Income Tax Appellate Tribunal - Chennai
West Asia Maritime Ltd. vs The Income-Tax Officer, International ... on 19 May, 2006
Equivalent citations: [2008]111ITD155(CHENNAI), [2008]297ITR202(CHENNAI)
ORDER
M.K. Chaturvedi, Vice President
1. These two appeals by the assessee are directed against the order of the CIT(Appeals) and relate to the assessment years 2003-04 and 2004-05. Since both the appeals rotate around an identical issue, for the sake of convenience these are consolidated and disposed of by a common order.
2. Various grounds taken in these appeals resemble so many radii of a circle, starting from different points on its circumference but all oriented towards the question: Whether on the facts and in the circumstances of the case the assessee had committed any default in not deducting tax at source in the context of payment made under the alleged Agreement for Bare Boat Charter cum Demise (hereinafter called 'BBCD') with Dolphin Maritime Co. Ltd. (hereinafter called 'DMCL')?
3. Shri V. Ramachandran, the learned Counsel for the assessee vehemently opposed the impugned order. It was contended that the agreement entered into by the assessee with DMCL, under which the assessee secured a vessel with an option to purchase the same was not a mere Bare Boat Charter and that the payment made under the said agreement cannot be termed as hire charges falling within Article 12 of the Double Taxation Avoidance Agreement (hereinafter called DTAA) between India and Cyprus. Further it was alleged that ship cannot be construed to be an equipment for the purpose of Article 12 of DTAA, as such, the payments made to DMCL cannot be termed as royalty, as the payment was not for the use of the equipment falling within Section 9(1)(vi) of the Income-tax Act, 1961 (hereinafter called the Act) read with Article 12 of the DTAA. The Bare Boat Charter entered into by the assessee with DMCL was an agreement relating to the sale of the ship. The consideration was payable in accordance with the said agreement. The terms of the said agreement have to be looked into along with the surrounding circumstances to decide the nature of the transaction. The Revenue failed to do so. The Assessing Officer adumbrated his findings on the misapprehension of the terms of the Bare Boat Charter. The agreement in fact was for the purchase of the ship. The assessee made an application to ICICI Limited for securing the price reasonableness certificate. It obtained the same for the purpose of BBCD acquisition. It is evident from the agreement that the transaction was for an outright purchase. In the case of a mere charter for hire there would be a clause for repossession. Such a clause is significantly absent in the agreement. The essence of the agreement is a sale, the consideration being payable in instalments. This coupled with the condition relating to the payment of the entire amount in advance would clearly determine the nature of the transaction as a sale and not a mere hire.
4. Adverting to the prescription of Article 8 of DTAA it was alleged that the transaction is exigible to tax in the contracting State only. The mere fact that there is an agreement between the assessee and DMCL for the use of the ship would not determine the nature of the transaction. As per the agreement between the assessee and DMCL the payment was made for plying the ship in international waters. As such the case of the assessee would be governed by Article 8 alone.
5. Alternatively it was prayed that the agreement between the assesse and Poompuhar Shipping Corporation Ltd. (hereinafter called PSCL) is to be considered as time charter. Accordingly the payment would not fall within the expression 'royalty' as defined under Section 9(1)(vi). A time charter is not a contract of hire of equipment attracting liability under Section 9(1)(vi). Referring to the provisions of Section 195 of the Act it was stated that the liability to deduct tax at source would arise only if the payment could be construed as royalty. Since the payment is not royalty, the prescription of Section 195 of the Act is not applicable.
6. The general conspectus of the main plank of the arguments of Shri Ramachandran can be summarized as under:
(i) Section 195 of the Act will not apply to this case, since the payments made by the assessee to the non resident are not exigible to tax in India.
(ii) The transaction in the instant case is a transaction of purchase of ship on the basis of BBCD. Ex consequenti there is no taxable receipt by the non resident.
(iii) If the transaction is treated as payment for operation of ship it is covered by Article 8 of DTAA.
(iv) Since there is a specific provision to assess the income from shipping under Article 8 no other provision under the DTAA would apply to this transaction.
(v) Article 12 sought to be applied by the Assessing Officer applies to royalty and does not apply to hiring of ship or payment in respect of such transaction.
(vi) Article 12 refers to 'equipment' and ship is not an equipment and BBCD agreement does not relate to the use of ship but relates to acquisition of ship.
To buttress the aforesaid points Shri Ramachandran relied on the various precedents and invited our attention on the documents contained in the paper book.
7. The learned departmental representative vehemently opposed the aforesaid arguments. It was submitted that the case of the assessee comes within the ken of Section 195, since the payments made by the assessee to the non resident were exigible to tax in India. What the assessee paid to the owner of the ship was hire charges for the user of the ship. The assessee did not exercise the option to purchase the vessel at the end of the year. As such it cannot be construed to be a transaction of purchase of ship on the basis of BBCD. Some precedents were also relied upon to buttress the point that even where there exists doubt as to the chargeability of income-tax, there also tax is to be deducted at source ex abundanti cautela.
8. Referring to the provisions of Article 8 Shri Srinivasan, the learned departmental representative, submitted that this Article can be used only in the context of profits from the operation of ships in international traffic. In the present case the ship was given to PSCL to be used in Indian Coastal waters only. As such Article 8 cannot be invoked. Our attention was invited on the prescription of Article 12. As per this Article royalty can be construed to be consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. Referring to the dictionary meaning of the word 'equipment' it was submitted that one of the meanings of the term 'equipment' is: 'tool'. As the assessee is engaged in the business of shipping, ship is a tool of the trade. As such it is an equipment. Reliance was also placed on The Law Lexicon, page 646, where the term 'equipment' is defined as under:
Equipment. A ship was part of the 'equipment' of the business of the shipowner whose ship carries ore/bulk/oil. Coltman v. Bibby Tankers Ltd. (1987) 3 AIIER 1068, 1071(HL) [Employer's Liability (Defective Equipment) Act, 1969 Section 1(1X3)].
9. We have heard the rival submissions in the light of material placed before us and precedents relied upon. The assessee is engaged in the business of shipping. Besides owning ships it also chartered ships. It has its office at No. 4, Moores Road, Chennai. It has subsidiary in Singapore and operations in Australia. Assessee took a ship on Bare Boat Charter cum Demise in the year 1998 from Dolphin Maritime Co. Ltd. The assessee paid rentals to the owner. As per the agreement it was open for the assessee to exercise the option to purchase the vessel at the end of each year. However, the assessee had not exercised the option till date. Transaction for each of the years from 1999-2000 till 2004-05 was taken to be payment for hire only and not as payment for purchase of ship. Revenue proposed to treat the payments for hiring of ships as royalties Under Section 9(1)(vi) of the Act.
10. Royalty is defined in Explanation 2 to Section 9(1)(vi) of the Act. As per Clause 4(a) inserted by the Finance Act, 2001 w.e.f. 1.4.2002, royalty means-consideration for the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred in Section 44BB. As per Article 12 of the DTAA, royalty means payments or credits made as consideration for the use of or the right to use any industrial, commercial or scientific equipment.
11. The word "equipment" is neither defined under the Act nor under the treaty. As per New Oxford Advanced Learners Dictionary "equipment" means "the things that are needed for a particular purpose or activity". As per Websters Dictionary "equipment" means "all fixed assets other than land and building" used in a business enterprise. A fixed asset is an asset held with an intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. The equipment for the purpose of the Employer's liability (Defective Equipment) Act 1969 was held to be (Stroud's Judicial Dictionary) wide enough to include a ship of whatever size notwithstanding that ships are not specifically mentioned in the definition of the equipment under the Act.
12. The official USA Government Website on the North American Industry Classification system includes shipping under the category of the transportation equipment. In the interpretation of tax treaties, aircrafts and ships have always been considered to fall within the meaning of the term industrial equipment. Whenever it was decided to exempt such payments from the provision of withholding tax a specific exclusion has been incorporated in the definition of royalties/income from shipping. In the DTAAs entered into with UK, USA and Ireland the payments for leasing ships or aircraft have been excluded from the definition (this exclusion is for rental of ships in international traffic only and not otherwise). Even this exclusion is not available for the countries of Spain, Norway, Australia, Singapore, France and Germany. In the DTAA with Spain Article 13(3), the term royalties means payments of any kind received as a consideration...for the use of or the right to use industrial, commercial or scientific equipment...and similarly in the DTAs with Norway, Australia, Singapore, France and Germany.
13. The Merriam Websters dictionary defines an equipment as "All fixed assets other than land and building" used in a business enterprise. A fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. [ICAI Accounting Standard (AS), 10. Accounting for fixed assets, para 6.1].
14. The Oxford concise dictionary defines "Equipment" as - Things needed for a particular purpose". MacMillan Dictionary defines it as Machines or Tools needed for a job. In the present case the ship has been put to use for the purpose of moving from the ports of Haldia, Paradip and Visakhapatnam to the ports of Ennore and Tuticorin."
15. The views expressed by Klaus Vogel on Double Taxation Convention(Third Edition) are pertinent to construe the meaning of 'equipment' in the context of Article 8:
Article(8) Para 32 ...leasing a ship or aircraft on charter fully equipped, manned and supplied is also considered as a form of operating ships or aircraft (para 5 MC COMM. Article 8, See m. No. 5). On the other hand leasing a ship on bareboat charter basis is not considered such a form of operation. Income from such a bareboat charter is, as a rule, treated as business income and thus falls under the Article 7 (MC.COMM. Para 5 supra m. No. 5); to the extent that DTCs in accordance with the OECD MC valid prior to version 1922 and with the UN MC include 'income from leasing of industrial equipment' in Article 12(2) the earnings from bareboat charters are royalties(see the previous edition of this commentary m. No. 32)
16. In view of the above we hold that Article 12 of DTAA with Cyprus relates to equipment and ship is an equipment. The hire charges thus partakes the character of royalty for use of equipment under the provisions of Section 9(1)(vi) pf the Act/Article 12.3 of the DTAA.
17. It was alleged before us that the transaction in question was for the purchase of the ship on the basis of BBCD and as such the receipt was not exigible to tax. The assessee conceded before the Commissioner(Appeals) that in the statement of facts the payment was wrongly shown to be hire charges. The assessee acquired the ship by name 'Yaqul' under the Bare Boat Character(BBC) in the year 1998-99 from DMCL and the ship was christened as 'Gem of Paradip'. Subsequently, by an agreement dated 14-5-1999 with DMCL the original agreement entered into was revised and the ship was acquired under BBCD. Before entering into the agreement with DMCL the assessee had obtained approval of ICICI Ltd. with regard to concomitant funding and financial commitments. It was claimed that the ship so acquired resulted in a sale transaction. It was further stated that there was no clause for repossession of the ship by the transferor. The terms of agreement of BBCD was that of a sale, with the consideration being paid in instalments. The agreement also contained an option for making payment in advance. What the assessee had actually paid was instalments and not hire charges.
18. The Commissioner(Appeals) examined the transaction with reference to the maxim: non quod dictum est, seb quod factum est in jure inspicitur which means that law takes note of what is done and not what is said. He proceeded on the theory that nomenclature is not decisive. The real character of the transaction needs to be examined. He relied upon the precedent where it is said that a party cannot escape the consequences of law merely by describing an agreement in a particular term, though in essence and in substance, it may be a different transaction.
19. The BBCD method was introduced by the Government vide the Shipping Ministry's press release dated 23-4-1992, keeping in view the imperative need for augmentation of national tonnage and in view of the difficulties experienced by the Indian Shipping Companies in arranging External Commercial Borrowings (ECB) for acquisition of ships from abroad, because of foreign exchange crunch and inability of the Indian Shipping Companies to have ECB due to drop in credit rating of the country. In this context it was decided as a matter of policy to encourage acquisition through Charter cum Demise method. This method of financing ship acquisition enabled the Indian Shipping Companies to acquire ships expeditiously and to finance the acquisition out of earnings of the ship itself. It was also decided that shipping company holding valid approval for acquisition of a ship can utilize the approval for acquiring the vessel by this method and would have to approach the Reserve Bank of India directly getting the payment terms of BBCD approved and seek clearance from foreign exchange angle. To this end the shipping companies need not come to Government for further approval. The Ministry of Finance, Department of Economic Affairs issued necessary guidelines for financing of acquisition of ships under BBCD method to the RBI vide their D.O. letter No. 10(14)/92-CCEI dated 19-10-1992 deciding that: (i) such proposals should have tenure of five years or longer, (ii) the technical condition of the vessel identified and the price reasonableness shall be certified by the Director General (Shipping), (iii) the interest rate margin on the rental payments shall be verified by the Directorate of Shipping and (iv) the rental agreement shall come into force after it is taken on record by the RBI.
20. The Chartering Wing of the Ministry issued orders on 12-8-1992 conveying the decision of the Government that the vessels so acquired under the method of acquisition by the Shipping Companies involving demise clause at the end of the lease/charter period would be treated at par with Indian vessels for the purpose of transportation of Government controlled cargo for which shipping arrangements are required to be made by the Chartering Wing of the Ministry. The use of foreign flags in the case of India Coastal Operations were reserved for Indian Flag Vessels without any stipulations about the vessels to be built in India. Foreign flag vessels were permitted in coastal trade only after ascertaining that no Indian flag vessels were available. The Ministry issued notification equating vessels acquired under BBCD method which fly foreign flags, equating them with Indian flag vessels for the limited purpose of lifting the Government cargo for which shipping arrangements are done by Transchart.
21. On 23-1-1999 the assessee received no objection certificate from the Directorate of Shipping in extending BBCD permission in respect of the ship m.v. 'Yaqui' to be renamed as m.v. 'Gem of Paradip' for a further period of 90 days from 13-2-1999 onwards. The assessee negotiated with the Marine Group of ICICI Ltd. for concomitant funding from March 31, 1999 onwards on the proposal to acquire the vessel on BBCD basis in respect of the vessel from the owners DMCL, Cyprus. It also corresponded with the DG (Shipping) towards obtaining technical clearance for the vessel and also price reasonableness certificate in accordance with the guidelines of the Government, which was required to be obtained in respect of vessel acquired under BBCD method. Fulfilling the clause related to purchase reasonableness it obtained price reasonableness certificate from the Shipping valuers which valued the ship at US$ 6,250,000/-.
22. The assessee entered into an agreement with DMCL, the owner of the vessel, on 14-5-1999. The agreement specified various aspects of build and technical specification of the vessel. It also entered into standard BBCD agreement which related to various aspects relating to the vessel and modalities including delivery, inspection, maintenance and operation, insurance and repairs, bank guarantee, etc.
23. The recitals contained in the Charter Agreement 'Barecon 89' Standard Bareboat Charter throws meaningful light in understanding the substance of the agreement entered into by the parties Part II 'Barecon 89' Standard Bareboat Charter
1. Definitions:
"The Owners" shall mean the person or company registered as Owners of theVessel.
"The Charterers" shall mean the Bareboat charterers and shall not be construed to mean a time charterer or a voyage charterer.
2. Delivery:
(iii) Time for delivery (not applicable to newbuilding vessels)
(iv) Cancelling (not applicable to newbuilding vessels)
(v) Trading Limits.
The vessel shall be employed in lawful trades for the carriage of suitable lawful merchandise within the trading limits indicated in Box 19.
The charterers undertake not to employ the vessel or suffer the vessel to be employed otherwise than in conformity with the terms of the instruments of insurance (including any warranties expressed or implied therein) without first obtaining the consent to such employment of the insurers and complying with such requirements as to extra premium or otherwise as the insurers may prescribe, if required, the charterers shall keep the owners and the mortgagees advised of the intended employment of the vessel.
(vi) Inspection:
The owners shall have the right at any time to inspect or survey the vessel or instruct a duly authorized surveyor to carry out such survey on their behalf to ascertain the condition of the vessel and satisfy themselves that the vessel is being properly repaired and maintained, The charterers shall also permit the owners to inspect the vessel's log books whenever requested and shall whenever required by the owners furnish them with full information regarding any casualities or other accidents or damage to the vessel.
(vii) Inventories and Consumable Oil & Stores:
(viii) Maintenance and Operation:
The vessel shall during the charter period be in the full possession and at the absolute disposal for all purposes of the charterers and under their complete control in every respect.
(ix) Hire:
The charterers shall pay the owners for the hire of the vessel as indicated in Box 21 commencing on and from the date and hour of her delivery to the charterers and at and after the agreed lump sum for any part of a month. Hire to continue until the date and hour when the vessel is redelivered by the charterers to her owners.
Payment of hire for the first and last hire if less than a full month shall be calculated proportionally according to the number of days in the particular calendar.
(x) Mortgage:
The charterers undertake that they will comply with all such instructions or directions in regard to the employment, insurance, repairs and maintenance of the vessel etc. from time to time during the currency of the charter by the mortgagee(s).
(xi) Insurance and Repairs:
(xii) Insurance Repairs and Classification
(xiii) Redelivery:
The charterers shall at the expiration of the charter period redeliver the vessel at a safe and ice-free port or place as indicated in Box 16.
(xiv) The charterers shall at the expiration of the charter period redeliver the vessel at a safe and ice-free port or place as indicated in Box 16.
(xv) Non-Lien and Indemnity.
Part IV Hire/Purchase Agreement On Expiration of this charter and provided the charterers have fulfilled their obligations according to Part I and II as well as Part III, if applicable it is agreed that on payment of the last month's hire instalment as per Clause 10 the charterers have purchased the vessel with everything belonging to her and the vessel is fully paid for....
...the sellers shall furnish the buyers with a bill of sale duly attested and legalized, together with a certificate setting out the registered encumbrances.
4.8. This contract was entered into by the appellant on 14th May, 1999 with DMCL. In the addendum 1 to the BBCD agreement in 'Barecon 89' dated 14th May, 1999 the hire charges payable quarterly for 69 months was specified as below:
Charter Period Charter hire payable per day First 15 months period from April 1999 to June 30, 2000 USD 1500 For 6 months from July 1, 2000 to Dec. 31,2000 USD 4225 For 1 year from Jan 1, 2001 to Dec. 31, 2001 USD 4050 For 1 year from Jan 1, 2002 to Dec.31, 2002 USD 3850 For 1 year from Jan 1, 2003 to Dec.31, 2003 USD 3700 For 1 year from Jan 1, 2004 to Dec.31,2004 USD 3500 Balloon payment at the end of charter Period along with last hire payment USD 2,750,000
The purchase option(cost) of the said vessel at the end of each period was also specified as follows:
Dec. 99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 Purchase option (US$ Million) 7.25 6.75 5.75 4.75 3.75 2.75
24. It transpires from the perusal of the aforesaid agreement that the assessee was not the owner of the vessel until the last month's hire instalment was paid to DMCL in exchange of which it would execute a bill of sale in favour of the assessee. It was also clear that the purchase option of the vessel would vary depending on the date on which such an option was exercised by the assessee. That is to say that if the assessee decided to opt for purchase in Dec. '99, it would be liable to pay the cost of US$ 7.25 million. And likewise if it chose to exercise the option in December, 2004. it would be so liable to US$ 2.75 million. Thus it is clear that the ownership remained with DMCL till the assessee opted to make the balloon payment to DMCL which was only on 12-1-2005 of US$ 2.75 million in the financial year 2004-05. On having made the balloon payment and in terms with the BBCD agreement G.M. Khaleelullah on behalf of DMCL executed a bill of sale dated 12th Jan., 2005 acknowledging the receipt of US$2.75 million from the assessee. This bill of sale was also acknowledged transfer of all the shares in the ship as described to the transferee. The bill of sale was executed in Nicosia, Cyprus. The ownership never passed to the assessee until 12th January, 2005. DMCL remained the owner till the balloon payment was made and the option to purchase was exercised by the assessee in January, 2005. The consideration paid to DMCL periodically was in the nature of hire charges for the use of the ship as described in the agreement and not sale consideration. The title in the goods remained with DMCL all through the period of agreement and only passed to the assessee on 12th January, 2005.
25. The Commissione(Appeals) in his order took into consideration the various correspondence made by the assessee with the various agencies. In its letter dated 29th April, 1999 the ICICI while approving the proposal provided that there will be no downpayment for the acquisition of the vessel on BBCD basis. As also there will be a back ended payment of US$ 2,750,000/- at the end of the charter period for the acquisition of the vessel on BBCD basis. On these, it approved the bare boat charter hire charges to be paid quarterly. The assessee in turn has conveyed to the DG(Shipping) vide correspondence dated 13-5-1999 that rental payment reasonableness is also approved by ICICI through this re/erred letter. ICICI approved the lease rentals till the back end payment was made. It is nowhere stated that the payment made towards hire charges should be treated as part of sale consideration. The acquisition of a ship by BBCD method is only a policy decision of the Government, which cannot override or preclude the application of the provisions of the Income-tax Act or of the relevant DTAA.
26. On the basis of the aforesaid facts it can be concluded that the assessee did make payment of hire charges for the user of the ship. These hire charges were exigible to tax in India.
27. Coming to the applicability of Article 8 of the DTAA with Cyprus we refer the relevant Article contained in the DTAA with Cyprus as under:
Article 8: Shipping and air transport -1. Profits derived by an enterprise registered and having the headquarters (i.e. effective management) in a Contracting State from the operation by that enterprise of ships or aircraft in international traffic should be taxable only in that State.
2. For the purposes of this Article profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including:
(a) the sale of tickets for such transportation on behalf of other enterprises.
(b) other activity directly connected with such transportation, and
(c) the rental of ships or aircraft incidental to any activity directly connected with such transportation.
3. Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers(including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State.
4. The provisions of paragraphs 1 and 3 shall also apply to profits from participation in pool, a joint business, or an international operating agency.
5. For the purposes of this Article interest of funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 (interest) shall not apply in relation to such interest.
6. Gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft or containers owned and operated by the enterprise, the income from which is taxable only in that State, shall be taxed only in that State.
28. As per the language of the Article, it would apply in a case when the contracting enterprise DMCL itself derives profits from the transportation by sea of passengers, etc.carried on by the owner. The assessee is in the operation of ships in the international traffic between 15-4-1999 to 25-10-2002. But the profits derived by DMCL are not from transportation of passenger, etc. Lease rentals/hire charges received from the assesse cannot be said to be incidental to any activity directly connected with such transportation by DMCL. They are pure hire charges for the use of bareboat or the ship. Admittedly during the year under consideration the ship was plying in the coastal traffic and not in the international traffic. As such the requirement of Article 8 is not fulfilled.
29. Similarly hire charges paid to a non resident enterprise cannot be treated as business income in view of Article 7.7 which states that where profits include items of income which are dealt with separately in other Articles of this agreement then the provisions of those articles shall not be affected by the provisions of this Article. In the present case the payments made to the non resident enterprise were found to be hire charges which were covered by Article 12 of DTAA as being royalty payment.
30. Adverting to the hire charges we find that the Assessing Officer observed that the assessee treated the charter hire charges paid to DMCL as revenue expenditure. It was submitted before us that the accounting procedure for claiming expenditure was not correctly followed. The Revenue authorities noted that the assessee regularly maintained books of accounts for all the relevant years treating it as revenue expenditure. Subsequently, after the commencement of proceedings under Section 201 claiming hire charges as capital expenditure does appear as an after thought on the part of the assessee. It was obligatory on the part of the assessee to purchase the vessel at the end of charter period only. Hence the hire charges paid till the date of exercise of option or at the end of the period would not be capitalized. Since there was an option on the part of the assessee to buy the vessel, the option was not exercised, and in that eventuality the payments to be treated as hire charges. These payments were treated as revenue expenditure. Keeping an option to buy alone would not be sufficient enough to characterize the hire charges as sale consideration.
31. In the case of Transmission Corporation of A.P. Ltd. and Anr. v. CIT 239 ITR 587, the Hon'ble Supreme Court has held that 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 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. 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."
32. On the basis of the aforesaid decision it can be said that once the amount of tax is deducted at source the person against whose income the tax is deducted could claim credit of that amount by filing the appropriate return. If tax is deducted on an amount which is not exigible to tax the AO makes refund of that amount after the completion of the assessment.
33. There are broad heads of tax levy. One is direct levy and the other is levy by deduction at source. Deduction of tax at source is a convenient method of tax collection since it affects early realization and is less painful to the person from whose income such tax is deducted. Moreover it saves time on the part of the Revenue inasmuch as all calculations and other attendant works are performed by the person responsible for paying tax. It also acts as a check on tax evasion.
34. Under Section 195 of the Act any person responsible for paying to a non resident, including a foreign company, any income by way of interest or any other sum which is chargeable to tax in India, is required to deduct tax at source on such income at the time of payment. As per the mandate of the section tax is to be deducted at source with reference to the income element embedded in the payments. However, a non resident including a foreign company may obtain from the AO a certificate authorizing him to receive payment without deduction of tax at source. The expression 'any other sum' occurring in Section 195(1) does not necessarily refer to sums which represent wholly income or profit. The scheme of tax deduction at source applies not only to the amount paid which wholly bears income character, 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 under Section 194C and payment of insurance commission under Section 194D. The provisions of Section 195(2) make the intention of the Legislature very clear that what is required to be considered for the purpose of tax deduction at source under Section 195(1) is not the wholly income or profit. In that view of the matter it cannot be contended that where the sum paid to any person is not wholly chargeable under the provisions of the Act, then the application of Section 195 is ousted. Section 195 takes within its sweep any sums paid to a non resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents. The Hon'ble Supreme Court took this view in the case of Transmission Corporation of A.P. Ltd. and Anr. v. CIT 239 ITR 587. The Hon'ble Calcutta High Court considered and interpreted a similar provision 18(3B) of the Indian Income-tax Act, 1922 in the case of P.C. Roy and Co.(India) Pvt. Ltd. v. A.C. Mukherjee ITO 36 ITR 365 and held at page 377: "If 'chargeable under the provisions of this Act' means actually liable to be assessed to tax, in other words, if the sum contemplated is taxable income, a difficulty is undoubtedly created as to complying with the provisions of the section."
35. It is not open for a person making payment to a non resident to take a unilateral decision that the payments made by him are not sums chargeable to tax. To take that view the concurrence of the Assessing Officer as provided in Sub-section (2) of Section 195 is sine qua non. Section 195 is for tentative deduction of income-tax subject to regular assessment. By the deduction of tax the rights of parties are not, in any manner, adversely affected. Where there exists a doubt as to the chargeability of income to tax, there also tax is to be deducted at source ex abundanti cautela. In the present case the attendant Circumstances suggest that ex facie the amount paid is not for the acquisition of the ship, but for the user of the ship, as such taxable. Therefore the assessee cannot be exonerated from the obligation of deduction of tax at source. We uphold the order of the Commissioner(Appeals).
36. In the result the appeals of the assessee stand dismissed.