2015 (3) TMI 684 - AT - Income Tax

Non deduction of TDS - assessee in default u/s. 201(1) - BIOCON, an Indian company and CIMAB,a Cuban company entered into a joint venture agreement hereby they agreed to form a joint venture company (JVC) in India - shares ought to be issued to CIMAB against of transfer of technology is payment which could be said to be royalty as per AO - Whether the provisions of Sec.195(1) of the Act are not applicable when shares are issued to a Non-resident (which is a foreign company in the present case) because it cannot be said to be a payment of any other sum chargeable under the provisions of this Act within the meaning of the said expression used in Sec.195(1) of the Act? - Held that - As rightly contended by the learned DR, the expression any other sum chargeable under the provisions of the Act used in the earlier part of Sec.195(1) of the Act has to be read in conjunction with the words at the time of credit of such income to the account of the payee or at the time of thereof in cash or by issue of a cheque or draft or by any other mode . Thus payment in terms of the money is not the only mode contemplated under the provisions of Sec.195(1) of the Act. The use of the expression or by any other mode in Sec.195(1) of the Act, makes the intention of the legislature clear that those provisions are attracted even to cases where payment is made otherwise than by money. We are therefore of the view that the argument canvassed by the Assessee cannot be accepted. - Decided against assessee. Whether the issue of shares by the Assessee on 30.3.2004 and 30.9.2004 can be said to be covered by the order of non-deduction of tax at source issued by the AO in his order dated 22.2.2005 and therefore in respect of issue of shares on the above two dates the Assessee cannot be proceeded against u/s. 201(1) & 201(1A) of the Act? - Held that - In the application filed by the assessee on 13.01.2005 u/s. 195(2) of the Act, there is no reference to the shares having already been issued by the assessee to CIMAB on 30.03.2004 and 30.09.2004. The order u/s. 195(2) of the Act does not grant immunity to the shares which are already issued prior to the date of application u/s. 195(2) of the Act by the assessee. The order, if at all, can be valid for issue of shares between 22.02.2005 the date of order u/s. 195(2) of the Act and 31.03.2005. Admittedly, during the above period, the assessee had not issued any shares to CIMAB, therefore it cannot be said that the assessee cannot be treated as an assessee in default in respect of issue of shares to CIMAB for failure to deduct tax at source.We do not think that the proposition canvassed by the ld. Counsel for the assessee can be accepted. There cannot be an estoppel against statute. The AO derives his powers by virtue of various provisions contained in the Act. If u/s. 195(2) of the Act, the AO does not have a power to issue a Nil deduction of tax at source on an application filed by the payer, then it would not be proper to say that an order given in contravention of those provisions would be binding on the revenue authorities. Apart from the above, in the present case, factually the order dated 22.02.2005 issued by the AO u/s. 195(2) of the Act did not operate or was not in force for any of the issue of shares made by the assessee non-resident CIMAB. This contention therefore is devoid of merits and in any event, does not arise for consideration in the present proceedings. In that view of the matter, we are of the view that there is no merit in the contentions put forth by the assessee before us. - Decided against assessee. Whether the Revenue is precluded from proceeding against the Assessee for failure to deduct tax at source u/s.201(1) of the Act, in respect of issue of shares made on 30.9.2005 and 31.3.2006 by reason of the application of principle of estoppel? - Held that - As already stated, the order u/s. 195(2) dated 22.02.2005 is non est in law and therefore the assessee cannot be heard to say that he acted on the basis of the said order. Moreover, u/s. 195(1) of the Act, the assessee was obliged to deduct tax at source while making payments to the non-resident. If the assessee fails to do so and ultimately if it is found that the assessee was obliged to deduct tax at source, then the plea of estoppel cannot be raised by the assessee.The AO can pass a general or special order on such application. The order dated 22.2.2005 cannot be said to be general order so as to be valid for all future issue of shares. We have already extracted in the earlier part of this order the operative portion of the order dated 22.2.2005, which clearly specifies that it is valid only for issue of shares upto 31.3.2005. This order was in response to the Assessee's application dated 13.1.2005 in which the Assessee did not disclose the facts regarding issue of shares to CIMAB on 30.3.2004 and 30.9.2004. Therefore the Assessee cannot take any benefit under the order dated 22.2.2005 for any issue of shares to CIMAB which is not in accordance with law because that order which was passed u/s.195(2) of the Act, was in response to an application by the person responsible for making payment in which the dispute can be only with regard to the rate of tax and not the question whether tax at all is deductible at source or not, which remedy is available only to the recipient of the payment u/s.195(3) or 197 of the Act. - Decided against assessee. Can it be said that proceedings u/s.201(1) & 201(1A) of the Act are not valid on the application of the principle Actus Curle Neminem Gravabit , which means an act of Court shall prejudice no man .? - Held that - It is well settled that Tax and equity are strangers. In interpreting tax legislations or determining tax liability equitable considerations have no role to play. The provisions of Sec.195 of the Act are clear and are not ambiguous. As already stated the order u/s.195(2) dated 22.2.2005 operated only for a limited period. Fortunately for the revenue during that period, the Assessee made no issue of shares to CIMAB. The provisions of law are clear that each of the payments to non-resident or foreign company requires specific order, unless there is any other general order operating for an indefinite period of time. - Decided against assessee. Whether the issue of shares by the Assessee to CIMAB would constitute a payment of Royalty by the Assessee to CIMAB which can be said to accrue or arise in India to CIMAB and therefore taxable in the hands of CIMAB in India and consequently the Assessee be held as liable to treated as an Assessee in default u/s.201(1) of the Act? - whether assessee can be said to be 'an assessee in default' to the extent of tax on capital gain? - Held that - From a perusal of the aforesaid clauses-3, 4, 6, 7 & 9 in the TT Agreement, it is clear that there was no transfer of the know-how by CIMAB to the assessee. It is thus clear from the terms of this Agreement that the assessee did not acquire the know-how through a transfer within the meaning of section 2(47) of the Act from CIMAB and therefore the arguments of the assessee on the arguments resulting in a transfer of know-how deserve to be rejected. The JVA read together with the JVA contains two parts. The first part transfers right to use know-how. This part is a separate contract and the right to use know-how so transferred was Royalty within the Explanation 2(iv) to section 9(1)(vi) of the Act. The second part is the mode of payment of the consideration payable under the JVA & TTA for providing technology by CIMAB to the assessee (right to use the know-how) which is in the form of issue of shares in the JVC. Accrual of income from the second part of the contract has to be brought to tax subject to fulfillment of conditions specified in section 9(1)(vi) of the Act. The fact that the consideration payable under the Agreement is discharged by issue of shares in a JVC will have no effect on accrual of income in India and its taxability in India. In the present case, as we have already seen, operations are effected and services are rendered in India. There is nothing on record to show that there was delivery of technical know-how abroad. On the other hand the circumstances suggest that there has been delivery of technical know-how in India. We have already seen in the present case that under clause 2.1 of the JVA provides that the JVC will manufacture cancer drugs using the technology developed by CIMAB. The technology brought in by CIMAB would be its capital contribution. The terms on which technology was to be brought in by CIMAB is contained in a TTA. We have already seen the terms of the TTA and have come to the conclusion that there was no transfer of any intellectual property in the technology by CIMAB to the Assessee. Therefore it cannot be said that the Assessee had acquired any right to intellectual property in the know-how. - Decided against assessee.

Summary

Issues Involved:
1. Applicability of Section 195(1) of the Income-tax Act, 1961 for issuing shares to a non-resident.
2. Validity of the order under Section 195(2) concerning shares issued before the order.
3. Estoppel and delay in disposing of applications under Section 195(2).
4. Application of the principle "Actus Curle Neminem Gravabit".
5. Classification of the issue of shares as "Royalty" or "Capital Gains".

Issue-wise Detailed Analysis:

Issue No.1: Applicability of Section 195(1) of the Act

The primary argument was whether issuing shares to a non-resident constitutes a payment of "any other sum chargeable under the provisions of this Act" under Section 195(1). The tribunal held that Section 195(1) applies even when payment is made by issuing shares, as the term "by any other mode" includes non-monetary payments. Thus, the assessee was required to deduct tax at source on the value of shares issued to CIMAB.

Issue No.2: Validity of the Order under Section 195(2)

The assessee argued that the shares issued on 30.03.2004 and 30.09.2004 were covered by the order dated 22.02.2005 under Section 195(2). However, the tribunal noted that the application for the order was made after these shares were issued, and the order did not reference these prior issuances. Therefore, the order did not cover the shares issued before its date, and the assessee was liable for not deducting tax at source for those shares.

Issue No.3: Estoppel and Delay in Disposing Applications

The assessee contended that the principle of estoppel should apply since it relied on the AO's previous order and the delay in disposing of subsequent applications. The tribunal rejected this, stating that the assessee cannot claim estoppel against statutory obligations. Moreover, the order dated 22.02.2005 was not in force when the shares were issued, and the applications made after issuing shares did not justify non-deduction of tax.

Issue No.4: Application of the Principle "Actus Curle Neminem Gravabit"

The assessee argued that the principle "Actus Curle Neminem Gravabit" (an act of the court shall prejudice no man) should apply due to reliance on the AO's order. The tribunal dismissed this argument, emphasizing that tax laws do not accommodate equitable considerations, and the statutory provisions of Section 195 are clear and unambiguous. The tribunal reiterated that the order dated 22.02.2005 was valid only for a limited period and did not cover the issue of shares in question.

Issue No.5: Classification as "Royalty" or "Capital Gains"

The tribunal examined whether the issue of shares constituted "Royalty" or "Capital Gains". The definition of "Royalty" under Explanation 2 to Section 9(1)(vi) excludes consideration chargeable under the head "Capital Gains". The tribunal analyzed the Joint Venture Agreement (JVA) and Technology Transfer Agreement (TTA), concluding that the agreements provided only a right to use the technology, not an outright transfer. Therefore, the consideration paid was classified as "Royalty" under Section 9(1)(vi), and the assessee was liable to deduct tax at source.

Conclusion:

The tribunal upheld the orders of the CIT(A), confirming that the assessee was in default for not deducting tax at source on the value of shares issued to CIMAB. The appeals of the assessee were dismissed.