Income Tax Appellate Tribunal - Mumbai
Mangalore Refinery And Petrochemicals ... vs Dy. Director Of Income-Tax (It) on 17 January, 2007
Equivalent citations: [2008]113ITD85(MUM), (2008)114TTJ(MUM)632
ORDER
Rajpal Yadav, Judicial Member
1. The assessee and the revenue are in cross appeals against the separate orders of even date i.e. 27/2/04 passed by ld. CIT(A) on the appeals of the assessee challenging the orders passed by the A.O under Section 201 & 201(1A) of the Act. Since common issues are involved, therefore, we heard all the appeals together and deem it fit to dispose of them by this common order.
2. As far as the appeals of the revenue are concerned, the assessee being a Public Sector Undertaking, therefore, for challenging any order of ld. CIT(A) passed on the appeal of the assessee the Department is required to take permission from the Committee On Disputes as per the decision of Hon'ble Supreme Court in the case of Oil & Natural Gas Commission v. Collection of Central Excise 1992(Suppl.11) S.C.C 432. It was pointed out that assessee has obtained such permission for prosecuting its appeal before the Tribunal, however, ld. D.R expressed his inability to inform whether such permission was granted to the revenue or not. According to his information the Department has applied for the permission but he is not possessing any information whether such permission was granted or rejected by the COD. We find that number of opportunities were given to the Department for ascertaining information, however, the department failed to supply the information. Due to this reason the appeals of the assessee also could not be taken for hearing. In view of the above we deem it appropriate to dismiss the appeal of the revenue for want of COD approval subject to the conditions that in case department is able to get such approval then it will be at liberty to approach the Tribunal for revival of its appeals. On such application the appeals of the department would be revived. Hence both the appeals are dismissed.
3. Now we take up the appeals of the assessee. The grounds of appeal taken by the assessee are not in consonance with Rule- 8 of ITAT Rules, they are argumentative and descriptive in nature. The grounds are running into five pages. The assessee in all has raised 10 grounds of appeal, but we find that these grounds are alternative arguments of the assessee. The basic issue for our adjudication is whether assessee can be treated in default Under Section 201, if so interest Under Section 201(1 A) is leviable upon the assessee.
4. The brief facts of the case are that assessee M/s. Mangalore Refineries & Petrochemicals Ltd., herein after referred to as M/s. MRPL is a company registered under the Companies Act 1956. It is engaged, inter alia, in the business of refining crude oil. The company was incorporated in 1988 as India's first Joint Sector Company to carry out a grass root refinery project. A survey under Section 133A of the Income-tax Act was carried out on 28/8/02 at the premises of M/s. MRPL, Arcadia, 7th Floor, 195, NCPA Marg, Nariman Point, Mumbai. During the course of survey, the statement of Shri D.C. Jain, Tax Consultant of M/s. MRPL was recorded. During the course of survey proceedings, it was found that M/s. MRPL has made payments to M/s. Toyo Engineering Corporation, Japan for off shore designs and drawings without deduction of tax at source. From the order of the ld. DDIT passed under Section 201 and Under Section 201(1A) it emerges out that M/s. MRPL had entered into four contracts with consortium Toyo Engineering Corporation, Japan, Matsui & Co Ltd., Japan and Mitsubushi Corporation, Japan for supply of off shore designs and drawings concerning Phase- I and Phase- II for setting up an oil refinery. The ld. DDIT has noted the details of the contract and the details of payment remitted by assessee from 1993 to 1999 at pages No. 5,6 & 7 of the impugned order. It emerges out that assessee had remitted a sum of Rs. 2,86,49,23,645/- towards consideration for supply of drawings and designs. The ld. DDIT further appended the details of such payment as Annexure - C at page- 32 of the impugned order. The details of these payments depict that these were made for supply of drawings and designs contract for Phase- I & Phase II to the Toyo Engineering Corporation. Apart from these payments certain other remittance aggregating to Rs. 5,57,62,342/- have also been made to non-residents. These have also been noticed by the DDIT in Annexure - D & E at page 33 & 34. In view of this a show case notice Under Section 201 of the Income-tax Act was issued on 11/9/02 asking the assessee as to why the payments on account of off shore designs and drawings should not be taxed as royalty. It emerges out that this notice was challenged in a writ petition before the Hon'ble High Court and subsequently one more show cause notice was issued on 11/10/02 which was served on 14/10/02. Vide this show cause notice assessee was asked to submit the details of payment made to non-residents from 1993 onwards on which no TDS was deducted along with the reasons for non deduction.
5. In response to the show cause notice assessee had submitted a detailed reply on 25/11/02. In its reply the assessee has contended that DDIT, Mumbai has no jurisdiction over the assessee to pass an order under Section 201 and, therefore, he should drop the proceedings. The ld. A.O by way of a well reasoned order rejected this contention of the assessee. On appeal ld. First appellate authority again re-appreciated this controversy and upheld the finding of the A.O.
6. The assessee has raised first ground of appeal on this issue and contended that A.O was not having any jurisdiction over the assessee for passing an order under Section 201. However, at the time of hearing ld. Counsel for the assessee did not press this ground of appeal and did not address arguments on this issue, therefore, we do not wish to go in detail on this issue.
7. The next objection raised by the assessee is to the effect that it was asked to produce details of information pertaining to payment to non-residents since 1993, i.e. from the date when the assessee commenced the commercial operation till the date of notice. It was submitted that where no period of limitation is prescribed for passing an order, it is well settled and well accepted that such order must be passed within a reasonable time from the end of the relevant previous year. In support of its contention the assessee relied upon the order of ITAT passed in the case of Raymond Woollen Mills v. ITO reported in 57 ITD 536.
8. The ld. A.O rejected the contention of assessee on he ground that Section 195(1) casts a duty upon the payer of any income specified therein to a non resident to deduct there from the tax at source at the prescribed rate. Section 201 provides that if such person fails to deduct such tax he shall be deemed to be an assessee in default in respect of the deductible amount of tax. An order under Section 201 so holding the defaulting payer as liable is not an order of assessment within the meaning of Section 153 because an assessment order under the Act and liability to deduct tax are not one and the same thing The actual assessment may take place after the liability to deduct tax has arisen. The period of limitation prescribed in the Section 153 for completion of assessment does not apply to the liability under Section 195 or 201.
9. Dissatisfied with the action of A.O assessee carried the matter in appeal before ld. CIT(A) on this issue. The ld. CIT(A) partly accepted the arguments of the assessee based on the decision of ITAT. The ld. CIT(A) has observed that when the Tribunal has passed the order in the case of Raymond Woollen Mills the limitation for passing an assessment in those assessment years was four years. However, under the present provisions of the Act six years period is provided for re-opening of any assessment. On the basis of this ld. CIT(A) concluded that the DDIT has passed the order under Section 201/201A on 30/12/02. She directed the DDIT that assessee should not be held in default in respect of any remittance made by it prior to 31st March 1996.
10. The assessee in the present appeals has raised Ground No. 2 on the issue of limitation i.e. whether an order under Section 201 can be passed within a period of six years from the end of relevant P.Y as held by ld. CIT(A) or it should have been restricted to 4 years on the basis of the Tribunal's decision passed in Raymond Woolen Mills decision.
11. The ld. Counsel for the assessee while impugning the order of ld. CIT(A) contended that ITAT in the case of Raymond Woollen Mills has examined this issue from all possible angles and after a detailed discussion has held that at the most A.O can pass order under Section 201 within four years from the end of relevant P.Y. The ld. Counsel for the assessee took us through the order of the ITAT and further contended that this decision has been followed by the Tribunal in a recent order in the case of Wockhardt Life Science Ltd. v. DCIT in ITA 3625/M/2000. On the strength of these decisions he contended that assessee cannot be held to be in default in respect of payment made prior to 31/3/98.
12. On the other hand, ld. D.R while controverting the contention of assessee submitted that facts are not as simple as pointed out by the ld. Counsel for the assessee. The order of the A.O passed under Section 201 on 30/12/02 can be tested on the point of limitation on this issue from the date when it came to the notice of Department that assessee has not deducted the TDS while making the payment. He pointed out that assessee has not disclosed this fact to the Department that it was not deducting the TDS on the payments made under the contract for the second phase.. A survey under Section 133A of the Act was conducted on 28/8/02 and only on that date it came to the notice of the Department that assessee has not been deducting tax on the payments made to non residents. Within four months of this date the order Under Section 201 and 201A has been passed, therefore, it cannot be said that order is time barred. In support of this contention he relied upon the judgment of ITAT rendered in the case of Gujarat Ambuja Cement Ltd. v. DCIT 2005 (Vol.2) SOT Pg. 784. The ld. D.R in this connection further drew our attention towards the statement of Tax Consultant Shri D.C. Jain recorded during the course of survey.
13. In the re-joinder ld. Counsel for the assessee pointed out that assessee has been claiming the disputed amount as expenses in the regular return so it was brought to the notice of the Department that payments were made to the non-residents.
14. We have considered the rival contentions. On the issue of limitation for exercising the powers in passing order Under Section 201 the ITAT in the case of Raymond Woollen Mills has made extremely lucid enunciation of law, and we cannot do anything better than to extract the relevant observation of the Tribunal.
8. On consideration of the above submissions, we are inclined to accept the contentions of the assessee that the revenue authorities are bound to exercise the powers within a reasonable time as held by the Hon'ble Kerala High Court in the case of Iswara Bhat. In that case, the Hon'ble High Court considered the issue in the context of the Kerala Agricultural Income-tax Act, 1950. However, the ratio is equally applicable under the Income-tax Act. The Hon'ble Kerala High Court came to the said conclusion on the basis of the general principle of law that it is trite law that statutory powers must be exercised bona fide, reasonably, without negligence, and for the purpose for which they were conferred. In following the said principle, the Hon'ble High Court also referred to the decision of the Hon'ble Supreme Court in the case of State of Gujarat v. Patel Raghav Natha AIR 1969 SC 1297 and S.B. Gurbaksh Singh v. Union of India AIR 1976 SC 1115 : (1976) 37 STC 424 (SC), where the Supreme Court held that for the exercise of suo motu power of revision, the revisional authority should initiate proceedings within a reasonable time even in the absence of a " time-limit" prescribed by the statute. The Hon'ble Bombay High Court considered the question of" reasonable time " in the context of surtax assessment where there is no time-limit prescribed for completion of assessment in the case of Indian Hume Pipe Co. Ltd. In that case, the Hon'ble High Court held that the surtax assessment completed within less than two years cannot be said to be an unreasonable period. It was further held that what will constitute reasonable time will depend on the nature of the order and the circumstances of the case.
9. The finality of any proceedings is implicit in the scheme of the Income-tax Act. All the proceedings including assessment proceedings and penalty proceedings have a specific time for commencement and completion of the proceedings. Section 153 of the Act deals with time-limit for completion of assessment within two years from the end of the assessment year in which the income is first assessable. Section 149 of the Act provides the period within which the order can be re-opened and such period is limited to 4 years at the first instance by the Assessing Officer. Section 154 of the Act provides the period within which the order can be rectified within a limited period of 4 years by the authorities. Similarly, penalty imposable under Chapter XXI is to be initiated and completed within two years from the date of completion of the proceedings, in the course of which proceedings for the imposition of penalty have been commenced. This section was amended with effect from 1-4-1989 and the limitation period is substantially reduced. Action of Commissioner under Section 263 of the Act is to be taken within two years from the end of the financial year in which the order sought to be rectified was passed. From the above provisions, it is clear that there is a time-limit for completion of any proceedings taken under the Act.
10. In the case of tax deducted at source, it is seen that the basic and main purpose of the section is to mop up taxes before the assessment and tax deducted at source is in the nature of pre-assessment tax which should come to the treasury before the end of the previous year itself. The Act, therefore, provides for filing the return under Section 206 within one month of the end of the financial year or June in each of the years. This is to enable the Assessing Officer to monitor the payment of pre-assessment taxes before dealing with the regular assessment proceedings. In this view of the matter, it appears that the Legislature did not consider it necessary to put even time-limit for levy of interest under Section 201(1 A) of the Act, as the proceedings under Section 201 of the Act are expected to be finalised before the assessment is completed.
12. In holding that a period of 4 years constitute a reasonable time, we take into account the various periods of limitation highlighted above which ranges from 2 to 4 years except in exceptional cases. We also hold that the intention of the Parliament not to put a specific bar of limitation is not to give licence to the Assessment Officer to hold the assessee to ransom for all time to come but to ensure that all pre-assessment taxes are collected promptly and such proceedings are finalised much before taking up the regular assessment proceedings.
This order of the Tribunal was passed on 1/12/95 and still holding the field on the issue. It is followed recently in the case of Workhardt Life Science Ltd. by ITAT Mumbai. From the order of Workhardt Life Science Ltd. it reveals that ITAT Delhi has also followed the Raymond Woollen Mill order in the case of Sahara Airlines reported in 83 ITD 11 (Del). In the case of Indian Rayon in ITA No. 2479/M/00 for A.Y 1994-95 ITAT, Mumbai again followed the order of M/s. Raymond Woollen Mills and held that an order under Section 201 ought to be passed within 4 years. Thus respectfully following all these orders we hold that action of A.O treating the assessee in default for the remittance made prior to 31/3/98 is barred by limitation. Accordingly we direct the A.O not to treat the assessee in default for then payments made prior to 31/3/98. This ground is partly allowed.
15. Since payments have been made after 31/3/98 hence we have to decide the issue on merit also. The ground No. 3 in the assessee's appeal against the order passed under Section 201 is in consonance of its objection before the A.O that while remitting payment fore the first phase of contracts the assessee had obtained the No Objection Certificate from the Assessing Officer in accordance with the requirement of Section 195(2) of the Income-tax Act. The assessee has remitted the payments according to the certificate of No Objection issued by the A.O without deducting the tax at source. The ld. Counsel for the assessee took us through page 195 of the paper book, where application filed under Section 195(2) of the Act is available. On the strength of this application he pointed out that assessee had duly applied for issuance of a No Objection Certificate with regard to remittance of payment of first contract. As far as the payments made under the contract for second phase are concerned he pointed out that the nature and the scope of the contract are identical to the first contract, therefore, assessee was under a bona fide belief that it is not required to deduct tax before remitting the payment. Similarly the assessee remained under the bona fide impression that once No Objection Certificate was issued by the A.O relating to the payment made for the first contract it is not necessary to approach the A.O time and again for the similar certificate. Hence assessee should not be considered in default within the meaning of Section 201 of the Act. He further pointed out that Section 201 only talks of failure to deduct tax and if the assessee is able to demonstrate its bona fide for not deducting the tax then the assessee cannot be held in default.
16. On the other hand, ld. D.R relied upon the orders of revenue authorities below and point out that Section 201 nowhere provide that if the assessee is able to show reasonable cause for not deducting the tax then he would be absolved from holding him as in default.
17. We have duly considered the rival contentions and gone through the record carefully. Section 195 nowhere provide that any assessee would himself harbour the belief that payment made by him does not involve element of income chargeable to tax. It is the A.O only who can permit an assessee to make the payment without deducting tax under Sub-section (2) of Section 195. If discretion of the A.O is extended to the assessees as propounded by the ld. Counsel for the assessee then there would be no end. In the present case the assessee contended that it has obtained a No Objection Certificate from the A.O under Section 195(2) of the Act for remitting the payment relating to the first contract and, therefore, it believed that for making similar payment it is not necessary to approach the A.O for similar payments. If this argument is accepted then some other assessee would say that in case of "A" A.O has permitted the remittance of payment without deducting the tax his contract is also similar to that of "A", hence he is not obliged to approach the A.O. In that situation the very purpose of the section would otiose. The Act imposes the authority for permitting an assessee to remit the payment without deducting tax in the A.O and not in any other person. The powers and discretions of A.O cannot be substituted with the belief of an assessee. Therefore, on the basis of this belief we cannot hold that assessee is justified for not deducting the tax while remitting the amount to nonresident. This argument of the assessee is rejected.
18. Ground No. 4: In this ground the grievance of assessee is that ld. CIT(A) has erred in upholding the action of the DDIT of recovering the tax from the assessee without providing the information as to whether this amount has been recovered from the recipient i.e. M/s. Toyo. The ld. Counsel for the assessee contended that M/s. Toyo has been assessed to tax in India and before treating the assessee in default the A.O ought to have ascertained whether recipient has paid the tax or not because the same amount cannot be taxable in two hands. He further contended that if the assessee is acted with bona fide belief then it cannot be held in default. In support of his contention he relied upon the decision of Hon'ble M.P. High Court reported in 140 ITR 832 rendered in the case of Gwalior Rayon Silk Co. Ltd., v. CIT. On the other hand, ld. D.R relied upon the orders of the Revenue Authorities below and contended that it is for the assessee to demonstrate that tax has been paid by M/s. Toyo.
19. We have duly considered the rival contentions and gone through the record carefully. The authoritative guidelines propounded by the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT 239 ITR 587 goad us how to approach the controversies arisen under Section 195 r.w.s. 201. The Hon'ble Supreme Court has observed that the scheme of subsections (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 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 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 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. 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 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 nonresident. The said provision is for tentative deduction of income-tax thereon 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 Assessing Officer 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 the 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.
20. The ld. D.R at the time of hearing relied upon the decision of Tribunal rendered in the case of Cherninor Drugs Ltd., v. ITO reported in 76 ITD 37. On going through this decision we find that the Tribunal has made extremely lucid enunciation of law on this issue and we cannot do anything better than to extract the relevant observation of the Tribunal.
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 for 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 made 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 made 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 nonresident, 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.
Thus the arguments of ld. Counsel for the assessee are required to be examined within the authoritative proposition propounded by the Hon'ble Supreme Court. It is to be seen whether assessee has deducted the tax at the time of making of the payment. If assessee is able to demonstrate at that point of time that recipient has paid the tax on the remittance only then it could argue that assessee cannot be treated in default. It is for the assessee to demonstrate that on the remittance the tax has already been paid. It is not the duty of the A.O to ascertain these facts and then adjudicate the dispute. As far as arguments of ld. Counsel for the assessee based on the decision of Hon'ble M.P. High Court is concerned we find that in the case of Hon'ble M.P High Court the employer has deducted the tax Under Section 192 from the salary according to his honest estimate. Section 192 authorize the deductor to make a fair and honest estimate of the salary income while deducting the tax. There the argument can be raised whether the estimate is bona fide and reasonable. Because the discretion of estimating the income vest in the deductor. But in Section 195 no such discretion vest in the deductor. The ld. A.O while passing the assessment orders of the employees made certain controversial additions to their salary income. On the basis of those controversial additions the A.O conversely treated the employer as in default. In this situation the Hon'ble High Court has held that employer has acted under the bona fide belief and deducted then tax on his honest estimate. Because of certain subsequent events the employer cannot be treated in default. The facts before us are quite different. Here the assessee has not deducted the tax while making the payment for the contracts relating to second phase. Thus assessee cannot draw any benefit from this decision and it is not the duty of the A.O to ascertain whether the recipient has paid the tax or not before passing order under Section 201 r.w.s. 195. More particularly Article - 5 of the contract, between assessee M/s. Toyo postulate the mode of payment of the contract price and how to discharge the tax liability etc. It is worth to note this Clause (d) of Sub-clause (8) of Article -5..
d. Net Payment All the payments of the Contract Price may OWNER to FEC shall to be made without deduction of any taxes or duties of India, so that the Contract Price specified in Article 4 and interest on the deferred payment portion shall be the net amount receivable by FEC Thus it was the obligation of the assessee to ascertain tax liability etc. while making the payments. The assessee has not deducted the TDS, therefore, we do not find any merit in this argument of the assessee and Ground No. 4 is rejected.
21. Ground No. 5 & 6 : The grievance of the assessee in this ground is two fold. Firstly the assessee contended that it had made an application under Section 195(2) of the Act for determination of appropriate sum chargeable out of remittance to be made to M/s. Toyo towards contract for Offshore design for phase one of the project and obtained No Objection Certificate for payment without deduction of TDS. Once the A.O has granted the No Objection Certificate to the assessee it cannot be treated in default to the extent payments were made on the basis of such No Objection Certificate. In the second fold of submission assessee has contended that its case is covered under Explanation-2 to Section 9(1)(vii) of the Act. It has also been pleaded that drawings and designs were imported after getting approval from Finance Ministry for availing foreign currency loan for import of capital goods, design and drawings. Thus the payment made by the assessee are for the purchase of capital goods, they cannot be held as payment made for consultancy services.
22. The ld. Counsel for the assessee submitted that the payment made to Toyo are not chargeable to tax. It is made just for supply of equipments. The ld. Counsel for the assessee contended that the design and other information received by the assessee was not with a view to enable it to commence the manufacturing of the equipment itself with the aid of such designs and information. Rather, the limited purpose of the design and drawing is only to get the Refinery installed. Thus the payment made by the assessee was for the construction of the Refinery which include the designs and drawings. If it is considered a consolidated contract for the construction of the Refinery then exclusion provided in Explanation- 2 to Section 9(1)(vii) would come to the rescue of assessee enabling it to argue that the payments made to Toyo is not chargeable to tax, hence assessee is not supposed to deduct the TDS. In support of his contention ld. Counsel for the assessee relied upon the judgment of Hon'ble Andhra Pradesh High Court reported in 229 ITR 735, Madras High Court reported in 243 ITR 459 and ITAT Bangalore reported in 92 ITD 366.
23. On the other hand, ld. D.R while controverting the contention of ld. Counsel for the assessee took us through Article- 2 of the contract wherein scope of services by FEC is provided. On the strength of the contract he contended that the Toyo has rendered services for preparation of extended designs and drawings. M/s. Toyo was not engaged in actual construction of Refinery. It had only provided services for preparation of extended design drawings, based on basic designs and drawings provided by the assessee. Therefore, the contract exhibit the scope of work to M/s. Toyo is that of rendering services to the assessee and not that of supply of design and drawings. With regard to the decisions relied upon by the ld. Counsel for the assessee he submitted that in all these decisions the non-resident has supplied equipments along with their broader specification guiding the Indian Company for installing those equipments. The basic difference between those designs and the designs received by the assessee are that with the help of design supplied by the Toyo it has constructed the Refinery. Thus the Toyo has rendered services to the assessee and for making payment in lieu of those services assessee is bound to deduct the TDS.
24. We have duly considered the rival contentions and gone through the record carefully. The ld. CIT(A) while adjudicating this issue has taken cognizance of Article - 2 of the contract between assessee and M/s. Toyo Engineering, exhibiting the scope of FEC Works Services. We have also gone through the scope of work and services as postulated in Article - 2 of the contract. On perusal of the Article - 2 we find that the agreement are for rendering of services for preparation of extended designs and contracts. The terms of agreement provides that the services for preparation of extended design and drawings will be rendered outside India. From the documents and other terms of agreement it also appears that M/s. Toyo Engineering is not engaged in actual construction of Refinery. It has only provided services for preparation of extended designs and drawings based on basic designs and drawings provided by the assessee. Thus the different clauses of the agreement do indicate that the scope of work of Toyo Engineering is that of rendering services to the assessee and not that of supply of designs and drawings as propounded by the assessee. The ld. revenue authorities below have dealt with this issue in detail and ld. CIT(A) has rightly construed the scope of FECS work and services from the terms of the contract and rightly held that it amounts to rendering of services. The case of assessee dos not fall under the exclusion provided in Explanation - 2 to Section 9(1)(vii) of the Act, Apart from all these things as observed earlier an order passed under Section 201 r.w.s. 195 is a tentative order subject to regular assessment. The A.O has to see prima facie whether any element of income chargeable to tax under Section 4 is involved in the amounts paid to the non-resident. If that be so assessee, then deduct TDS before making the payment. Whether such receipts are actually taxable or not and to which extent element of income is involved in such payment is the issue which can be agitated in the regular assessment proceedings of the recipients. Therefore, prima facie basis ld. revenue authorities below have rightly arrived at a conclusion that element of income is involved in the remittance made to Toyo Engineering. As far as various decisions relied upon by ld. Counsel for the assessee are concerned we are of the view that it is not necessary to re-capitulate and re-cite all the decisions on this point. But suffice it to say that the core of all the decisions of the Hon'ble High Court or Tribunal is to the effect that if payment was made for purchase of some goods and along with that goods certain basic literature had come for explaining the functioning or assembling that item, then it should not be construed that some part of the payments required to be allocated towards services upon whom TDS deserves to be deducted. The facts of the assessee's case are quite different and therefore, assessee cannot draw any benefit from these decisions. In principle we do not find any merit in the contentions of ld. Counsel for the assessee. However, from the record it revealed that while making payment for the contracts relating to Phase-1 assessee has moved an application under Section 195 (2) of the Act. The ld. A.O has issued No Objection Certificate for making the remittance without deducting tax. The ld. D.R at the time of hearing pointed out that it is not an order passed under Section 195(2) of the Act, it is simply a No Objection Certificate authorizing the assessee to make the payment. It is for facilitating the assessee from rigors of RBI guidelines etc. However, we have gone through the application of the assessee available at page 195 of the paper book. It is an application moved under Section 195(2) of the Act. It is immaterial how the A.O processed this application and issued a No Objection Certificate for making the remittance without making TDS. Therefore, as far as for the payment made for Phase-1 the assessee cannot be treated in default under Section 201 of the Act because it has applied under Section 195(2) of the IT Act. before the A.O prior to remitting the payment. The ld. A.O shall re-compute the liability of the assessee and exclude all those amounts for which assessee has moved application under Section 195(2) of the Act and no No Objection Certificate was issued by the A.O. Hence ground No. 6 is partly allowed, whereas Ground No. 5 is rejected.
25. Ground No. 7: The grievance of assessee in this ground relates to grossing up the tax rate by applying provisions of Section 195A of the Act. At the time of hearing ld. Counsel for the assessee contended that is consequential in nature, hence it is rejected.
26. Ground No. 8: In this ground grievance of the assessee is that ld. CIT(A) has erred in upholding the action of DDIT of passing order under Section 201 for alleged non deduction of TDS in respect of certain miscellaneous remittance aggregating to Rs. 10,33,793/-. In Annexure - E appended with the impugned order passed under Section 201 the ld. A.O considered certain miscellaneous payment upon which no TDS was deducted by the assessee. These payments read as under:
(1) Niigata Engineering Co. Japan Rs. 4,73,962/-
(2) Niigata Engineering Co., Japal Rs. 4,06,166/-
(3) Core Laboratry Inc. Jersey Rs. 1,53,665
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Total Rs. 10.33.793
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27. At the time of hearing the Id.counsel for the assessee did not press this ground of appeal to the extent payment was made to Niigata Engineering Co. Japal. However, with regard to the payment made to Core Laboratory Inc, the ld. Counsel for the assessee submitted that Core Laboratory is a U.S. Company. The payment of fees made by the assessee is for included services, therefore, they are covered by Article 12(4) of the DTAA between U.S and India. The assessee has not made available the technical services hence the fees received by Core Laboratory in lieu of its services cannot be held that for technical services because simply a technical service is not enough, it must be made available. In this connection he relied upon the decision of ITAT rendered in the case of Mc KINSEY & CO. INC 99 ITD 549 and in the case of Raymond Woollen Mills, 86 ITD 791.
28. We have duly considered the rival contentions. The ld. revenue authorities have not examined this issue whether the services rendered by Core Laboratory are to be treated as "made available", therefore, we set aside this issue to the file of A.O for re-adjudication in the light of the decision of the Tribunal in the case of Mc KINSEY & CO. INC.
29. Ground No. 9: The last grievance of assessee is that ld. CIT(A) has erred in upholding the action of DDIT for treating the assessee in default for non deduction of TDS in respect of delayed payment charges remitted for crude oil purchase.
30. The brief facts of the case are that the ld. A.O tabulated certain payments in Annexure- F, which are delayed payment charges remitted for crude purchase to Texco International Traders Inc., U.S.A and Chevron International Sales Co., Singapore. The ld. Counsel for the assessee pointed out that in view of the specific exclusion provided under Article 11(3) of the DTAA between India & Singapore and Article 11(4) of DTAA between India and USA excluding such penalty charges from the purview of interest, the same cannot be construed as interest liable to tax in India. The ld. Counsel for the assessee while taking us through expression interest as provided in Article 11(3) of the DTAA between India and Singapore contended that interest is something different. The penalty charges for late payment shall not be regarded as interest for the purpose of this Articles. He pointed out that as far as the definition of interest provided under Section 2(28) is concerned that definition could not be applied upon the assessee in view of Sub-section (2) of Section- 90 of the Income Tax Act because the provisions of the Act shall apply to the extent they are more beneficial to the assessee. In view of the above he pointed out that the penalty charges paid by the assessee cannot be equated with interest and assessee cannot be treated in default for non deduction of TDS while making the payment of such penalty charges. On the other hand, ld. D.R relied upon the orders of revenue authorities below. He emphasized that late payment charges are nothing but the interest paid by the assessee on delay in payment of cost of crude oil.
31. We have duly considered the rival contentions and gone through the record carefully. We find that ld. first appellate authority has recorded a finding of fact that assessee failed to bring any evidence on record to prove that the payments made to the aforesaid parties are in the nature of penalty charges for delayed payment. The ld. first appellate authority further on the basis of the agreement for supply of crude oil observed that payment of interest is for delay in payment of purchase price. In this connection Clause 2(c) of Part-II of the agreement with Texco International has been referred by the ld. CIT(A). Therefore, we do not find any merit in the contention of ld. Counsel for the assessee. On facts it has been held that the delayed payment charges are nothing but in the nature of interest.
31. Apart from the above the dispute is covered against the assessee by the decision of Honble Gujarat High Court rendered in the case of CIT v. Vijay Ship Breaking as pointed out by the ld. D.R. In that case the Hon'ble High Court has examined the meaning of expression interest in the DTAA between India and Singapore. The facts of that case are that the assessee-firm was engaged in the business of ship breaking at Along Port during the previous year relevant to the assessment year 1995-96. Old and condemned ships were acquired by the assessees for demolishing purpose. The two ships which were purchased by the assessee for breaking purposes were M.V. Krasnozarodsk and M.V. Global Hope. Krasnozarodsk was purchased by the assessee from Electra Maritime (Jersey) Ltd., London, under the memorandum of agreement (MOA for short) dated March 15, 1993, for a total purchase price of the ship which was agreed at US $ 901252.98. In the MOA, credit for 180 days usance period from the date of physical delivery of the vessel at safe anchorage Alang was agreed and the rate of interest was stipulated in para. 2 thereof flat at 6 per cent. per annum. The other vessel M.V. Global Hope was purchased by the assessee from Neter Navigator, Singapore, under the MOA dated July 14, 1994, for a total purchase price which was agreed at US $ 3069416.5 calculated at the rate of US $ 166.06 per long ton. Interest was stipulated to be paid at 7.25 per cent, from the date of notice of release for 180 days of usance period worked out on the purchase price of the ship. In both the cases the amounts were to be paid by means of irrevocable 180 days usance letter of credit (L.C.).
32. During the course of scrutiny proceedings, the Assessing Officer (Assistant Commissioner of Income-tax, Central Circle-1, Rajkot) observed that, as per the terms of the MOA, the assessee was making interest payment to the nonresident parties on account of credit facility availed of by it for the purchase of the ships. Therefore, he raised queries by letter dated January 2, 1998, inquiring as to whether tax was deducted at source on such interest payments and if it was not so deducted, then calling upon them to show as to why the provision of Section 40(a)(i) of the Income-tax Act, 1961 ("the Act" for short), should not be invoked in the assessee's case and why the entire interest paid outside India should not be disallowed in the course of assessment. After considering the submissions made by the assessee and the material on record, the Assessing Officer negatived the contention of the assessee that both the principal amount of the purchase price of the ship and the interest amount paid on the usance credit constituted the purchase price of the ship. It was held that the purchase price of the ship was separately mentioned in the MOA and that the usance interest amount which was also separately mentioned was not part of the purchase price. The officer held that any other view would be illogical because if the contention of the assessee is to be accepted, then it would lead to a situation where as soon as the delivery of the vessel was made, the seller would get the price of the vessel plus the usance interest of 180 days though the usance period would be counted only after the date of delivery. It was held that the purchase price of the vessel and the usance interest were two distinct items of payment.
33. Appeal to the ld. CIT(A) did not bring any relief to the assessee. Thereafter the assessee carried the matter to the Tribunal. The Tribunal held that the purchase of a Ship was a single transaction for which the agreement was entered into and although the purchase price of Ship and users interest for 180 days from the date of delivery were separately mentioned in the MOA, none the less it remained a single transaction of purchase and sale of the Ship. The Tribunal further observed that the buyer had to make payment of the total amount which was inclusive of interest by letter of credit. The Tribunal further observed that the definition of the term interest provided in the provisions of DTAA does not take in its fold each and every debt in the expression "debt claims" referred in the definition of interest. According to the Tribunal the expression "debt claim" will take colour from the associated terms used in the definition namely bonds, debentures etc and the term interest under the DTAA was made to be interest on Government Securities, Bonds etc. The Tribunal has held that there was no intention between the parties to raise any loan and pay interest thereon. Thus the Tribunal treated the amount for users interest as part of the purchase price upon whom, while making payment no TDS was required to be deducted.
34. The Hon'ble High Court has taken cognizance of the meaning of expression interest as provided in Article -11/3 of DTAA between India and Singapore and held that expression "debt claims" of every kind has wider meaning. It will include the interest on deferred payment of sales. In other words according to the Hon'ble High Court there cannot be any restricted meaning to the expression "debt claims" of every kind. The observation of the Hon'ble High Court in this regard are worth to note:
It therefore leaves that State free to apply its own laws and, in particular, to levy tax either by deduction at source or by individual assessment. Referring to the definition of "interest" in para. 3 of Article 11 of the Model Convention, which is the definition adopted in the DTAAs between India on the one side and the U.K. and Singapore and other countries on the other, the OECD Commentary in para. 11C.21 records that the definition of "interest" is, in principle, exhaustive and covers practically all the kinds of income which are regarded as interest in the various domestic laws and that the formula employed offers greater security from the legal point of view and ensures that Conventions would be unaffected by future changes in any countries in domestic law." The expression "debt claims of every kind" cannot, therefore, be whittled down to mere debt claim in the form of loans. The addition of the words "including interest on deferred payment of sales", in parentheses after the words "debt claim of every kind" in the DTAAs with Indonesia or the words to the same effect in the DTAA with Philippines, is, in our view, only explanatory and makes explicit what is implicit in the phrase "debt claims of every kind", to prevent unnecessary arguments of the type raised by these assessees, Even the Model Convention did not contain such words that amplify the meaning of the expression "debt claims of every kind". In the present case, the purchase price of the ship became outstanding on the date of its delivery and since it was not being actually paid cash down against delivery, interest was contractually charged thereon at the specified rate for the usance period. Thus, by the very intention of the parties reflected in the MCA and their conduct, the interest amount was agreed to be paid treating the purchase price as a debt claim that arose when the purchase price became payable against delivery. The contractual interest on the debt in the form of the outstanding purchase price of the ship, which revenue was to be recognized, as per the MCA and the provisions of the Sale of Goods Act as well as Accounting Standards, from the date of delivery of the ship, was the amount that would aptly fall in the expression "debt claims of every kind". This was not a case where the vendor gave the goods to the buyers on credit at a lumpsum price to be paid in future in which the interest element could not be definitely identified, but it is a case where the price became outstanding under the MCA on the date of delivery and the interest was agreed to be paid on the debt that was incurred in the form of the unpaid purchase price that was treated as debt outstanding. The interest, in the present case, having regard to the nature of the contract and the intention of the parties reflected from their conduct of treating the purchase price and interest as separate for all purposes including payment of customs duty and accounts, has no element whatsoever of the selling price of the ship. The contention that the interest payable to the non-resident under the MOAs was part of the purchase price of the ship, therefore, fails both on facts and in law.
35. In view of the above decision of the Hon'ble High Court we are of the view that the assessee may call it as penalty charges on the delayed payment of purchase price but it is nothing else except interest. Otherwise on the facts also ld. revenue authorities have established that it is a payment of interest. So in law as well as on facts we uphold the finding of ld. revenue authorities below and hold that that assessee ought to have deducted TDS before making the payment. The ld. A.O has rightly treated the assessee in default for this payment also.
36. We summarize the result as under:
(i) The action of A.O for treating the assessee in default for the payments made prior to 31/3/98 are barred by limitation as provided in the case of Raymond Woollen Mills, therefore, assessee should not be treated in default qua those payments and necessary relief be granted to the assessee.
(ii) The payments made after moving an application under Section 195(2) and on issuance of certificate of No Objection by the A.O the assessee should not be treated in default. The ld. A.O shall carry out this exercise afresh and exclude all those payments for which No Objection Certificates were issued while holding the assessee in default.
(iii) With regard to payment made to Core Laboratories i.e. an amount of Rs. 1,53,665/-, ld. A.O shall re-decide this issue in the light of Tribunal's decision rendered in the case of Mc KINSEY & CO. INC, 99 ITD 549.
(iv) Except the above modification we uphold the order of ld. CIT(A).
(v) As far as the appeal relating to charging of interest under Section 201(1A), it is consequential in nature and after carrying out the above exercise ld. A.O shall grant consequential relief to the assessee.
37. In the result, both the appeals of the Revenue are dismissed for want of COD approval and both the appeals of the assessee are partly allowed.
Order pronounced in the open court on this 17th day of January 2007.