2012 (9) TMI 389 - AT - Income Tax

Disallowance under section 40(a )(i) of the Act payment to non-resident - assessee submitted as per the provisions of section 44BB of the Income-tax Act, 1961 the income of the service provider was deemed to be 10 per cent of the aggregate amount and the rate of tax including surcharge came to nearly 41 per cent. Thus TDS amount comes to 4.1 per cent. Held that - On account of the special provisions of section 44BB, 10 per cent of the gross amount payable to the non-residents deemed as the income chargeable to tax in India - assessee has deducted tax at the specified rate on the 10 per cent of the Bare Boat charges paid to the Norway company who is the non-resident, computed as per the provisions of section 44BB - there is no violation of the provisions of section 195 in the assessee s case which calls for a disallowance by invoking the provisions of section 40(a)( i) of the Act - In favor of assessee

Issues Involved:
1. Applicability of Section 44BB of the Income-tax Act, 1961.
2. Obligation to deduct TDS under Section 195.
3. Disallowance under Section 40(a)(i) for non-deduction or short deduction of TDS.
4. Interpretation of "sum chargeable to tax" and "appropriate portion of income chargeable" under Section 195.
5. Relevance of previous Tribunal and Supreme Court decisions.

Issue-wise Detailed Analysis:

1. Applicability of Section 44BB of the Income-tax Act, 1961:
The assessee, a company providing oil field services, entered into an agreement to drill oil wells and hired drilling units from two foreign companies. The assessee deducted TDS at 4.1% on Bare Boat charges, based on Section 44BB, which deems 10% of the aggregate amount as income. The Tribunal examined whether Section 44BB, a special provision for non-residents providing services in connection with oil exploration, applied in this context. The Tribunal concluded that Section 44BB, being a special provision, overrides general provisions and deems 10% of the gross receipts as income, thus validating the assessee's deduction method.

2. Obligation to Deduct TDS under Section 195:
The Tribunal referenced the Supreme Court's decision in GE India Technology Centre (P.) Ltd., which clarified that TDS under Section 195 is limited to the portion of income chargeable under the Act. The Tribunal emphasized that the obligation to deduct TDS is on the sum chargeable to tax, which, in this case, is 10% of the gross amount as per Section 44BB. The Tribunal agreed with the assessee's interpretation that the TDS was correctly deducted on the deemed income portion.

3. Disallowance under Section 40(a)(i) for Non-Deduction or Short Deduction of TDS:
The Tribunal analyzed whether the disallowance under Section 40(a)(i) was justified. Section 40(a)(i) disallows deductions for payments to non-residents if TDS is not deducted as per Chapter XVII-B. The Tribunal noted that the assessee had deducted TDS on the deemed income portion as per Section 44BB, and there was no absolute failure to deduct TDS. Thus, the Tribunal found no basis for disallowance under Section 40(a)(i).

4. Interpretation of "Sum Chargeable to Tax" and "Appropriate Portion of Income Chargeable" under Section 195:
The Tribunal examined the interpretation of "sum chargeable to tax" under Section 195, referencing the Supreme Court's decision in GE India Technology Centre (P.) Ltd. The Tribunal concluded that the sum chargeable to tax is the deemed income portion under Section 44BB, which is 10% of the gross amount. The assessee had deducted TDS on this portion, aligning with the statutory requirement.

5. Relevance of Previous Tribunal and Supreme Court Decisions:
The Tribunal reviewed its previous decision in the assessee's case for the assessment year 2003-04, which was based on the Supreme Court's decision in Transmission Corporation of A.P. Ltd. The Tribunal noted that the Supreme Court's decision in GE India Technology Centre (P.) Ltd. had clarified the interpretation of Section 195, rendering the earlier Tribunal decision inconsistent with the current legal understanding. The Tribunal emphasized that continuing an error is not justified and aligned its decision with the Supreme Court's clarification.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the assessee correctly applied Section 44BB for TDS deduction, and there was no violation of Section 195 warranting disallowance under Section 40(a)(i). The Tribunal reversed the findings of the CIT(A) and the Assessing Officer, affirming the assessee's compliance with the statutory provisions.

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