2014 (5) TMI 1190 - AT - Income Tax

Special provision for computing profits and gains of shipping business in the case of non-residents - section 44B applicability - TDS u/s 195 - Default u/s 201(1) - non deduction of tds on hire/time charter charges paid by the assessee to the non-resident entities being in the nature of royalty (equipment royalty taking ship as an equipment) - provisions of section 44B applicability - HELD THAT - CIT(A) was not justified in holding that the provisions of section 44B of the Act are applicable to the payments in question made by the assessee. Default u/s 201(1)/201(1A) - as respectfully following the decision of the Special Bench of ITAT in the case of Mahindra Mahindra 2009 (4) TMI 207 - ITAT BOMBAY-H we hold that the orders passed by the A.O. u/s 201(1)/201(1A) of the Act in the present case for all the three years under consideration treating SCIL as the assessee in default cannot be sustained as there are no assessments which have been made in the hands of the payees in respect of the amounts paid by the assessee and even the time period for issuing notices u/s 148 for making such assessments have already come to an end. We accordingly uphold the impugned orders of the ld. CIT(A) giving relief to the assessee

Summary

Issues Involved:
1. Applicability of Section 44B of the Income Tax Act to payments made by SCIL.
2. Treatment of payments as royalty under Section 9(1)(vi) of the Income Tax Act.
3. Validity of orders passed under Section 201(1) and 201(1A) of the Income Tax Act.
4. Impact of non-assessment of payees on the liability of the payer under Section 201(1).

Issue-wise Detailed Analysis:

1. Applicability of Section 44B of the Income Tax Act:
The primary issue raised by SCIL was whether the provisions of Section 44B of the Income Tax Act were applicable to the payments made by SCIL. The Tribunal noted that this issue was already decided in favor of SCIL for the assessment year 2003-04, where it was held that the provisions of Section 44B were not applicable. The Tribunal reiterated that Section 44B applies to non-residents engaged in the business of operation of ships, and the payments made by SCIL for charter hire charges did not fall within the scope of this section. Consequently, the orders of the CIT(A) applying Section 44B were set aside, and SCIL's appeals were allowed.

2. Treatment of Payments as Royalty under Section 9(1)(vi):
The Revenue contended that the payments made by SCIL to non-resident ship owners should be considered as royalty under Section 9(1)(vi) of the Income Tax Act. The CIT(A) had held that these payments were not in the nature of royalty. The Tribunal upheld this view, noting that the payments made by SCIL were for the use of ships and not for the use of any equipment, which is a requirement for considering payments as royalty under the relevant section. The Tribunal thus dismissed the Revenue's appeals on this issue.

3. Validity of Orders Passed under Section 201(1) and 201(1A):
The Tribunal considered whether the orders passed by the A.O. under Section 201(1) and 201(1A) of the Income Tax Act were valid. The Tribunal referenced the decision of the Special Bench in the case of Mahindra & Mahindra, which held that no order under Section 201(1) can be passed if the Revenue has not taken any action against the payee and the time limit for such action has expired. Since no assessments were made against the payees and the time limit for issuing notices under Section 148 had expired, the Tribunal held that the orders under Section 201(1) treating SCIL as an assessee in default could not be sustained.

4. Impact of Non-assessment of Payees on the Liability of the Payer:
The Tribunal addressed the argument that the payer (SCIL) could not be treated as an assessee in default if the payees were not assessed and the time limit for such assessments had expired. The Tribunal upheld this argument, citing the Special Bench decision in Mahindra & Mahindra, which emphasized that the liability to deduct tax at source is tied to the tax liability of the payee. If the payee is not liable to tax or the time limit for assessing the payee has expired, the payer cannot be treated as an assessee in default. Consequently, the Tribunal dismissed the appeals of the Revenue and upheld the CIT(A)'s orders giving relief to SCIL.

Conclusion:
In summary, the Tribunal allowed SCIL's appeals regarding the applicability of Section 44B, dismissed the Revenue's appeals on the treatment of payments as royalty, and invalidated the orders passed under Section 201(1) and 201(1A) due to the non-assessment of payees. The cross objections filed by SCIL were dismissed as infructuous. The decision was pronounced in the open court on 30th May 2014.