Frontier Offshore Exploration (India) ... vs The Dy. Cit on 28 February, 2007

[Cites 62, Cited by 1]

Income Tax Appellate Tribunal - Chennai

Frontier Offshore Exploration (India) ... vs The Dy. Cit on 28 February, 2007

ORDER

T.R. Sood, Accountant Member

1. In this appeal by the assessee the following grounds have been raised:

(1) The Learned CIT(A) grossly erred in confirming the addition of Rs. 45.4().61.871 Under Section 40(a)(i) of the Income-tax Act. 1961.

(2) He failed to appreciate that appellant was under an obligation to deduct tax at source Under Section 195 of the Act from the income changeable under the Act and not from the gross payments made to the non residents.

(3) He grossly erred in ignoring the provisions of Section 44BB of the Income-tax Act. 1961 to arrive at the income of the non residents to whom payments were made by the appellant company.

2. The brief facts of the case are that during the year the assessee had made certain payments in foreign currency in pursuance of an agreement with ONGC and Hardy Exploration and Production (India) Inc. ("HEPII" for short) to drill oil wells in Indian waters off the coast of India. For execution of these contracts, the assessee company had taken two drilling units. which were owned by M/s. Frontier Drilling ASA, Bergen, Norway and M/s. Frontier Ice. AS. Bergen. Norway. For this the assessee company was required to pay charter hire for the two drilling units, rig management fees and service fees. The assessee company had made payment in foreign currency as under:

Bare Boat rentals relating to the AY 2002-03 But TDS deducted during the year Rs. 1,64,19,256 Bare Boat rentals Rs. 37,96,34.157 Rig Management Charges Rs. 10,79,19,369 Service Charges Rs. 57,09,873

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Rs. 50.96.82.655

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3. The Assessing Officer noticed that for all these payments the assessee has deducted tax (a) 4.2% on the bare boat charges only According to the Assessing Officer since this rate was lower than the rate prescribed under the Act. therefore a query was raised that why lower TDS was deducted. It was explained that Section 195(1) requires tax to be deducted only on the sum. which was chargeable under the provisions of the Act. i.e. tax is required to be deducted only on that sum, which could he ultimately assessed to tax under the Act. In simple terms, the assessee contended that it was only income portion contained in such payments made in foreign currency on which TDS was required to be made and in this regard, reliance was placed on the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT 239 ITR 587 (SC). It was further explained that since as per the provisions of Section 44BB of the Act, income of a non-resident engaged in the business of supplying plant and machinery on hire used in the prospecting for or extraction or production of Mineral Oil, a sum equal to 10% of the aggregate of the amount shall be deemed to be profits and gains of such business. It was submitted that Section 44BB of the Act by a legal fiction prescribes a presumptive profit of 10% on the aggregate amount specified in Sub-section (2) as income chargeable under the head profits and gains of business and therefore. this legal fiction logically should extend for the purpose of deduction of tax at source against payments of the nature specified in Sub-section (2). It was explained that keeping the provisions of Section 44BB in view the assessee company had estimated 10% of the said charter hire and other related payments and accordingly deducted tax a 40.80% of such 10% income.

4. The Assessing Officer did not accept these contentions by observing that the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT (supra) has categorically held that tax has to he deducted on the gross sum of money paid to the non-resident. According to the Assessing Officer, therefore, the assessee was liable to deduct tax a 30% plus surcharge of 5% and because this amount has not been deducted by the assessee, therefore provisions of Section 40(a)(i) were attracted. In this background, the Assessing Officer out of the total payment made in foreign currency, after allowing the payment proportionately to the tax deducted by the assessee, disallowed the balance of Rs. 45,40.62.871.

5. Before the CIT(Appeals), similar contentions were reiterated. The ld. CIT (Appeals) observed that the provisions of Section 195 of the Act were independent from the provisions of Section 44BB. He further observed that as per the provisions of Section 195(1). tax was required to be deducted at source at the rates in force at the time of making payments of any sum to a non-resident. In case such sum was not fully chargeable to tax. then Section 195(2) would come into operation and the assessee could have made an application to the Assessing Officer to determine the appropriate proportion of such sum. which was chargeable to tax and then the lax was required to be deducted Under Section 195(1) on such proportion. He further observed that since the assessee had not availed the benefit of lower TDS available Under Section 195(2). therefore the only conclusion which could be drawn by the Department was that the entire sum so payable was chargeable to tax under the Act. He also observed that the provisions of Section 44BB were applicable only in ease of existing assessees and the iron-resident party to whom the appellant had made payment cannot be referred to as existing assessee. He also referred to the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT (supra) and observed that reliance placed by the assessee on the last para of the decision was not the ratio of the decision and the ratio was quite clear that the assessee was required to deduct tax on the entire payment made to non-resident. In this regard, the ld. CIT(Appeals) referred to the observations made by the Supreme Court in pages 594 and 595. In this background, the ld. CIT(Appeals) confirmed the order of the Assessing Officer.

6. Before us, the ld. Senior Advocate. Shri S.E. Dastur, referred to pages 2 and 3 of the assessment order and pointed out that the assessee had entered into agreements with M/s. Frontier Drilling ASA. Bergen. Norway and M/s. Frontier Ice. AS, Bergen. Norway for taking their drilling units for the purpose of exploration of oil wells in Indian waters. He further pointed out that as per these agreements, the assessee had made payments in respect of Bare boat rentals for the current year as well as assessment year 2002-03 as well as rig management charges and service charges. Then he referred to the provisions of Section 44BB of the Act and submitted that the non-resident party to whom such payments were made was clearly covered under this provision, which provides for presumptive tax (a) 10% of such receipts, which have also been described under Sub-section (2) of Section 44BB. He then referred to the observations made by the CIT( Appeals) in paragraph 5.2 of his order that such provisions are applicable only in the case of existing assessee and wondered what was the meaning of the term "existing assessee". He submitted that this provision was equally applicable to any party, who was coming to India even for the first time to supply plant and machinery, etc. which was used in the business of oil exploration or production. Since the provision was introduced by the Finance Act, 1987 w.e.f. 1.4.1987. therefore, it was applicable in the year before us.

7. The ld. senior counsel for the assessee then referred to the provisions of Section 40(a)(i) and argued that the purpose of this provision was not to determine tax, but it was there to ensure that taxes have been properly deducted by the assessee from payments made to nonresident. He emphasized that this provision also contains the expression "other sum chargeable under this Act", which means, disallowance if any has to be restricted only to that portion of the sum. which is chargeable to tax. He then referred to Section 4, which is the charging section and submitted that any tax shall be charged for any assessment year as prescribed under the various Central Act, which is generally in the form of Finance Act. in respect of total income. He then referred to Section 2(45). which is the definition section and defines "total income" as amount of income referred to in Section 5 computed in the manner laid down in this Act. He then took us to Sub-section (2) of Section 5. which deals with the total income of a person, who is non-resident and provides that such total income would include all income which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise to such non-resident in India. He vehemently argued that all these provisions very clearly show that what can be charged to tax is only the income portion and not the total payments made to non-residents. He submitted that "sum" referred to in Section 40(a)(i) can by no stretch of imagination be extended to gross sum. He also referred to the proviso in this section, which provided that if taxes have been deducted or paid in subsequent year, then such sum shall be allowed in the year in which such tax has been paid. This means, to give effect to the proviso, the assessing authority is required to determine the component of income, otherwise proviso will not remain workable. This also clearly shows that under this sub-section, only that sum can be disallowed which is chargeable to tax under the Act.

8. Shri Dastur further argued that in respect of any expenditure or deduction claimed Under Section 30 to 37. normally the burden of proof regarding claims of deduction or expenditure is on the assessee because it is settled law that assessee needs to discharge the burden for claim of any deduction or expenditure. However, provision of Section 40(a)(i) was a "disallowance" provision Therefore, burden naturally should lie on the taxing authority because whenever such authority wants to disallow a particular sum. then it needs to discharge the burden to prove that so much of sum is really not allowable in terms of a particular provision and no such burden has been discharged by the revenue authorities. In this regard, he referred to the decision of Jt. CIT v. Modi Olivetti Ltd. (2004) 4 SOT 859 (Del) [copy filed]. He particularly referred to para 41 of the decision. where the Tribunal has observed that while invoking the provision of Section 40A(2)(b). the onus was on the Assessing Officer to prove that the assessee had made payments in excess of fair market value of goods or services. Thus, it is clear that in case of disallowance provision, burden should be that of the Revenue.

9. Then he referred to the provisions of Section 195 and pointed out that Sub-section (2) is not a provision meant for disallowance. In fact, this provision was for the benefit of the assessee and an option has been given for the assessee under this provision to approach the tax authorities where the assessee feels that whole of the amount is not chargeable to tax and in such cases. the assessee can approach the Department and seek lower deduction of TDS. He submitted that the assessee need not compulsorily comply with the provisions of Section 195(2). He further argued that incase the assessee chooses not to make an application Under Section 195(2). then it cannot lead to disallowance automatically. He contended that in the case before us since the provisions of Section 44BB were directly applicable. the assessee was confident that non-resident to whom payments were being made was covered Under Section 44BB and that is why the assessee did not choose to make any application Under Section 195(2). He submitted that application is required to be made where the assessee has any doubt that how much percentage is to be subjected to tax in respect of a particular payment. Since no doubt existed in the mind of the assessee because of application of Section 44BB, no application was made Under Section 195(2). He also invited our attention to the assessment order and pointed out that no where the Assessing Officer has stated why the provisions of Section 44BB were not applicable to non-resident party to whom such payments were made by the assessee. He further contended that in this case the assessee had definitely deducted tax and it is not a case of no deduction and at best, the Department can make a case of short deduction only. In this connection he also referred to the provisions of Section 201. where the words "the whole or any part of the tax" have been inserted by the Finance Act, 2002 w.r.e.f. 1.4.1962 He then invited our attention to the decision of Andhra Pradesh High Court in the case of P.V. Rajagopal and Ors. v. UOI 233 ITR 678 (AP). He pointed out that while explaining the scope of Section 201. the court observed that. "This section has two limbs, one is where the employer does not deduct tax and the second where after deducting tax. the employer fails to remit it to the Government. There is nothing in this section to treat the employer as the defaulter where there is a shortfall in the deduction. The Department assumes that where the deduction is not as required by or under the Act. there is a default. But the fact is that this expression "as required by or under this Act" grammatically refers only to the duty to pay the tax that is deducted and cannot refer to the duty to deduct the tax. Since this is a penal section it has to be strictly construed and it cannot be assumed that there is a duty to deduct the tax strictly in accordance with the computation under the Act and if there is any shortfall due to any difference of opinion as to the taxability of any item the employer can he declared to be an assessee in default." He submitted that these observations were made when the words "the whole or any part of the tax" were not there in Section 201. Then he again referred to Section 40(a)(i) which employs the expression ''on which tax has not been deducted". He emphasized that the amendment which was made in Section 201 by inserting the words "the whole or any part of the tax" have not been inserted in Section 4(a)(i) and therefore this section should also be interpreted as not applicable in the absence of the said expression as held by the Andhra Pradesh High Court in the case of P.V. Rajagopal and Ors. v. UOI (supra).

10. Next, the ld. senior counsel referred to Transmission Corporation of AP Ltd. v. CIT (supra) and submitted that since the assessee as well as the Department are relying on this decision, it would be appropriate to analyse the decision in detail and for that he submitted that he would like to start with the decision rendered by the Andhra Pradesh High Court where the case was titled as CIT v. Superintending Engineer 152 ITR 753 (AP). In that case, the Andhra Pradesh State Electricity Board ("Electricity Board" for short) made payments to three foreign parties on which no tax was deducted. In case of one party, the Electricity Board had made an application Under Section 195(2). During the proceedings Under Section 201, the Assessing Officer estimated the tax to be deducted on whole of the payments in respect of two foreign parties, where no application was made and in case where application was made, the profit was estimated and tax to he deducted was determined. Various questions were raised before the Hon'ble Andhra Pradesh High Court, but the ld. Counsel of the assessee pointed out that ultimately the court itself refrained the questions by observing that two fundamental questions arise and the questions were reframed as under:

(a) Whether the provisions of Section 195 of the Act are applicable to cases where the sum paid to the non-resident does not wholly represent the income: and

(b) If Section 195 is applicable to such cases, whether the ITO could enforce deduction of tax at source on the gross amount of trading receipts or only in respect of that portion of the trading receipts which may be chargeable as income under the Act.

11. The ld. Counsel of the assessee referred to the various portions of the judgment and pointed out that ultimately the court held that provisions of Section 195 relating to deduction of tax at source come into operation in respect of sums paid to non-resident, whether or not such sums represent whole income or profits and even if such sums are paid to the non-resident during the course of regular trading operations. However, at the same time, the court was of the opinion that the power of the Income-tax Officer Under Section 201 of the Act to deem a person responsible for paying any sum to the non-resident us. 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money. He vehemently argued that the Hon'ble Andhra Pradesh High Court has clearly held that though provisions of Section 195(1) are applicable in respect of any sum, but at the same time tax authorities were bound to determine the proportion of income on which the tax has to be deducted. The court had also observed in that case that a person may he honestly under the impression that no part of gross sum payable to non-resident is chargeable to tax as income under the Act and hence he does not find it necessary to make an application Under Section 195(2). Even in such cases, where no application was made Under Section 195(2), the revenue authorities were bound to determine the tax chargeable only on the portion of the income. Then he took us through the Supreme Court judgment in this case and read the last paragraph at page 596 of the report, which is as under:

In this view of the matter, the answers given by the High Court that (i) the assessee who made the payments to the three nonresidents was under obligation to deduct lax at source under Section 195 of the Act in respect of the sums paid to them under the contracts entered into: and (ii) the obligation of the respondent-assessee to deduct tax under Section 195 is limited only to the appropriate proportion of income chargeable under the Act are correct.

He submitted that the Hon'ble Supreme Court has very clearly concluded that obligation of the assessee to deduct the tax Under Section 195 is limited only to the appropriate proportion of the income chargeable under the Act.

12. He further submitted that by doctrine of merger, the judgment of the Supreme Court should be read together with the judgment of the Andhra Pradesh High Court. The Andhra Pradesh High Court has clearly held that even if no application is made Under Section 195(2), even then the ITC should determine only that amount of tax deductible, which pertains to proportion of income chargeable to tax. As observed by the Hon'ble Andhra Pradesh High Court, there may be so many reasons for the assessee not to make an application Under Section 195(2), particularly the reason that the assessee may be under the honest belief that no proportion of sum referred to in Section 195(1) is chargeable to tax. Even then, the revenue authorities can determine the amount of tax deductible only on the proportion of such sum, which is required to be taxed under the Act. He submitted that in the case before us. since the provisions of Section 44BB were clearly attracted and the assessee was confident that only 10% of the gross sum would be presumed to be tax Under Section 44BB, therefore, he accordingly deducted the tax on this proportion of 10% and thus the assessee had deducted the appropriate amount of tax and therefore no disallowance Under Section 40(a)(i) is attracted.

13. The ld. Counsel of the assessee also submitted that right to make an application Under Section 195(2) cannot be converted into an obligation and the assessee be penalised. Even if no application is made Under Section 195(2). even then the provision has to be applied in the right spirit as propounded by the courts. In this regard, he also referred to the decision of the Supreme Court in the case of CIT v. Mahendra Mills 243 ITR 56(SC). He submitted that in this case it was clearly observed that a right cannot be converted into an obligation. Therefore, mere failure to make an application Under Section 195(2) and that too when the assessee had a bona fide belief that provisions of Section 44BB are applicable, cannot lead to disallowance Under Section 40(a)(i).

14. On the other hand, the ld. DR submitted that for understanding the whole issue. one needs to go through the scheme of the Act. He submitted that the provisions of Section 44BB are contained in Chapter IV of the Income-tax Act. which deals with the computation of business income. This means that any assessee who wants to avail the provisions of Section 44BB can file his return accordingly. In turn, it would mean that these provisions perhaps may be applicable to non-resident party and such party could have availed these provisions by filing a return accordingly. He then referred to the provisions of Section 190 to Section 206CA. which have been placed in Chapter XVII under the head "Collection and Recovery Advance payment of tax" and Sections 190 to 206CA deal with the tax deduction provisions. He submitted that in the case before us. non-resident to whom payments were made by the assessee company was not the appellant and such non-resident is not even the Respondent and not connected with the appeal in any manner whatsoever. Therefore, reference to Section 44BB itself is contrary to the scheme of the Act. He submitted that tax has to be deducted as per the provisions of Section 195. which has very clearly cast a duty on every assessee to deduct tax at a particular rate, because if tax is not required to be deducted as per this provision, then there is a remedy provided under Section 195(2). So many questions are required to be considered if tax is not to be deducted as per Section 195(1) like, whether non-resident party is having a Permanent Establishment? Or covered by DTAA? Nature of services? etc. All these facts are required to be examined and such facts can be examined only when the assessee submits an application Under Section 195(2). He read out the provisions of Section 195(1) and 195(2) and submitted that as per Section 195(1), the assessee is required to deduct tax at the prescribed rate when any payment is made to a non-resident. Even though the expression "or any other sum chargeable under the provisions of this Act" is used, but the assumption would be whole of such sum is chargeable to tax, because Sub-section (2) of this section very clearly provides a remedy to the assessee when only some portion of such sum is taxable. Sub-section (2) clearly provides that whenever an assessee considers that whole of such sum would not be income chargeable to tax. he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable and upon such determination tax shall be deducted under Sub-section (1) only on that portion of the sum. which is so chargeable. Me submitted that thus Sub-section (2) make it very clear and plain that authority vests with the Department only i.e.. the Assessing Officer, to determine what proportion is chargeable and such sum chargeable can be reduced only upon the application made by the assessee in this behalf. The assessee himself is not an authority as such to decide what proportion of the sum is chargeable to tax.

15. The ld. DR Further argued that there is no force in the contention of the ld. senior counsel of the assessee that when presumptive rule of tax has been prescribed Under Section 44BB, there was no need to file an application Under Section 195(2) and the assessee himself can decide that tax would he chargeable only at 10% of the gross receipts in case of non-residents engaged in the business of providing services and facilities in connection with or setting up of plant and machinery on hire used in the prospecting or exploration of mineral oils. He submitted that Section 44AD also prescribes for presumptive tax of 8% of the gross receipts in case of contracts engaged in the business of civil construction. But at the same time, Section 194C mandates deduction of tax @ 2%. Therefore, it cannot be said that in this case that since provisions of Section 44A1) are applicable, therefore tax can be deducted at a lower rate. Then he referred to various provisions of TDS and submitted that Section 190 is a general provision, which mandates tax to be deducted at source in accordance with the various provisions. Then he referred to provisions of Section 192 which requires tax to be deducted at the average rate in case of salary income. Again Section 193 prescribes tax to be deducted at the. rates in force. Similarly, he took us through various provisions and submitted that specific rates have been prescribed for deduction of tax. He submitted that all the provisions including Section 195 prescribes for specific rates of deduction and only in case of salary, tax is to be deducted at the average rate. This clearly shows that in case of salary, the responsibility is given to the employer only to compute the income and then deduct the tax accordingly, whereas in all other cases, tax is to be deducted at the specified rates only on gross sums and deductor has no authority to determine the proportion of income on which tax is required to be deducted.

16. He further argued that in this case, non-resident may not have filed any return because such assessee may be taxable at the higher rate and just to avoid such situation, tax deduction provisions are there. He submitted that if the deduction prescribed Under Section 195 is not made or made at a lower rate, then the Department may not have any remedy against such assessee. Then he referred to Circular No. 528 [176 ITR (St.) 154] and took us to the contents of the Circular and submitted that the Board has clearly clarified that in order to ensure effective compliance of provision in Section 195 of the Act relating to tax deduction at source in respect of payments outside India, the scope of Section 40(a) has been extended to cover payments in respect of royalty, fees for technical services or other sum chargeable under the Act. He also submitted that the Board has further clarified that after the amendment made by the Finance Act. 1987, even if a person making payment is himself an agent of non-resident. even then tax has to be deducted, which means, even if there is an agent, non-deduction of tax at source will be in contravention of the law, which will now result in disallowance in terms of Section 40(a)(i).

17. The ld. DR vehemently contended that there is no force in the contention of the ld. Counsel of the assessee that the Revenue was bound to discharge the burden of proving that so and so items were not allowable. He pointed out that the decision in the case of Jt. CIT v. Modi Olivetti Ltd. (supra) is altogether distinguishable because that decision was rendered with reference to Section 40A(ii)(b). Under that provision, a disallowance can be made only when an assessee makes payment to the specified persons mentioned in Clause (b) of that section, if the Assessing Officer is of the opinion that such payment is excessive or unreasonable having regard to the fair market value. Therefore, it is quite natural that the Revenue is required to prove that a particular payment was excessive in comparison to the fair market value. But in case of disallowance referred to in Section 40(a)(i), such disallowance has to be made once tax has not been deducted in accordance with the provisions of Chapter XVII-B. which means, nothing is required to be proved once it is found that TDS has not been deducted in accordance with the provisions of Chapter XVII-B and such disallowance is automatic. He also submitted that there is no force even in the submission that when tax has been deducted, but short deduction is made, then provisions of Section 40(a)(i) will not be attracted. This is so because the provision itself makes it clear that certain payments shall not be deducted in computing the income, which include payments made to non-residents, when tax has not been deducted under the provisions of Chapter XVII-B. Therefore, even if the expression "the whole or any part of the tax" is not there in Section 40(a)(i). same is applicable, the reason being that expression used is "notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession":

...

on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under Sub-section (1) of Section 200 and in accordance with the other provisions of Chapter XVII-B", which means whenever tax is not deducted as per the provision, then disallowance is attracted. In any case, the decision in the case of P.V. Rajagopal and Ors. v. UOI (supra) was rendered in respect of salary, where tax is required to be deducted only on the income at the average rate whereas Under Section 195. tax is to be deducted at the flat rate. He also invited our attention to the observations of the court at page 695. which is as under:

The alternate remedy is for an assessee to apply to the Income-tax Officer for a certificate under Section 197 that the amount presumably is not subject to deduction of tax at source or should he subject to deduction at a lower rate. This section may work well in the case of unusual or extraordinary payments. But in the case of an interest subsidy payable to thousands of employees it would be meaningless to suggest that each employee should approach the Income-tax Officer for a certificate under Section 197. Some employees may be able to get it in time, some may not.

He forcefully argued that in this case, the court took this view because thousands of employees were involved and the court felt that it may not be practical for each of the employee to approach the income-tax authorities Under Section 197 for lower deduction. There is no such hardship in the case before us and therefore this decision was not applicable at all.

18. The ld. DR argued that normally the deductor (of tax) is duty bound to deduct and the recipient of such payment on which tax has been deducted is not required to pay even advance tax even when the deductor fails and in such case the Department will have no remedy. He submitted that these observations were made by the Madras High Court in the case of CIT v. Madras Fertilizer Ltd. 149 ITR 703(Mad). He submitted that in this ease. the Bank which had paid interest to assessee has failed to deduct tax, but still the court held as under:

Hence, where the statute provides for deduction of tax at source in respect of a particular income. the concerned assessee need not pay any advance tax in relation to the said income. In this case it is not in dispute that in respect of the interest income deduction of tax at source is contemplated Under Section 194A of the Act. However, the deduction at source has not been effected by the banks which paid the interest to the assessee which they should have done as per the provisions of the Act. For the default of compliance with Section 194A, the bank can be brought under Section 201 as an assessee in default. Section 201(1A) specifically provides that if a person or authority who is bound to make a deduction of tax at source as contemplated by the statute does not deduct or after deducting fails to pay the tax. then such a person or authority is liable to pay simple interest on the ' amount of tax not deducted from the date on which such tax was deductible to the date on which the said tax was actually paid. Thus, in respect of interest income on which deduction of tax at source should have been made, the liability to pay interest is fastened on the person or authority who failed to make deduction as required under Section 194A. Therefore, in respect of the tax payable on the said interest income, the assessee also cannot be taken to be liable to pay interest. Otherwise, it will mean that there are two persons under the Act to pay interest on tax on the same income. The Legislature would not have contemplated such a situation where in respect of the tax on interest income, two persons are liable to pay interest for the delayed payment of tax. We are, therefore, inclined to hold that wherever there is a possibility of a deduction of tax at source, the person who had failed to deduct tax at source is liable to pay interest and not the assessee, as otherwise, there will be charging of interest twice on the payment of tax in relation to the same income. Such an interpretation should normally be avoided. In this case, therefore, the Tribunal appears to be right in holding that in terms of Section 215 interest could not be levied on the assessee on the tax which is deductible at source.

(emphasis supplied).

19. Further the ld. DR referred to the decision of the Apex Court in the case of Associated Cement Co. Ltd. v. CIT 201 ITR 435(SC), where it was clearly held that person responsible for payment has to deduct tax from the entire sum paid or credited and not merely income component of the same. He referred to the provisions of Section 194C and submitted that during the relevant time that section also contained the expression "income comprised therein" and the section read as under:

194C (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and ...

...

(i) shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.

(emphasis supplied).

This means that the language of Section 194C was identical to that of Section 195 as far as reference to the expression "income comprised therein" is concerned. Then he brought to our attention the head-note of the decision in the case of Associated Cement Co. Ltd. v. CIT (supra), which reads as under:

Held, dismissing the appeal (i). that Section 194C(1) had a wide import and covered "any work" which could be got carried out through a contractor under a contract including the obtaining of supply of labour under a contract with a contractor for carrying out any work. The section was not confined or restricted in its application to "works contracts" (see p. 440 B - D).

(ii) That the percentage deductible under Section 194C(1) was from the sum or sums credited to the account or paid to the contractor. The words "on income comprised therein" appearing in the section immediately after the words "deduct an amount equal to two per cent of such sum as income-tax", from their purport, could not be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account or paid to him. It was neither possible nor permissible for the payer to determine what part of the sum paid to the contractor constituted the income of the latter (see p. 441 A E).

20. While turning to the decision of the Apex Court in the case of Transmission Corporation of AP Ltd. v. CIT (supra), he submitted that this case was decided Under Section 201 of the Act. He then referred to the decision of the High Court in this case and referred to page 758 and 762 of the judgments rendered by the High Court and pointed out that in this case application Under Section 195(2) was also moved and therefore the Assessing Officer got the opportunity to determine the amount of profits comprised in the gross payments. Therefore, as far as reference to the second question by the ld. Counsel of the assessee is concerned, the facts are quite distinguishable. In any case, from every judgment, it is not the decision on every small fact which could he applied in other cases, but the doctrine of precedent would remain restricted only to the ratio decided in a particular decision and in this regard, he referred to page 594 and 595 of the Transmission Corporation of AP Ltd. v. CIT (supra). He submitted that clearly the ratio seems to be that if no application is made Under Section 195(2). the income tax has to be deducted on the gross amount.

21. He then referred to the decision of the Delhi Bench of the Tribunal in the case of HNS India VSAT Inc. v. Dy. Director of Income-tax, International Taxation 95 ITD 157(Del), where in similar circumstances, it was held that when no application was made Under Section 195(2). the assessee was under obligation to deduct tax at source and once no such tax was deducted, then disallowance of such payments Under Section 40(a)(i) were justified. He submitted that similar view was taken by the Mumbai Bench of the Tribunal in the case of Satellite Television Asian Region Ltd. v. DCIT 99 ITD 91(Mum). He submitted that in this decision, it was clearly held that for invoking the provisions of Section 40(a)(i). it was not necessary for the Assessing Officer to establish the chargeability of tax of payments in question. He also relied on Czechoslovak Ocean Shipping International Joint Stock Company and Anr. v. ITO 81 ITR 162.

22. In the rejoinder, the ld. Sr. counsel of the assessee submitted that the ld 1)R was not correct in submitting that in case of Transmission Corporation of AP Ltd. v. CIT (supra) application Under Section 195(2) was made in all the three cases where payments were made to non-resident parties. He referred to the decision of the High Court at page 761 and pointed out that only in one case, application Under Section 195(2) was made. Then while referring to page 595 of the decision in the case of Transmission Corporation of AP Ltd. v. CIT (supra) by the Supreme Court and submitted that herein the context was whether the amount paid was pure income or not. He also submitted that appeal was filed in this case by the assessee, which means, answer to second question given by the High Court was accepted by the Department. The Supreme Court in that case was concerned only with the question whether total amount included only a part as income and even then whether tax was to be deducted, i.e.. in other words the first question framed by the High Court. He also referred to the decision of Berger Paints India Ltd. v. CIT 266 ITR 99 and submitted that when Department does not challenge the correctness of a particular decision in case of one assessee, then it is not open to the Department to challenge the same in case of another assessee. Then he referred to page 3 of the assessment order where the Assessing Officer has extracted the details of contract entered into by the assessee with the non-resident party regarding taking on hire of rigs and other machines for exploration of oil in the Indian shore. These facts clearly establish that Section 44BB was applicable to such non-resident parties and since the assessee was not entertaining any doubts in this situation, therefore it was never thought appropriate to make application Under Section 195(2). He then referred to Section 194C and submitted that when direct decision in the form of Transmission Corporation of AP Ltd. v. CIT (supra) is available in respect of deduction of tax Under Section 195, then there is no need to refer to the decision of Associated Cement Co. Ltd. v. CIT 201 ITR 435. In any case, it is settled principle that when two decisions from Supreme Court are available, then the latter decision in respect of that issue should be followed. In this regard, he relied on the decision of the Delhi High Court in the case of Bhika Ram and Ors. v. UOI 238 ITR 113(Del). Then referring to the case of HNS India VSAT Inc. v. Dy. Director of Income-tax, International Taxation (supra), he submitted that, that decision is clearly distinguishable because there are two distinguishing features viz.. (i) in that case no tax was deducted at all. and (ii) that payment was made towards technical services. In case of technical services, obviously the amount of TDS has to be on the gross payment. Similarly in the case of Satellite Television Asian Region Ltd. v. DCIT (supra), no tax was deducted at all. He submitted that the decision of Czechoslovak Ocean Shipping International Joint Slock Company and Anr. v. ITO (supra) is not relevant to the issue because the assessee never made any application Under Section 195(2).

23. the ld. Sr. counsel of the assessee submitted that it is not correct to say that the Department will have no remedy if tax is not deducted from non-resident, because the Assessing Officer can always issue notice Under Section 201. which deals with the consequences of failure to deduct and pay tax. The Department can also treat the assessee as agent of the non-resident party Under Section 163 and force the assessee to file returns etc. 24. We have considered the rival submissions carefully in the light of material available on record as well as decisions cited by both the parties. We agree with the first submissions of the ld. DR that we are concerned in this appeal with the disallowance made by the Assessing Officer and confirmed by the CIT(Appeals) Under Section 40(a)(i) in the assessment completed against the assessee, against which the assessee has come in appeal before us. We are not concerned with the issue whether the provisions of Section 44BB are applicable to the non-resident party, because such party has not filed any return and consequently no appeal is pending before us. Applicability of Section 44BB would depend on the context laid down in that section. It would mean that if a particular non-resident party who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire to be used for exploration of oil. etc., then profits have to be assumed on a particular percentage, what is in common parlance known as presumptive tax. But for coming to that conclusion, obviously the nature of business of such party what are the services or facilities or machinery, etc. being used or provided on hire, and various other factors needs to be examined in detail. Then such party also has a right under Sub-section (3) to claim lower profits than prescribed as presumptive profits in Sub-section (2) of Section 44BB. We agree with the ld counsel of the assessee that the purpose of introduction of Section 44AB was simplification of taxation in case of non-residents, who were engaged in the business of providing services and facilities in connection with, or supply of plant and machinery on hire used or to he used in the exploration or for exploration of mineral oils, because such taxation involved number of complications. However, we have to agree with the ld. DR that any party claiming benefit of Section 44BB has to file return and then only the income-tax authorities can pronounce whether such party is entitled to the benefit of provisions of Section 44BB or not. This issue cannot be decided by a party who is supposed to make payment to non-resident without filing any details in the form of return by such nonresident party with the tax authorities. Therefore, the ld. DR is clearly right that the issue regarding application of Section 44BB to the nonresident party to whom payments were made by the assessee company cannot be examined in the case of assessee itself. We are also unable to agree with the submission of the ld. Sr. counsel of the assessee that there is no expression such as "existing assessee" used by the CIT( Appeals) by holding that provisions of Section 44BB were applicable only in the case of existing assessees. In view of the legal situation which we have discussed, perhaps what the ld. CIT (Appeals) meant was applicability of these provisions could be examined only when somebody had filed return and was an existing assessee. Naturally applicability of this provision cannot be examined in a ease of a person who has never filed am return because after all nature of business, nature of activities and other things require examination by the tax authorities. We are of the humble opinion that the overall scheme of the Act cannot be lost sight of. Sections 28 to 44DA deals with computation provisions under the head income from profits and gains of business or profession. Whenever some income is assessable under that head, the same has to be computed in accordance with the Chapter IV i.e., Sections 28 to 44DA. But Chapter XVII deals with collection and recovery of tax and part A of this chapter consisting of Sections 190 and 191 are of general nature with regard to deduction at source and advance payment as well as direct payment. Whereas part B specifically deals with the deduction of tax at source. Therefore, this Chapter deals with the mode of taxes being collected from the assessee. whereas Chapter IV deals with computation of income and accordingly the computation of tax on the same. Therefore, the issue pertaining to one aspect of taxation i.e., computation of taxable income and tax cannot be mixed with the other aspect, i.e., collection of taxes. Therefore, for proper appreciation of the issue raised before us, let us examine what Section 40(a)(i) prescribes, which is as under:

Amounts not deductible.

40. Notwithstanding anything to the contrary in Section 30 to 38. the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession".

(a) in the case of any assessee

(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April. 1938), royalty, tees for technical services or other sum chargeable under this Act, which is payable, (A) outside India, or (B) in India to a non-resident, not being a company or to a foreign company.

on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under Sub-section (1) of Section 200 and in accordance with other provisions of Chapter XVII-B:

Provided that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

25. A plain reading of the above provision would clearly show that no deduction shall be allowed in terms of Section 28 to 38 for any expenditure, payment for which has been made to a non-resident, on which tax has not been deducted in accordance with the provisions of Chapter XVII-B. A careful reading of the provision would show that it is starting with non-obstante clause, which means, it would prevail over Sections 30 to 38, which are basically sections dealing with deductions to be given for computing the business profits under various sections. This in turn in plain words means, if some expenditure has been incurred for the purpose of business, where payment for the same has been made to a non-resident and tax to be deducted in accordance with the provisions of Chapter XVII-B has not been deducted, then such deduction cannot be allowed, even if expenditure was incurred for the purpose of business. Because of the wordings "in accordance with the provisions of Chapter XVII-B. the argument of the ld. Sr. counsel of the assessee that this provisions will not be applicable if it is a case of only short deduction in view of the decision of P.V. Rajagopal and Ors. v. UOI (supra), does not carry any weight because it was observed in that decision that Section 201 was a penal provision and therefore the provision has to be construed strictly, whereas Section 40(a)(i) is not a penal provision and therefore the ratio of the decision cannot he made applicable to the ease before us. In any case, Section 40(a)(i) very clearly uses the expression "in accordance with the other provisions of Chapter XVII-B", which would include Section 201 also and would include the expression "the whole or any part of the tax", which has been inserted in Section 201 by the Finance Act. 2001 with retrospective effect from 1.4.1962. Therefore, whatever may be the impact of the absence of the expression "the whole or any part of the tax" in Section 40(a)(i). it will not affect the disallowance Under Section 40(a)(i) because this section clearly uses the expression "in accordance with the provisions of Chapter XVII-B", which would include Section 201 also.

26. We also find no force in the submission of the ld. Sr. counsel of the assessee that the Department was duty bound to discharge the burden before disallowing any payment, because for making disallowance burden lay on the Department, Even assuming that any such burden lies on the Department, it stands to be discharged once it is proved that the assessee has not deducted tax in accordance with the provisions of Chapter XVII-B, because disallowance Under Section 40(a)(i) only envisages disallowance of any payment made to non-resident if tax has not been deducted on such payment in terms of Chapter XVII-B. Once it is shown to the assessee that such taxes have not been deducted, then burden would shift to the assessee to prove that such taxes have already been deducted or the assessee was not required to deduct any tax.

27. We also find no force in the submission that the provision of Section 195(2) is not mandatory in the sense that being a beneficial provision, the assessee may or may not choose to make application under this provision. In the same breath, a further argument in this respect was raised that merely non-making of application Under Section 195(2) cannot attract disallowance Under Section 40(a)(i). On the face of it, this argument may look attractive, but when we look at the whole of Section 195 and Chapter XV11-B, then the real picture would emerge. As contended by the ld. DR, Chapter XVII-B deals with collection of taxes and Part B of this Chapter specifically deals with the provisions of tax to be deducted at source. Section 195 reads as under:

195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

Provided....

Provided further....

Explanation....

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine by general or special order, the appropriate proportion of such sum. so chargeable, and upon such determination, tax shall be deducted under sub-section. (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under Sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under Sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section; and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under Sub-section (1).

The above provision clearly shows that any person responsible for making payment to non-resident in respect of any interest or any other sum chargeable under the provisions of this Act has to deduct tax at the rates in force. Now what is the meaning of "any other sum chargeable under the provisions of this Act". Obviously it would mean that portion of the sum on which tax is payable by such non-resident. But how much that portion is actually there? This needs investigation and there may be situations that 100% of such sum is chargeable to tax and there may be situations where practically the whole of such sum is not chargeable to tax. This would depend on the facts and circumstances of each case. Now whenever an assessee making payment to a non-resident finds that only a particular portion is chargeable, then obviously he has been given a right in terms of Sub-section (2), which the ld. Sr. counsel of the assessee has called a beneficial section. We have no quarrel whether this section is a called a beneficial section or machinery provision because for working out the amount of tax to be deducted on a particular portion of sum chargeable, this provision is absolutely necessary. As per Sub-section (2). whenever a person responsible for paying any sum chargeable considers that whole of such sum would not be income chargeable in the case of recipient, he may make an application to the Assessing Officer to determine the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted under Sub-section (1) only on that proportion of sum which is so chargeable, which means, the person responsible for making payment etc. cannot himself decide what is the appropriate proportion which is chargeable to tax. The expression "by general or special order" and the "appropriate proportion" in this sub-section are key words to understand the meaning in the sense that there may be situations where only one particular portion of such sum is taxable in case of similar assessees and the income-tax authorities may make a general order that in such type of assessees that a particular proportion of the sum has to be considered as income chargeable to tax and tax can be deducted accordingly. It seems the Central Board of Direct Taxes has already issued a circular in respect of advertisement income earned by non-resident TV channels etc., where a proportion of income has been fixed to be considered as income. Both the parties had mentioned about this Circular in a cursory fashion and the same was not produced before us. so we are not going in detail. But suffice it to say that there can be situations which can be generalized and the proportion of the sum can be determined on general basis. In all other situations, where "appropriate proportion" is required to be determined, the assessee has to go before the taxing authorities and get such "appropriate proportion" of the same on which tax is to be deducted, determined and accordingly deduct tax. Therefore, wherever a general situation exists a general order is passed by the Department in the form of Circular etc. No such circular has been issued by the CBDT, which means such parties must apply Under Section 195(2) for special order so as to get the "appropriate proportion" determined. Also the word "appropriate proportion" is significant. If the payer of such sum was to decide the proportion of amount which was chargeable, then there was no need to use the words "appropriate proportion". The use of these words clearly suggests that somebody needs to determine such appropriate proportion after considering all the facts and circumstances of the case. Naturally this somebody cannot be the assessee himself. Therefore, assessee is required to come before the income-tax authorities in the form of application Under Section 195(2) and make a claim that only a particular proportion is chargeable and the appropriateness of the same is to be decided by the Assessing Officer and only after that, such sum is to be determined. This clearly shows the requirement of application of mind by the taxing authorities and therefore this sum cannot be decided by the payer of such sum. whatever may be the circumstances. If such appropriate proportion was to be decided by the payer or the assessee. then Section 195(2) will become redundant.

28. The ld. Counsel of the assessee has put in great emphasis on the judgment of the Hon'ble Andhra Pradesh High Court where at page 763. the Hon'ble High Court framed two questions which are as under:

(a) Whether the provisions of Section 195 of the Act are applicable to cases where the sum paid to the non-resident does not wholly represent the income; and

(b) If Section 195 is applicable to such cases, whether the ITO could enforce deduction of tax at source on the gross amount of trading receipts or only in respect of that portion of the trading receipts which may be chargeable as income under the Act.

The court further observed that though the first question was only referred, but the second aspect is also an integral part of the first question and it is necessary to reframe the question in order to bring the real controversy between the parties. Then he mainly relied that ultimately the Hon'ble High Court has replied question No. 2 as under:

(2) The obligation of the respondent-assessee to deduct tax under Section 195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred.

29. He submitted, this means even if no application is made us. 195(2). even then the ITO is required to compute the tax to be deducted only on the appropriate portion which was chargeable under the Act.

30. We have read the whole judgment of the Hon'ble Andhra Pradesh High Court as well as the judgment of the Hon'ble Apex Court very carefully. For understanding this aspect, we need to know certain facts. In this case, the Andhra Pradesh Electricity Board (for short "Electricity Board") made certain payments to non-residents against purchase of machinery and equipment and also against the work executed by the nonresidents in India of erecting and commissioning the machinery and equipment. The Electricity Board made the payments to various parties without deducting tax at source. The ITO was of the view that the Electricity Board was under an obligation to deduct tax at source Under Section 195 and because of the failure of the Electricity Board to deduct such tax, the Electricity Board was deemed to be an assessee in default in respect of tax deductible at source Under Section 195 and consequently the ITO passed orders Under Section 201 determining the tax, which according to him, was deductible at source Under Section 195. From further details it can be noticed that in respect of R.C. No. 203 of 1998, which related to payments made by the Electricity Board to M/s. Charmilles Engineering Works Ltd., Geneva, Switzerland. Separate contracts were entered into with this non-resident for supply of equipment and assembling, erection and testing and commissioning of the said equipment. Various payments were made from the assessment years 1966-67 to 1972-73. It seems on erection and testing etc. of the equipment, the Electricity Board was required to make the payment to non-resident free of income-tax and therefore the ITO grossed up the net payments so as to arrive at the corresponding gross amounts, which after the payment of tax by the non-resident under the provisions of the Act. would yield the net amount paid and treated the difference between such gross amount and the net amount paid as the tax which was deductible at source Under Section 195. Thus, the difference between the gross amount and the net amount was held to be deductible at source. Against the net amount paid in assessment year 1966-67 amounting to Rs. 3,65.237. the gross amount arrived at by the Assessing Officer was Rs. 18,25,805 on which tax, according to the Assessing Officer, was deductible at 30% income-tax plus 3% surcharge. By this process, the Assessing Officer concluded that the Electricity Board was under obligation to deduct tax amounting to Rs. 14,60.568 and for failure to deduct such lax, the interest was charged Under Section 201(1 A) and corresponding interest on the same of Rs. 14.60,568 was worked out at Rs. 12.77,996. The net result was that against the net payment of Rs. 3,65,237 paid to non-resident, the ITO determined the tax deductible at source along with interest at Rs. 27.38,564. which seemed to be very curious to the Hon'ble High Court. Similarly astounding figures were arrived at in respect of other payments. E.g., in case of R.C. No. 205 of 1978 the Electricity Board had entered into an agreement with Oerliken Engineering Co. In this case against the payment made amounting to Rs. 17,00,784, the tax deductible was arrived at Rs. 72,01.554 and interest Under Section 201(1 A) at Rs. 58,55.747 totalling to Rs. 1,30,57,301.

31. We think that the importance of question No. 2 framed by the Hon'ble Andhra Pradesh High Court should be judged in the background of above noted facts as well as it should be kept in mind that the above decision was rendered in respect of Section 201, which means, the court was asked upon to determine whether the assessee was required to deduct tax and if yes. on what amount and what should be the appropriate rate of interest. Keeping these things in view, the Hon'ble High Court very clearly observed as under:

Two fundamental questions arise for consideration and they are : (a) Whether the provisions of Section 195 of the Act are applicable to cases where the sum paid to the non-resident does not wholly represent income; and (b) if Section 195 is applicable to such cases, whether the ITO could enforce deduction of tax at source on the gross amount of trading receipts or only in respect of that portion of the trading receipts which may he chargeable as income under the Act. The question referred to us deals with only the first aspect mentioned above. The second aspect is an integral part of the first aspect and it is necessary to reframe the question in order to bring the real controversy between the parties, which we shall do, before furnishing the required answers. We shall examine both the aspects as they are the subject-matter of consideration by all the authorities below and the counsel for both sides addressed elaborate arguments on these two aspects.

The need for framing the second question was explained, which we have also appreciated in the background of the facts of the case. Then the High Court after considering the submissions of the parties examined Sections 192. 193, 194, 194-A, 194-B, 194-C and 194-D as well as Section 195 and considered the scheme regarding tax to be deducted at source in respect of various payments, after which it was observed at pages 765 to 767 as under:

We shall now examine the provisions of Section 195 of the Act which fall for consideration in these references. Sub-section (1) of Section 195. to the extent it is relevant, lays an obligation on any person responsible for paying to a non-resident any interest, not being interest on securities or any other sum, not being dividends chargeable under the provisions of the Act. to deduct tax at source at the rates in force. Sub-section (2) of Section 195 provides that, where the person responsible for paying any such sum chargeable under the Act to a non-resident considers that the whole of such sum would not he income chargeable in the case of the recipient, he may make an application to the ITO to determine, by general or special order, the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under Sub-section (1) only on that proportion of the sum which is so chargeable, It is not necessary to refer to the other provisions contained in Section 195, as they are not relevant for our purpose. We are unable to find, in the language of Section 195. any support for the argument that the expression "any other sum" occurring in the section refers necessarily to sums which represent wholly income or profits. As we have already pointed out. the scheme of tax deduction at source applies not only to amounts paid which wholly bear "income" character, but also to gross sums. the whole of which is not income or profits to the recipient, such as payments to contractors and sub-contractors under Section 194C and the payment of insurance commission under Section 194D. That being so. it is not possible to accept the contention of the learned Counsel for the Electricity Board that there is no sanction to deduct tax at source from sums which do not represent wholly income or profits. Indeed. the scheme of tax deduction at source makes distinct provisions for deduction of tax from sums which represent wholly income or profit, or other sums, which may not so represent. In our opinion, the provisions of Section 195(2) make the intendment of the Legislature very clear that what was required to be considered for the purposes of tax deduction at source under Section 195(1) is not wholly income or profit. We are not impressed with the argument that Section 195 expressly refers to "any other sum chargeable under the provisions of the Act" and consequently, the whole of such sum must be chargeable as income under the Act. In other words, what is contended is 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. If this contention is to be accepted, Section 195(2) will be rendered otiose, because if the obligation to deduct tax in respect of "any other sum" attaches only to sums which are wholly chargeable under the Act. then the necessity for the person responsible for paying such sums making an application to the ITO under Sub-section (2) to determine the appropriate proportion of such sum so chargeable does not arise. If the entirety of the sum, as contended by the learned Counsel for the Electricity Board, should be taxable for Section 195 coming into operation, then Sub-section (2) of Section 195 becomes entirely ineffective. We cannot accept an argument which renders a legislative provision a dead letter. If. on a harmonious construction of the relevant provisions, it is possible to make effective all the provisions contained in a statute, courts must always lean in favour of such interpretation. This is an established rule of interpretation, faking note of the scheme of tax deduction at source, which we have already mentioned above, it would be entirely consistent if the expression -any other sum" occurring in Section 195(1) is interpreted as referable not only to a sum which is wholly income chargeable under the Act. but also to a sum, which is not wholly income so chargeable. Then, the provisions of Sub-section (2) of Section 195 will become fully effective, for the aforesaid reasons, we must prefer the interpretation which renders Section 195(2) effective without making it a dead letter. We do not also find anything inconsistent in the scheme of the Act or in the exigencies requiring deduction of tax at source to protect the interests of the Revenue from out of the sums consisting of only a small moiety of income. The safeguard provided in Sub-section (2) of Section 195 protects the interests of the person receiving such sums because an application can always be made to the ITO to determine the appropriate proportion of the sum chargeable under the Act, so that tax deduction at source can be confined only to such appropriate proportion and not to the gross amount. It should also be borne in mind that whatever tax is deducted at source under Section 195 from out of the gross sum is not irretrievably lost to the recipient. It is only a provisional payment which will be made to the Central Government to the credit of the recipient. The provisions of the Act enable the recipient, whether such recipient is a resident or non-resident, to file a return of income in the regular course and prove to the satisfaction of the ITO the income chargeable under the Act. After such determination, if the tax provisionally deducted at source under any of the provisions contained in Part B of Chapter XVII is in excess of what is required to be paid, the ITO is bound to grant refund of the excess tax deducted at source with interest to the recipient. Thus, the interests of the recipient are fully protected under the scheme of the Act. We do not see any ground for the person responsible for making the payment to object to the deduction of tax at source provisionally either from sums which represent wholly income or from sums which represent only a part of the income chargeable under the provisions of the Act, so long as the recipient is clearly told that the tax deducted at source from out of the sums paid are liable to be refunded by the Income-tax Department to the recipient if. by any chance, the tax deducted at source is more than the tax properly chargeable on the total income of the recipient. We, therefore, uphold the contention of the Revenue that the provisions contained in Section 195 of the Act take in their sweep any sums paid to a nonresident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents.

32. The above observations are very very clear and no doubt can be entertained that the initial assumption would be that whole of such sum is liable for deduction and in case the assessee has any doubt or is of the opinion that smaller proportion of such sum is liable for taxation, then he could make application Under Section 195(2) and request the tax authorities to determine such proportion. It is also clear that while answering second question the court observed that obligation of the respondent to deduct tax Under Section 195 was limited to appropriate proportion of income because in this case the Assessing Officer has determined exorbitantly high proportions which were required to be deducted while grossing of such payments. For determining tax and interest etc. Under Section 201. the Assessing Officer was accordingly duty bound to determine only tax in respect of that portion for which income was chargeable to tax. But if no tax Under Section 195(2) has been made, then same analogy cannot be applied for the purpose of Section 40(a)(i). These things further become clear from the judgment of the Hon'ble Supreme Court, which was rendered in appeal filed by the assessee. On page 591 to 592, the Hon'ble court has reproduced the provisions of Section 190 to 197 and then by analyzing the provisions, it was observed as under:

Before considering Section 195. it is to be stated that the said section is in Chapter XVII containing provisions for collection and recovery of tax. The said Chapter is divided into various pans as A to F. Part A - General - deals with deduction at source and advance payment. Section 190, inter alia, provides that notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment, as the case may be, in accordance with provisions of the Chapter. Hence, before a regular assessment is made, tax on income shall be payable by deduction or collection at source or by advance payment in accordance with the other provisions. Section 191 provides for direct payment of income-tax by the assessee where provision is not made under the Chapter for deducting income-tax at the time of payment. Thereafter. Part B of the said Chapter contains a group of sections which provides for "deduction of tax" at source. Section 192 provides for deduction of income-tax on the income chargeable under the head "Salaries" by any person responsible for paying such salaries. Section 193 provides for deduction of income-tax by the person responsible for paying any income by way of "interest on securities". Similarly, Section 194 provides for deduction of income-tax by the company paying "dividends". Section 194A. Section 194B. Section 194BB provide for deduction of income-tax on the income of interest other than interest on securities, winnings from lotteries or crossword puzzles and winning from horse races, respectively Even with regard to payments to contractors and sub-contractors, specific provision is made for deducting the lax specified on the basis of payment there of in cash or by issue of a cheque or draft or by any other mode at the rate of one per cent, or two per cent, as the case may he of such sum as income-tax on income comprised therein Section reveals the intention of the Legislature to enforce tax deduction at source even in respect of gross sums, the whole of which do not represent income chargeable under the Act. Similar provisions are made in Section 194D, Section 194E, Section 194EE, Section 194E, Section 194G Section 194H Section 194-I, Section 194J and Section 194K, which cast an obligation to deduct tax on the person responsible for paying such sum which may not represent income. In all these cases, what is deducted is the amount specified in the said sections without there being any actual assessment. Thereafter, Section 194 deals with deduction of tax in cases where payment is to be made on a non-resident which, inter alia, provides

(a) Any person responsible for paying to a non-resident, any interest or any sum, chargeable under the provisions of this Act (other than interest on securities and salary), shall, at the time of payment, deduct income-tax thereon at the rates in force. Sub-section (1) of Section 195 excludes from its operation the sum which is to be paid as interest on securities or the sum which is chargeable under the head "Salaries" as the deduction on such sum would be governed by other sections, namely. Section 192 and Section 193

(b) Where the person responsible for paying any sum chargeable under the Act to a non-resident considers that the whole of such sum would not be chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine "the appropriate proportion of such sums so chargeable"; upon such determination, tax shall be deducted under Sub-section (I) only on that proportion of the sum which is so chargeable.

(c) Not only this, but Sub-section (3) provides that any person entitled to receive any interest or other sum on which income-tax is to be deducted under Sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under the sub-section.

(d) Further, Section 197 provides that the recipient can file an application to the Assessing Officer for a certificate that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax and the Assessing Officer, if satisfied, can grant such certificate as may be appropriate.

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. 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 (I), 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, I he sum which is to be paid may be income out of different heads of income provided under Section 14 of the Act. that is to say, income from salaries, income from house property. profits and gains of business or profession, capital gains and income from other sources. The scheme of tax deduction at source applies not only to the amount paid which wholly bears "income" character such as salaries, dividends, interest on securities, etc.. but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. It has been contended that the sum which may he required to be paid to the non-resident may only be a trading receipt, and, may contain a fraction of the sum as taxable income. It is true that in some cases, a trading receipt may contain a fraction of the sum as taxable income, but in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions, it may contain a large sum as taxable income under the provisions of the Act. Whatever may be the position, if the income is from profits and gains of business, it would be computed under the Act as provided at the time of regular assessment. The purpose of Sub-section (1) of Section 195 is to see that the sum which is chargeable under Section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon 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 required to be done by them is to file an application for determination by the Assessing Officer that such sum would not he chargeable to tax in the ease 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.

(emphasis supplied).

33. The Hon'ble Court clearly observed that the provision of Section 195(1) is for "tentative deduction", which means, the initial assumption should be that the lax has to he deducted on the whole of the amount because same is subject 10 regular assessment and it was specifically pointed out that the rights of the parties were not in any manner adversely affected, because wherever the assessee had any doubt that tax is to be deducted on the lower proportion, then such assessee had the option to make an application Under Section l95(2). Even the recipient of such payment can make an application to the Assessing Officer that he may be allowed to receive the payment without any deduction of tax. We would again reiterate that though Sub-section (2) of Section 195 is of beneficial nature definitely and is an optional one, but it does not mean that if the assessee chooses not to take the benefit, then he should be allowed to get away without deduction of tax at source, because the assessee has some other logic. How income has to be computed or tax is to be deducted etc. these things have been clearly laid down in Chapter IV and Chapter XV1I-B and it is the prerogative of the tax authorities to determine these things as per the provisions of the Act and not the prerogative of the assessee. except in case of tax to be deducted Under Section 192 in case of salaries, where the average rate of tax has to be deducted depending upon the income of the assessee. otherwise tax has to be deducted on the rules specified. We have already clarified in the initial portion of the order that the provisions regarding computation of income and tax cannot be mixed up and confused with the provisions regarding deduction of tax at source. We fail to understand what prevented the assessee from making an application Under Section l95(2) and claim the so-called benefits Under Section 44BB. We are at a loss to understand how the assessee sitting in his own office can lake such a decision that whatever payments it was making to the nonresidents ultimately would he covered us. 44BB. even when such nonresident had never filed any return. We think, by adopting this course of action, the assessee tried to decide everything on his own. ignoring all statutory provisions.

34. A serious doubt was raised by the ld. Sr. counsel of the assessee that ratio of the decision in case that ratio of the decision in case of Transmission Corporation of AP Ltd. v. CIT (supra) was basically that the obligation of the assessee to deduct tax Under Section 195 is limited only to the appropriate portion of the income chargeable under the Act, because of the answer to question No. 2 given by the Supreme Court in the last paragraph of the order. Here we find that though apparently this argument seems very attractive, but when we read the whole judgment carefully, we find that there is no force in this submission This is mainly so, as pointed out by us in the above noted paragraphs that the court was concerned with the determination of amount of tax deductible and interest thereon us. 201 and it was also seen that the Assessing Officer had worked out fantastic figures of such tax and therefore. the court had partly upheld the contention of the Department that the assessee was under obligation to deduct tax at source Under Section 195 in respect of sums paid to non-residents. I here fore, it becomes clear that since the Assessing Officer had worked out apparently unreasonable sums on such tax to be deducted, the court had sent the matter back to the file of the Assessing Officer for determination of correct tax and that is why the answers of the Andhra Pradesh High Court became more relevant, which are given in the last paragraph of the judgment and are as under:

(1) The respondent-assessee, who made the payments to the three non-residents above referred, was under an obligation to deduct tax at under Section 195 of the Act in respect of the sums paid to them under the contracts entered into (2) The obligation of the respondent-assessee to deduct tax under Section 195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred.

(3) While the ITO was correct in the determination of tax under Section 195 in respect of the payments made to M/s. Sacheron Works Ltd. in R.C. No. 204. he was in error in determining the tax deductible under Section 195 in respect of the gross sums of money paid to M/s. Charmilles Engineering Works Ltd. in R.C. No. 203 and M/s. Oerlikon Engineering Company in R.C. No. 205.

35. The answers to questions would show that the High Court sent the matter back to the file of the Assessing Officer for correct determination of tax and in that sense, it was important to work out the tax on the basis of income chargeable under the Act.

36. We would like to mention that the first principle of doctrine of precedent is that what is binding on the lower court or Tribunal is the ratio decicdendi in a particular case decided by the higher court. It is not that even word or sentence from the judgment of a higher court which is binding and in this context, it would be pertinent to note the observations of the Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works P. Ltd. 198 ITR 297 (SC):

It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and. while applying the decision to a later case, courts must carefully to ascertain the true principle laid down by the decision.

37. Now the question is what is the ratio of the decision of the Transmission Corporation of AP Ltd. v. CIT (supra) case. As pointed out by the ld. DR. basically the issue involved in the case of Transmission Corporation of AP Ltd. v. CIT (supra) was determination of tax and interest etc. Under Section 201 and one of the issue was whether the provisions of Section 195 of the Act are applicable to cases where some paid to nonresident does not wholly represent income. The Hon'ble Andhra Pradesh High Court as well as the Hon'ble Supreme Court has very clearly observed that if is held that tax is to be deducted only on the proportion of income comprised in the gross payment made to non-resident in the absence of Section 195(2). then the provisions of Section 195(2) would be otiose and therefore, it may not be correct to interpret the provision in this fashion. Then the Supreme Court again very clearly observed that it is a tentative deduction which clearly indicate that deduction has to be made on the whole payment and if the assessee is of the opinion that whole of such gross amount does not constitute income of the recipient, then he could always come to the Department by way of application Under Section 195(2), that is why the Hon'ble Supreme Court clearly observed at page 595, "the rights of payee or recipient are fully safeguarded Under Section 195(2), 195(3) and 197. The only thing which is required to be done by them is to file application for determination by the Assessing Officer that such sum would not be chargeable to tax in the ease of 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 tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at appropriate rate could be deducted at the source.

(emphasis supplied).

38. The next two lines are very important and seems to be the ratio of the decision, which are as under:

If no such application is filed, income tax of such sum is to be deducted and it is statutory obligation of the person responsible for paying such "sum" to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.

(emphasis supplied).

39. From the above observations, it becomes clear from the context of Section 195 the above seems to be the ratio. At this juncture, we would like to point out that in ease any doubt is to be entertained, then one have a look at the decision of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. v. CIT 201 ITR 435 (SC). The brief facts of this case are under the terms and conditions of an agreement between the appellant and a contractor, the contractor was to be paid at a flat rate for loading packed cement bags into wagons or trucks. this rate was fixed on the basis of daily basic wages, dearness allowance, etc. and Clause 13 of the agreement stipulated reimbursement by the appellant to the contractor in case of certain increase in the dearness allowance etc.. payable by the contractor to the workmen employed by him. The appellant paid the contractor the amount stipulated at a flat rule as well as amounts by way of reimbursement under Clause 13. But the deduction of tax at source made by he appellant under Section 194C(1) of the Income-tax Act, 1961. fell short of the deductions required to be made thereunder. I he appellant's claim was that it was not liable to deduct any amount under the section. Notices were served on the appellant to show cause as to why action should be taken under Sections 276B(1), 201 and 221 for short deduction. On these facts, the Hon'ble Apex Court considered the provisions of Section 194-C, which at the relevant lime read as under.

194C(1) Am person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and:

shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent of such sum as income tax on income comprised therein.

(emphasis supplied).

40. A reading of the above provision would show that the expression "such sum as income tax on the income comprised therein was also present in Section 194-(.'. On the basis of this expression, the Hon'ble Apex Court observed at page 441 as under:

The above decision cannot be of any help to the appellant for it dues not lay down that the percentage amount deductible under Section 194C(1) should be out of the income of the contractor from the sum or sums credited to the account of or paid to him. the words in the sub-section "on income comprised therein" appearing immediately after the words "deduct an amount equal to two per cent, of such sum as income-tax" from their purport, cannot be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account or paid to him in pursuance of the contract. Moreover, the concluding part of the sub-section requiring deduction of an amount equal to two per cent of such sum as income-tax, by use of the words "on income comprised there in" makes it obvious that the amount equal to two per cent of the sum required to be deducted is a deduction at source. Indeed, it is neither possible nor permissible for the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible to think that Parliament could have intended to cast such impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision. Hence, on the express language employed in the sub-section, it is impossible to hold that the sum credited to the account of or paid to the contractor has to be confined to his income component out of that sum. There is also nothing paid on behalf of the organization to the contractor according to Clause 13 of the terms and conditions of the contract in reimbursement of the amount paid by him to workers, from the sum envisaged therein, as was suggested on behalf of the appellant.

(emphasis supplied).

The above emphasized portion clearly shows that the assessee is not permitted to determine that part of the amount paid by him. which would constitute the income of the latter. Since there is no corresponding provision as in Section 195(2) in Section 194-C. therefore, the deduction was required to be made on the gross amount. Whereas in the case of Section 195. the assessee always is at liberty to approach the Department with a request that only smaller proportion i.e., "appropriate proportion" as mentioned in the section is taxable. Then it is the Assessing Officer, who can decide what proportion is taxable. Therefore. these observations of the Hon'ble Apex Court further clarify the intention of the Legislature as well as the meaning of the decision rendered in the case of Transmission Corporation of AP Ltd. v. CIT (supra).

42. We also find that the issue is covered squarely against the assessee by the decision of the Tribunal in the case of HNS India VSAT Inc. v. Dy. Director of Income Tax (International Taxation) (supra), where it was held that when the assessee had not deducted tax from the payments made to non-residents against various jobs relating to installation and no application Under Section 195(2) was made, then the assessee was under obligation to deduct tax at source and having failed to make any such deduction, the Assessing Officer was fully justified in disallowing payments by invoking the provisions of Section 40(a)(i). We think, it is immaterial whether some tax has been deducted or not and in any case, whatever tax has been deducted by the assessee. corresponding credit has already been allowed by the lower authorities. Similar view was taken by the Mumbai Bench of the Tribunal in the case of Satellite Television Asian Region Ltd. v. DCIT (supra).

43. In view of the detailed discussion and reasons given by us in the above noted paragraphs, we find no merit in the appeal tiled by the assessee In any case, no harm is going to be caused to the assessee due to this disallowance because proviso to Section 40(a)(i) itself makes it clear that whenever the so-called tax is deducted and paid to the Government, the assessee would get the deduction accordingly even in the subsequent year. In these circumstances, we find nothing wrong with the order of the ld. CIT (Appeals) and confirm the same.

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