission either accrued in India or deemed to have accrued in India, the agents are not liable to be taxed in India and, therefore, there is no liability to tax thereon under the provisions of the Act."
7. We heard both sides in detail. At the time of hearing, the learned Chartered Accountant appearing for the appellant requested for admission of additional evidence as submitted by him in paper-book No. 1 filed before us. When the admissibility of additional evidence was considered, the learned departmental representative strongly objected to the admission of the additional evidence and submitted that many of the papers now sought to be adduced as additional evidence were not filed before the Income Tax Officer in spite of effective opportunity given to the assessee.
8. After hearing extensive arguments from both sides on this point, we found that the entire material now produced by the appellant as additional evidence cannot be considered at the second appeal stage. On a consensus arrived at in the court, we were of the view that copies of three agreements out of ten filed by the assessee could be brought on record before the Tribunal as evidence. Those agreements relate to (i) Shri P.V. Rama Rao, (ii) M/s. Reddy-Cheminor Inc., USA, and (iii) M/s. Carlos Vallecilla, B & CIA, Columbia. The appellant has accordingly submitted a revised paper-book which is placed on record.
9. Shri Ganesan, learned Chartered Accountant appearing for the appellant, argued on the two issues involved in these appeals at length. He argued that the legal services rendered by the attorneys in USA was in the context of a specific hurdle faced by the assessee in the course of its export business and does not amount to any consultancy so as to attract the provisions of Explanation 2 under section 9(1)(vii)(b). lf at all, for argument's sake, it is deemed as consultancy services, still the fee was paid for the services utilised by the assessee for the business carried on by the assessee outside India and, therefore, it could not be treated as income deemed to accrue or arise in India. In the case of other remittances towards commission, the learned Chartered Accountant argued that as per the terms of the agreement, the commission had to be paid in US dollars in USA and, therefore, the remittances of those amounts by way of TT or DD shall be deemed to have been paid in USA itself, especially in view of the decision of the Supreme Court in the case of CIT v. Patney & Co. (1959) 36 ITR 488 (SC). He touched upon all the aspects of the issues extensively relying on a number of case laws. He relied on the decisions of the Hon'ble Supreme Court in the cases of CIT v. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SC), CIT v. Ogale Glass Works Ltd. (1954) 25 ITR 527 (SC), 114 ITR 520 (sic), . CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC), Electronics Corporation of India Ltd. v. CIT (1990) 183 ITR 43 (SC) and Barendra Prasad Ray v. Income Tax Officer (1981) 129 ITR 295 (SC). He also relied on the decisions in G.V.K. Industries Ltd. v. Income Tax Officer (1997) 228 ITR 564 (AP), 18 ITR 845 (Mad.) (sic) and Gurdas Singh v. CIT (1964) 54 ITR 259 (Punj.) and substantially on the decision of the ITAT, Hyderabad Bench, in Dr. Reddy Laboratories Ltd. v. Income Tax Officer (1996) 58 ITD 104 (Hyd-Trib).
10. Shri Rama Swami, learned Departmental Representative, on the other hand, argued that the issues have been rightly adjudicated by the lower authorities. He argued that only by virtue of some export sales it could not be held that the assessee was carrying on a business outside India so as to keep away from liability arising out of section 9. He argued that the services rendered by the attorneys in USA, as discernable from the records of the case, were in the nature of consultancy services and, therefore, the fees paid by the assessee have been rightly held by the Income Tax Officer as deemed to accrue or arise in India. In respect of payment of sales commission through bank DDs and TTs, the learned Departmental Representative heavily relied on the decision of the Hon'ble Supreme Court in' Ogale Glass Works Ltd.'s case (supra).
11. We have considered the rival submissions. The assessee-company had made foreign exchange remittances of fees to its attorneys in USA and to various other non-residents as export sales commission during the relevant financial years 1992-93 and 1993-94. Any person responsible for paying an amount to a non-resident shall, at the time of crediting 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. This is the general scheme of things provided in section 195 of the Income Tax Act, 1961. Sub-section (1) of section 195 makes it obligatory for every person in India to deduct tax at source at the rates specified in the relevant Finance Act. The provisions of section 195(1) apply where the payment is that of "any other sum chargeable under the provisions of this Act, not being salary income or interest on securities. The test for making deduction of income-tax is that the relevant payment should be chargeable under the provisions of the Income Tax Act. Where the payer considers that the whole of the sums specified in section 195(1) would not be chargeable in the hands of the recipient, he can make an application to the assessing officer to determine the appropriate portion of the sum so chargeable. Once the assessing officer determines such appropriate portion of the sums so chargeable, the deduction of income-tax at source under section 195(1) is only to be made on that portion of the sum which is to be so determined. This is provided in sub-section (2) of section 195. Likewise, sub-section (3) of section 195 enables any non-resident in receipt of such payments to make an application to the assessing officer for a certificate entitling the non-resident to receive payments specified in section 195(1) without deduction of tax at source. On satisfying on the facts and circumstances of the case, the assessing officer may authorises payment without any deduction of tax at source.
12. The above provisions contained in sub-sections (1), (2) and (3) of section 195 are closely inter-connected and are complementary to each other and, therefore, have to be read together and as a whole. The duty to deduct tax under section 195(1) is an essential liability cast by statute on a person who is making payments to non-residents. A person responsible f'or making payments to a non-resident, other than interest on securities and income chargeable under the head "salaries" has necessarily to examine the liability to deduct tax at source. He has to satisfy himself that the payments made by him are not such sums which are chargeable under the provisions of the Income Tax Act. The liability to deduct tax at source arises only in the case of such payments where those payments are in the nature of income chargeable under the Income Tax Act. The provisions of section 195(1) may create an avoidable inconvenience in such cases where the payments make by a person are not such amounts which are chargeable to income-tax. It is in order to avoid such inconvenience to a person that sub-section (2) of section 195 has been provided. Where the person making such payments to a non-resident thinks that the payments made by him to the non-resident would not be income chargeable in the case of the recipient, he can make an application to the assessing officer to determine the issue and decide whether tax is to be deducted at source or not and if it is to be deducted, to what extent. The facility of consulting the assessing officer is available not only to the payer but also to the recipient non-resident who can request for the issue of a certificate under the provisions of section 195(3). Deduction of tax at source is excluded from such payments to a non-resident, in the statute itself, like interest on securities or salary income. In all other cases, the person making the payment has a duty to deduct tax at source. For the purposes of deciding whether any payment is in the nature of income chargeable or not, law provides an opportunity to the payer to approach the assessing officer under sub-section (2) of section 195. The consultation provided under sub-section (2) of section 195 is, therefore, to be mandatorily, followed by the person making the payment to the non-resident; he is otherwise liable to deduct tax at source under the provisions of sub-section (1). It is thus clear that the person making the payments to a non-resident cannot take a unilateral decision that the payments made by him are not sums chargeable to income-tax and, therefore, he could make the payments without deduction of tax at source, without the concurrence of the assessing officer as provided in sub-section (2) of section 195.
13. We find that the provisions of section 195(2) are not provisions of convenience which the assessee may use or may not use. If a person wants to make payments to a non-resident and those payments are not explicitly, declared exempt by the provisions of the Income Tax Act, the person, making the payments has to deduct tax at source and he can free himself of the liability to deduct tax at source only if he gets the concurrence of the assessing officer under sub-section (2) of section 195. If the person making the payments has not fulfilled his obligations under the provisions of sub-sections (1), (2) or (3) of section 195 as the case may be, he becomes an assessee in default and the consequences of the provisions of section 201 will follow.
14. In the present case, the assessee has not complied with any of the provisions contained in sub-sections (1), (2) and (3) of section 195 as stated above. The assessee denied its liability and argued its case only at the stage when the assessee was proceeded against under section 201 of the Income Tax Act. If that were the proper course envisaged in law, sub-section (2) of section 195 becomes redundant and any person can adhere to or avoid the compliance of section 195(2) according to his convenience and belief. One of the cardinal principles of statutory construction is that no section or provision incorporated in a statute is redundant or irrelevant or ornamental. Every section or provision of a statute is active, relevant and essential in subserving the intention and objects of the legislation of that statute. The scheme of provisions arranged in section 195 are to be construed as a whole. If recourse to sub-section (2) is not made and that sub-section is made redundant at the choice of the person liable to deduct tax at source, then sub-section (1) of section 195 also becomes redundant and an assessee can get away without deducting tax at source. The wholeness of various sub-sections of section 195 is all the more important because the provisions relate to collection and recovery of tax arranged under Chapter VII-D of the Income Tax Act. The scheme is to deduct the tax during the financial year itself. Particularly, the intention of section 195 is to collect the tax before money is remitted to a non-resident. The collection of tax in advance is made subject to the adjustments to be made later on in the regular course of assessment. Therefore, the provisions contained in section 195 are in the nature of urgent provisions.
15. Therefore, the liability cast upon a person to deduct tax at source under section 195, is a strict liability. He has to discharge that liability by deducting tax at source under sub-section (1) of section 195. If any person wants to come out of the liability provided under section 195(1) on the ground that the payments made to the non-residents are not in the nature of sums chargeable under the provisions of the Act, then he has to make an application to the assessing officer under section 195(2); or the non-resident recipient should obtain an exemption certificate issued by the assessing officer under sub-section (3) of section 195. In other words, the liability cast under section 195(1) can be discharged other than by way of deducting tax, only by taking recourse to sub-section (2) or sub-section (3) of that section.
16. In view of the legal position as discussed above, we are in agreement with the learned Income Tax Officer that the order under section 201 of the Income Tax Act is not an assessment order and, therefore, the nature of enquiry and the nature of adjudication of the issue relating to deduction of tax at source under section 195(1) shall necessarily be summary and generally peremptory in nature. This is mainly because the Income Tax Officer is acting as a tax collector under the provisions relating to collecting tax in advance by way of TDS during the financial year itself. In the scheme of things, we have to find whether a person making payments to non-residents, other than those payments which are specifically exempted under section 195(1), is under a statutory obligation to make an application under section 195(2), if he is not proposing to deduct tax at source. On the question of deducting tax at source, the person making the payments can avoid the liability under section 195(1), if and only if recourse has been made either under sub-section (2) or under sub-section (3) of section 195. In such circumstances, the person making payments to a non-resident has to either deduct tax according to section 195(1) or go by the provisions of sub-section (2) unless the non-resident payee procures a clearance certificate from the assessing officer under sub-section (3) of section 195.
17. In the present case before us, the assessee-company has not made any application to the Income Tax Officer 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 assessing officer 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 Income Tax Officer in the course of proceedings under section 201, the assessee-company could have consolidated its position by providing appropriate evidence to the Income Tax Officer. 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 Income Tax Officer 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 Income Tax Officer would have been frustrated in proceedings further. In the course of proceedings under section 201, the Income Tax Officer 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 Income Tax Officer under section 195(2) and the assessee has not produced a certificate under the provisions of section 195(3). 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 Income Tax Officer 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.
18. As a matter of fact, all the evidences which the assessee-company is said to have in its possession to prove that the remittances made by it were not in the nature of sums chargeable to tax under the provisions of the Income Tax Act, 1961, should have been produced before the assessing officer in the context of application to be put in before the assessing officer under section 195(2). Section 195(2) provides real opportunity to the assessee to convince the assessing officer in the light of the evidences that may be available with the assessee that the payments made to the non-residents were not liable to be charged under the provisions of the Income Tax Act. In the case before us, the assessee-company has not made any attempt in this direction. At the second stage when the proceedings were initiated under section 201 also, the assessee has not produced the evidences before the assessing officer so that it could establish that it was not an assessee in default. It is the assessing officer who should necessarily be satisfied that the sums paid by the assessee-company were not liable to be taxed under the provisions of the Income Tax Act, and, therefore, the evidences should have been produced before him. It is not sufficient that the assessee makes an attempt to produce such evidences said to be in its possession at the first or second appellate stage. This is because, as we have already stated, the provisions contained in section 195 are urgent provisions specifically meant for collecting tax during the financial year itself before the remittances are made to non-residents. If the assessee does not choose to produce the evidences before the assessing officer either under section 195(2) or latest in the course of proceedings under section 201, then the only way open for the assessee is to agitate the matter in a regular proceeding before the assessing officer after filing the return of income as an agent of the non-residents as provided under section 163 of the Income Tax Act.
19. Once the assessee-company is found to be an assessee in default, the consequences as provided in section 201 shall invariably follow. Therefore, we find that the Income Tax Officer is justified in treating the assessee-company as an assessee in default under the provisions of section 201 and making the demand for appropriate tax from the assessee-company. On this short ground alone, we find that the Income Tax Officer is justified in passing the order under section 201, which is challenged in the appeals before us.
20. As we have found that the Income Tax Officer is justified in passing the order under section 201 on the short ground of non-compliance by the assessee with the provisions of section 195, we do not find it necessary to examine the various other contentions of the assessee relating to whether the payments made by the assessee were in the nature of income chargeable to tax under the Income Tax Act, 1961, or not. Therefore, discussion on those grounds and consideration of the entire case laws relied on by the assessee and the evidences sought to be placed before us also are not found necessary.
21. In the result, both the appeals are dismissed.