2012 (3) TMI 104 - AT - Income Tax

DTAA between India and UK - appellant had made a request u/s. 195 for non deduction of tax from the payment made to ARL - The request was rejected by the DCIT, TDS Circle-1(1), vide his order u/s. 195 dt. 1.12.1998 - Ld. Counsel for the appellant on the other hand, submitted that as far as the case of ARL is concerned, this Tribunal has already taken a view that the receipts in question are not chargeable to tax - It was his submission that since proceedings for assessment of income of the non-resident have been initiated, it was not open to the revenue to initiate proceedings under section 163 of the Act against the appellant - Held that an agent or any person who apprehends that he may be assessed as such an agent can retain out of the money payable to the non-resident a sum equal to the estimated liability. A mere relation between the business of the non-resident and the activity in India which facilitates or assists the carrying on of the business of the non-resident would result in a business connection - the provisions of Sec. 166 of the Act provides that the provisions for treating person in India as agent of the non-resident does not prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income - Held that CIT(A)fell into an error in accepting the plea of the appellant and canceling the order under section 163 of the Act - Appeals are allowed

Issues Involved:
1. Treatment of the appellant as the agent and representative assessee of non-resident entities under Section 163 of the Income Tax Act, 1961.
2. Determination of Permanent Establishment (PE) for the non-resident entities in India.
3. Chargeability of income to tax in India for the non-resident entities.
4. Simultaneous proceedings for assessment of income in the hands of the agent and the principal.
5. Applicability of judicial precedents and statutory provisions.

Detailed Analysis:

1. Treatment of the Appellant as the Agent and Representative Assessee
The primary issue was whether the appellant should be treated as the agent and representative assessee of three non-resident entities: ARL (UK), MA (Austria), and MAS (Malaysia) under Section 163 of the Income Tax Act, 1961. The Assessing Officer (AO) had issued notices and passed orders treating the appellant as an agent under Section 163(1)(b) and 163(1)(c), citing business connections and receipt of income by the non-residents from the appellant.

The CIT(A) had initially cancelled the AO's orders, stating that the non-residents did not have any business connections or financial associations in India. However, the Tribunal reversed this, holding that there was a business connection and that the non-residents received income from the appellant, thus satisfying the criteria under Section 163.

2. Determination of Permanent Establishment (PE)
The Tribunal noted that in the case of ARL, the ITAT had previously ruled that ARL did not have a PE in India, and thus its business income could not be taxed in India. However, the Tribunal remanded the issue of taxability of the consideration attributable to the right to use replacement components under Article 13(3)(b) of the India-UK DTAA.

3. Chargeability of Income to Tax in India
The Tribunal clarified that the chargeability of income to tax in India for non-residents would be determined in separate assessment proceedings. The CIT(A) had erred by delving into the chargeability of income at the stage of Section 163 proceedings. The Tribunal emphasized that the purpose of Section 163 is to enable the revenue to proceed against a person in India who can be treated as an agent of a non-resident, without establishing the non-resident's liability to tax at that stage.

4. Simultaneous Proceedings for Assessment
The appellant argued that simultaneous proceedings for assessment of the same income in the hands of the agent and the principal should not be allowed. The Tribunal referred to the Bombay High Court's decision in Aditya Birla Nuvo Ltd. v. DDIT, which held that ordinarily, the AO should not proceed against the representative assessee once assessment proceedings are initiated against the non-resident. However, the Tribunal found that Section 166 allows for such simultaneous proceedings, and thus, the appellant's contention was rejected.

5. Applicability of Judicial Precedents and Statutory Provisions
The Tribunal examined various judicial precedents and statutory provisions to determine the validity of the AO's orders. It referred to the Supreme Court's decision in R.D. Agarwal and Co., which defined "business connection" and concluded that there was a business connection between the non-residents and the appellant. The Tribunal also considered the provisions of Sections 160, 161, and 163, which create a vicarious liability for the agent regarding the non-resident's tax liability.

Conclusion:
The Tribunal allowed the revenue's appeals, reversing the CIT(A)'s orders and restoring the AO's orders treating the appellant as the agent and representative assessee of the non-residents under Section 163. The Tribunal directed the CIT(A) to examine the taxability of the receipts by the non-residents on merits. The appeals by the revenue were allowed for statistical purposes, ensuring that the taxability of the income would be determined in subsequent assessment proceedings.

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