Income Tax Appellate Tribunal - Chennai
Ajappa Integrated Project Management ... vs Assessee on 28 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH "B" CHENNAI
(Before Shri Abraham P. George, Accountant Member
and Shri George Mathan, Judicial Member)
.....
I.T.A. No. 2169/Mds/2010
Assessment Year : 2007-08
M/s Ajapa Integrated Project
The Dy. Commissioner of Management Consultants Pvt. Ltd.,
Income Tax, v. No.47, Velacherry Road,
Company Circle I(1), Little Mount, Saidapet,
Chennai - 600 034. Chennai - 600 015.
PAN : AAFCA5848L
(Appellant) (Respondent)
C.O. No. 29/Mds/2011
(in I.T.A. No. 2169/Mds/10)
Assessment Year : 2007-08
M/s Ajapa Integrated Project The Dy. Commissioner of
Management Consultants Pvt. Ltd., Income Tax,
No.47, Velacherry Road, v. Company Circle I(1),
Little Mount, Saidapet, Chennai - 600 034.
Chennai - 600 015.
(Cross Objector) (Respondent)
Revenue by : Shri P.B. Sekaran
Assessee by : Shri V.S. Jayakumar
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
Appeal filed by the Revenue and Cross Objection filed by the assessee are directed against the order dated 28.9.2010 of Commissioner of Income Tax (Appeals)-III, Chennai. 2 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11
2. Appeal of the Revenue is taken first for disposal. Revenue has raised four grounds of which, 1 and 4 are general needing no adjudication.
3. Vide its ground No.2, Revenue's grievance is that ld. CIT(Appeals) had deleted disallowance of ` 46,99,128/- made by the A.O. under Section 40(a)(i) of Income-tax Act, 1961 (in short "the Act") for non deduction of tax on consultancy charges paid to non- residents working in oil exploration projects in India. As per the Revenue, deduction of tax was compulsory in view of the decision of Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd. (320 ITR 20). Revenue also placed reliance on the decision of Hon'ble Apex Court in the case of Transmission Corporation of AP Ltd. v. CIT (239 ITR 587).
4. Short facts apropos are that assessee, doing the business of rendering consultancy services for exploration of oil, had engaged outside consultants for rendering such services. There were both receipts from consultancy as well as payment of consultancy fees to the consultants. The receipt derived by the assessee by rendering consultancy service was ` 4,33,61,775/- against which consultancy fees payment claimed was ` 3,67,86,792/-. During the course of 3 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 assessment proceedings, it was noted by the Assessing Officer that there were payment of consultancy fees by the assessee both to residents as well as non-residents. But, in certain cases, assessee had deducted tax only at 4% while in certain other cases, there was no deduction of tax at source at all. Assessing Officer put assessee on notice as to why a disallowance under Section 40(a)(i) of the Act should not be made on the consultancy charges paid without deduction of tax. Assessee, thereupon, filed a petition under Section 144A of the Act before the ACIT, Company Range I, who gave certain directions to the A.O. and the A.O. proceeded in accordance with such directions.
5. Assessee had deducted 4% tax at source on consultancy fees paid to one M/s IP Services (Australia) Pty Limited and to one Shri Dave Sholer. Assessee was under the impression that Section 44BB of the Act would apply in their case since the services rendered by them were in relation to prospecting or extracting or production of mineral oils in India. Hence, as per the assessee, sub-section (2) of Section 44BB of the Act would apply and it was obliged to deduct only 4% tax on payments made to such consultants. The said 4% was arrived at by the assessee considering 10% of the payments as 4 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 income of the recipients by virtue of sub-section (1) of Section 44BB of the Act and applying thereon the tax rate of 40%. However, the A.O. was of the opinion that assessee had not obtained the certificate specified in sub-section (2) of Section 195 of the Act from the Assessing Officer before making a deduction of tax at a lower rate and by virtue of decision of Hon'ble Apex Court in the case of Transmission Corporation of AP Ltd. (supra) an assessee could not take up by itself the role of the Assessing Officer and decide on the rate of tax that was to be deducted or the part of income included in the payments to non-residents. He was, therefore, of the opinion that assessee having deducted tax at a lower rate than specified under the Act, it had not complied with the provisions of Section 40(a)(i) of the Act. Disallowance thereunder was made. Assessing Officer also placed reliance on the decision of co-ordinate Bench of this Tribunal in the case of Frontier Offshore Ltd. v. DCIT (118 ITD 494) and that of Special Bench in the case of Van Oord Acz India (P) Ltd. v. Addl. CIT (112 ITD 79) (Del).
6. In its appeal before ld. CIT(Appeals), argument of the assessee was that both the above consultants were non-residents and persons other than of Indian origin and Section 44BB of the Act was 5 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 applicable to them for services rendered by them in India. Therefore, as per the assessee, their income could be taken only at 10% of consultancy receipts and it had appropriately deducted 4% on the payments made to them considering 40% tax rate. As per the assessee, it had also considered surcharge and the actual deduction effected was at ` 4.182%. Assessee also submitted before ld. CIT(Appeals) that the services by the above non-residents were in relation to oil exploration contract entered into by it with M/s Heramec, M/s Jubilant Oil and M/s Hindustan Oil Exploration Company Ltd. Ld. CIT(Appeals) after verifying the submission of the assessee, held that the assessee had rightly deducted tax at 4.182% on the gross payments since Section 44BB applied to the concerned non-residents. As per ld. CIT(Appeals), the Special Bench of this Tribunal in the case of ITO v. Prasad Productions Ltd. (125 ITD 263) had clearly held that when a payer was under a bonafide belief that the income was not chargeable to tax, application of Section 195 was not called for. Ld. CIT(Appeals) further relying on the decision of Hon'ble Apex Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT (327 ITR 456) held that the payment made when it did not comprise any element of income, the payer could not be held liable for non-deduction of tax at source. As per ld. CIT(Appeals), 6 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 assessee was under a bonafide belief that Section 44BB of the Act was applicable and had, accordingly, deducted tax. Hence, ld. CIT(Appeals) concluded that assessee could not have been forced to follow procedure laid down under sub-section (2) of Section 195 of the Act. He, therefore, deleted the disallowance made by the A.O.
7. Now before us, learned D.R., strongly assailing the order of ld. CIT(Appeals), submitted that the decision of Special Bench of this Tribunal in the case of Prasad Productions Ltd. (supra) could only be applied where there was no element of income in the payment made by the assessee to a non-resident. According to him, here admittedly, a part of the payment was considered as income of the payee by the assessee itself. This being so, according to learned D.R., assessee ought have resorted to the course provided in sub- section (2) of Section 195 of the Act and obtained certificate from the Assessing Officer for lower deduction or non-deduction of tax. As against this permitted course, learned D.R. submitted that, assessee had by itself decided on the income element comprised in the payments made to non-residents and made a deduction of tax at source at a lower rate which violated the very spirit of provisions of tax deduction prescribed under Section 195 of the Act. According to 7 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 him, both, decision of Special Bench in the case of Prasad Productions Ltd. (supra) as well as decision of Hon'ble Apex Court in the case of GE India Technology Centre Pvt. Ltd. (supra) would not help the case of the assessee since assessee itself admitted that part of payment made by it to the non-residents were income in their hands.
8. Per contra, learned A.R. submitted that there was no dispute that income of the non-residents concerned fell under the purview of Section 44BB of the Act since they were engaged in services relating to prospecting and extracting or production of mineral oils in India. Therefore, according to him, only 10% of the receipts of such persons could be considered as income in their hands by virtue of sub-section (1) of Section 44BB of the Act. Assessee having rightly considered this position, had deducted tax at 4% along with surcharge applicable. In any case, according to him, Section 44BB of the Act was a separate code and co-ordinate Bench of this Tribunal in the case of Cairn Energy India Pty. Ltd. v. ACIT (2009) 126 TTJ (Chennai) 226 had held that where special provisions of computation applied, such provisions would prevail over general provisions of computation of income contained in Section 30 to 38 of the Act. 8 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 Therefore, according to learned A.R., no disallowance could be made by invoking Section 40(a)(i) of the Act. In this respect, reliance was also placed on the decision of Hyderabad Bench of this Tribunal in the case of Teja Constructions v. ACIT (2010) 129 TTJ (Hyd) (UO)
57.
9. We have perused the orders and heard the rival contentions. There is no dispute that assessee had effected payments to two non- residents and Section 44BB of the Act applied to these persons since the services rendered by such non-residents were in relation to prospecting for mineral oils in India. There is also no dispute that assessee had deducted tax at the rate of 4.182% considering the tax rate of 40% along with surcharge as payable to the said non- residents. Section 195(1) of the Act, no doubt, specifies that any person paying to a non-resident any sum chargeable under the provisions of the Act, was obliged to deduct tax at source. As held by Special Bench of this Tribunal in the case of Prasad Productions Ltd. (supra), if an assessee was under bonafide impression that no part of the sum paid to the non-resident was chargeable to tax under the provisions of the Act, then it would not be obliged to deduct tax at source. But, where the assessee had an apprehension that a part of 9 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 the payment did comprise income chargeable to tax under the provisions of the Act in the hands of the non-resident, no doubt, sub- section (2) of Section 195 of the Act would have to be resorted to by him by making a proper application to the Assessing Officer. Decision of Hon'ble Apex Court in the case of GE India Technology Centre Pvt. Ltd. (supra) as also that of Prasad Productions Ltd. (supra) underline the position that the assessee had to be under a bonafide belief regarding no part of the payment made to the non- resident being chargeable to tax under the provisions of the Act. Here admittedly, the assessee itself had deducted tax at 4.182%. Therefore, it had a bonafide belief that part of the income was chargeable to tax in India. So these cases cannot save assessee's position. Nevertheless, the Section under which non-residents were liable to tax was Section 44BB of the Act. Section 44BB of the Act is a special provision for computing profits and gains in connection with business of exploration, etc. of mineral oils. Co-ordinate Bench of this Tribunal in the case of Cairn Energy India Pty. Ltd. (supra) has in relation to Section 42 of the Act, which is a special provision for deductions in the case of prospecting for mineral oil, held at paras 14 and 15 of its order, as under:-
10 I.T.A. No. 2169/Mds/10C.O. No. 29/Mds/11
"14. We also find force in the contention of the learned counsel for the assessee that income of the assessee is to be computed as per the special provisions of s. 42 of the Act and consequently no disallowance can be made by invoking the provisions of s. 40(a)(i) of the Act. Though it is not a non obstante provision, yet it is a special provision relating to the computation of the income of an assessee engaged in the business of prospecting for or extracting or producing mineral oils in India. It is a settled legal provision that general provisions must give way to the special provisions. Reference can be made to the judgement of the Hon'ble Supreme Court in the case of CIT v. Shahzada Nand & Sons & ` (1966) 60 ITR 392 (SC) as well as the judgement of the Hon'ble Madras High Court in the case of CIT v. Copes Vulcan Inc. (1986) 57 CTR (Mad) 244; (1987) 167 ITR 884 (Mad) wherein it was held that special provisions would prevail over the general provisions contained in the Act. Even the Board Circular No.308, dt. 29th June, 1981 clarifies this position. Para 11.1 of the said circular reads as under:
"11.1 Sec. 42 provides the machinery for securing flexible deductions in respect of expenses and allowances etc., admissible in determining the profits and gains of any business consisting of the prospecting for, or extraction or production of mineral oils. The provision of this section can be invoked only where the Central Government has entered into an agreement with the person concerned for prospecting for or extraction or production of mineral oils and the Central Government is a participant in such business. Sec. 42 further provides that the agreement between the Central Government and the person concerned may make provisions in relation to the expenditure by way of infructuous or abortive exploration or expenditure incurred on drilling or exploration activities and depletion allowance and where such provisions are made, the expenditure or allowance shall be computed in accordance with the agreement and not in accordance with the general provisions of the I.T.Act."
The above circular makes it clear beyond doubt that general provisions of the Act would not apply for computing the income of such assessee and the income would have to be computed in accordance with the special provisions of s. 42 of the Act. The 11 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 circular being binding on the tax authorities, it cannot be contended by the Revenue that the provisions of s. 42 would not prevail over the general provisions.
15. Further, the scope of s. 42 has been recently analysed by the Hon'ble Apex Court in the case of CIT v. Enron Oil & Gas India Ltd. cited supra, wherein their Lordships observed as under:
"Sec. 42 of the 1961 Act was enacted to ensure that where the structure of the PSC was not variance with the accounting principles generally used for ascertaining taxable income, the provisions of the PSC would prevail. Sec. 42 provides for deduction of expenditure incurred on prospecting for or extraction or production of mineral oil whereas s. 44BB contains special provisions for computing profits and gains in connection with the business of exploration or extraction or production of mineral oils. The headnote itself indicates that s. 42 is a special provision for deduction of expenditure incurred on prospecting, extraction or production of mineral oils" (para 16) "Analysing s. 42(1), it becomes clear that the said section is a special provision for deduction in the case of business of prospecting, extraction or production of mineral oils. As stated above, s. 42(1), inter alia, provides for deduction of certain expenses." (para 18).
"The above analysis shows that s. 42 provides for deduction for expenses provided such expenses/allowances are provided for in the PSC. The PSC in question provides for both capital and revenue expenditure. It also provides for a method in which the said expenses had to be accounted for. The said PSC is an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits, etc. It prescribed a separate rule of accounting." (para 22).
"Therefore, the PSC represented an independent regime. The shares of the Government and the contractors were also determined on that basis. Sec. 42 is inoperative by itself. It becomes operative only when it is read with the PSC. Expenses 12 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 deductible under s. 42 had to be determined as per the PSC. This implied that expenses had to be accounted for only as contemplated by the PSC" (para 22) "The said 'PSC accounting' obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the P&L a/c without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whether the expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, AS-11 had to be ruled out."
(para 22) The above observations make it clear that : (i) Sec. 42, being a special provision, is a code by itself for computing the income from business of providing for, or production of mineral oil in India. (ii) it provides that the assessee would be entitled to deduct any expense which is referred to in the PSC, whether capital or revenue in nature. If the expenditure claimed as deduction is in accordance with the provisions of PSC then it has to be allowed as per the decision of the Hon'ble Apex Court. The fact that even capital expenditure is allowable as deduction under s. 42 itself shows that it overrides the provisions of s. 37 of the Act. Thus, the scheme of the Act makes it clear that the provisions of s. 42 would prevail over general provisions of computing the income contained in ss. 30 to 38. Hence, in our opinion, the provisions of s. 40 cannot be invoked where the income is to be computed under s. 42 of the Act. There is no dispute that the payment was made by the assessee as per the provisions of the PSC. Particular reference can be made to s. 3.1.4 of the PSC. Therefore, in our view, the assessee is entitled to deduction in respect of payment made by it to its parent company."
10. Thus, though the claim of the assessee that it was not obliged to deduct tax at source, being under a bonafide belief, would not hold any water since it had by itself deducted 4.182% from the payments 13 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 made to non-residents, the decision of co-ordinate Bench of this Tribunal in Cairn Energy India Pty. Ltd. (supra) would come to its help. Section 44BB of the Act is also a special provision for computing profits and gains and therefore, as held by the co-ordinate Bench of this Tribunal, such a special provision would prevail over other general provisions for computing income contained in Sections 30 to 38 of the Act. When 10% alone was considered as income of the non-residents, it simply means that 90% was taken as expenditure. This being the case, we are of the opinion that non- deduction of tax at source on such payments made by the assessee or deduction of tax at source at lower rate would not call for application of Section 40(a)(i) of the Act. Ld. CIT(Appeals)'s view is upheld, though for different reason. Ground No.2 of the Revenue stands dismissed.
11. Vide its ground No.3, Revenue is again aggrieved regarding deletion of disallowance made under Section 40(a)(i) of the Act by the Assessing Officer. But, here, the payments made by the assessee to non-residents were in respect of projects in Nigeria.
12. Short facts apropos are that assessee had paid consultancy fees to one Shri Sashi Kant and Shri Umamaheshwar for consultancy 14 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 services rendered in Nigeria. When put on notice regarding non- deduction of tax at source, reply of the assessee was that the said consultants were used in the business of the assessee in Nigeria and therefore, sub-clause (b) of clause (vii) of sub-section (1) of Section 9 would apply. Assessee submitted before the A.O. that the payments were for services rendered by the consultants on account of its business abroad and hence, the income of such non-residents could not be deemed to accrue or arise in India. However, the A.O. was not impressed. He, following the directions of ACIT under Section 144A of the Act, held that assessee was not carrying any separate business outside India and it did not have any branches outside India. Therefore, according to A.O., assessee was not liable for tax in Nigeria and the payments constituted income in India of the concerned non-residents. He, therefore, considered the amounts as income of the non-residents accruing in India and for non-deduction of tax at source, disallowance of ` 60,95,311/- was made relying on Section 40(a)(i) of the Act.
13. In its appeal before ld. CIT(Appeals), argument of the assessee was that the payments were not chargeable to tax in india and Section 195(1) of the Act would make it obligatory to deduct tax at 15 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 source only from the income chargeable to tax as per the provisions of the Act in India, in the hands of the concerned non-residents. Ld. CIT(Appeals) deleting the disallowance held as under:-
"5.2.1 As per sec. 9(1)(vii)(b) income by way of fees for technical services payable by a resident shall be deemed to accrue or arise in India except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any sources outside India. As rightly observed by the Addl. CIT if the resident assessee utilizes the services of non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Having held so, he could not have pressed into service the mischief of section 40(a)(i) because the appellant did not make application u/s 195(2). For this he has relied on the decision of the Karnataka High Court in the case of Samsung Electronics (supra). However, the Hon'ble Supreme Court in its recent ruling in GE India Technology Centre Pvt. Ltd. v. CIT & Others in Civil Appeal Nos. 7541-4542 of 2010 dated 09.09.2010 held as under:
"Section 195 uses the word 'payer' and non the word 'assessee'. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income, the payer cannot be made liable. He cannot be declared to be an assessee-in default."
Further it held "In our view, Section 195(2) is based on the 'principle of proportionality'. The said sub-section gets attracted in cases where the payment made is composite payment in 16 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 which certain portion of the payment has an element of 'income' chargeable to tax in India."
It also stated "This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from 'sums chargeable' under the provisions of the Act, i.e. chargeable under sections 4, 5 and 9 of the Income-tax Act, 1961."
It is absolutely clear from the above ruling of the Apex Court that section 195(2) springs into action only when the payment to the recipient contains an element of income chargeable to tax in India. It has already been discussed above that the payments made to the non-residents for services rendered outside India would not amount to income accrued or arising in India. Since the sum is not chargeable to tax in India, provisions of sec. 195(2) are not attracted. Hence, the disallowance u/s 40(a)(i) would also not arise. Accordingly the AO is directed to delete the addition. This ground is accordingly allowed."
14. Now before us, learned D.R., strongly assailing the order of ld. CIT(Appeals), submitted that the assessee could not be given freedom to decide whether tax is to be deducted at source or not. According to him, the assessee-company had made payments directly from India and not from Nigeria and whether Section 9(1)(vii)(b) of the Act would apply or not was not clear.
15. Per contra, learned D.R. supported the order of ld. CIT(Appeals).
17 I.T.A. No. 2169/Mds/10C.O. No. 29/Mds/11
16. We have perused the orders and heard the rival contentions. This issue is slightly different from the issue raised by the Revenue in its ground No.2. Here, the payments made by the assessee were to non-residents Indian who were working abroad. Assessee had made no deduction of tax at source whatsoever. As per the assessee, they were working for its business carried on in Nigeria and hence, by virtue of Section 9(1)(vii)(b) of the Act, the fees payable to such non- residents could not be considered as income accruing or arising to them in India. We find that that the ACIT in his directions under Section 144A of the Act, had stated as under:-
"S 9(1)(vii)(b) itself provides the exception. If the Resident- assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Here, the assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria.
Therefore, though assessee company has shown that the payments are directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria leaves some ambiguity in determining whether the exception provided to the non-resident on utilization of services outside India would directly apply to the said non-resident consultants and whether the income accrue to them in India or abroad, as section 9(1)(vii)(b) is a deeming provision." (emphasis supplied)"18 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11
17. It is clear from the above that the payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee. Assessee being engaged in consultancy business, the fees paid to such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. Therefore, clearly Section 9(1)(vii)(b) of the Act applied and the income earned by such non-residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason to hold a bonafide belief that no part of the payment had any element of income which was chargeable to tax in India. When the assessee held such a bonafide belief, it is clearly covered by the decision of Hon'ble Apex Court in GE India Technology Centre Pvt. Ltd. (supra) and decision of Special Bench of this Tribunal in Prasad Productions Ltd. (supra). This being so, assessee could not be put in a position where it can be visited with the rigours associated with non deduction of tax at source. It cannot be fastened with any liability associated with non- deduction of tax at source on such payments. In these circumstances, application of Section 40(a)(i) of the Act was not called for. Ld. CIT(Appeals) was right in deleting the addition. No 19 I.T.A. No. 2169/Mds/10 C.O. No. 29/Mds/11 interference is called for. Ground No.3 raised by the Revenue is dismissed.
18. In the result, the appeal filed by the Revenue is dismissed.
19. When the Cross Objection of the assessee came up for hearing, learned A.R. submitted that the assessee was not pressing it. Hence, the Cross Objection is dismissed as withdrawn.
20. To summarise, both the appeal and Cross Objection are dismissed.
Order pronounced in the open court after conclusion of hearing on the Twenty Second Day of June, 2011.
sd/- sd/-
(George Mathan) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 22nd June, 2011.
Kri.
Copy to: (1) Assessee
(2) Assessing Officer
(3) CIT(A)-III, Chennai
(4) CIT, Chennai-I, Chennai
(5) D.R.
(6) Guard file