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2010 (4) TMI 784 - AT - Income TaxAssessee in default - TDS u/s 195 - Fees for technical services - The agreement entered into by the assessee with IMAX is very clear. The total purchase price for the system and the technology transfer fee is stated to be US 23,15,000. It also specifics that out of the above sum, US 13,65,000 is for the purchase of the system and US 9,50,000 is the fee for transfer of technology. Schedule C to the agreement is also very clear to point out that IMAX is to install the equipment/test it and also provide training for upto four projectionists - These services are auxiliary to the sale of the equipment The payment of US 9,02,500 is a part of the equipment price which includes the services of installation and training. Therefore, it follows that the said sum of US 9,02,500 is not chargeable to tax in India and hence the assessee was justified in not deducting any tax at source - Decided in favor of the assessee. If the assessee has not applied to the AO under s. 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident is chargeable to tax, then he is not under any statutory obligation to deduct tax at source on any part of the payment.
Issues Involved:
1. Statutory obligation to deduct tax at source under Section 195(2) of the IT Act, 1961. 2. Liability of the assessee for non-deduction of tax at source on remittance to a non-resident. 3. Application of the Supreme Court decision in the case of Transmission Corporation of A.P. Ltd. vs. CIT. 4. Interpretation of Double Taxation Avoidance Agreement (DTAA) provisions. 5. Validity of the order under Section 201(1) and 201(1A) of the IT Act. Issue-wise Detailed Analysis: 1. Statutory Obligation to Deduct Tax at Source: The core issue is whether an assessee responsible for making payment to a non-resident is under a statutory obligation to deduct tax at source on the entire payment if they have not applied to the AO under Section 195(2) for deduction of tax at a lower or nil rate. The Tribunal discussed the interpretation of Section 195(1) and 195(2), emphasizing that the obligation to deduct tax arises only if the payment is chargeable to tax under the IT Act. The Tribunal highlighted that if the payer has a bona fide belief that no part of the payment is chargeable to tax, Section 195(1) would not apply. 2. Liability of the Assessee for Non-Deduction of Tax: The Tribunal examined the facts of the case where the assessee remitted US $ 9,02,500 to IMAX Ltd. for technology transfer without deducting tax at source. The AO had raised a demand under Section 201 for non-deduction of tax. The Tribunal noted that the payment was for services auxiliary to the sale of equipment and not independent technical services, thus not chargeable to tax in India. Therefore, the assessee was justified in not deducting tax at source. 3. Application of the Supreme Court Decision in Transmission Corporation of A.P. Ltd. vs. CIT: The Tribunal extensively discussed the Supreme Court's decision in Transmission Corporation, which held that tax should be deducted at source if the payment contains an income element. However, the Tribunal clarified that this applies only if the payment is chargeable to tax. If the payer has a bona fide belief that no part of the payment is taxable, they are not required to deduct tax at source. 4. Interpretation of DTAA Provisions: The assessee argued that under the DTAA between India and Canada, the payment for technology transfer was not taxable in India. The Tribunal agreed, noting that the services provided were inextricably linked to the sale of equipment and not independent technical services. Thus, the DTAA provisions prevailed, and the payment was not chargeable to tax in India. 5. Validity of the Order under Section 201(1) and 201(1A): The Tribunal upheld the CIT(A)'s order canceling the demand raised by the AO under Sections 201(1) and 201(1A). It was concluded that the payment made by the assessee was not chargeable to tax, and therefore, there was no obligation to deduct tax at source. The Tribunal emphasized that if the Department believes tax should have been deducted, it can proceed under Section 201, but the payer has the right to defend their belief in such proceedings. Conclusion: The Tribunal concluded that if the assessee has a bona fide belief that no part of the payment is chargeable to tax, they are not under a statutory obligation to deduct tax at source. The appeal of the Department was dismissed, and the order of the CIT(A) was upheld, confirming that the remittance made by the assessee was not chargeable to tax in India.
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