2002 (2) TMI 319 - AT - Income Tax

Summary

Issues Involved:
1. Liability to deduct tax u/s 195 from payments made to non-residents and whether the assessee can be considered as an assessee in default u/s 201(1).
2. Grossing up of tax rates by the Assessing Officer.
3. Validity of NOCs issued by the Assessing Officer.
4. Classification of payments as fees for technical services or business profits.
5. Period of limitation for passing orders u/s 201(1).

Summary:

1. Liability to Deduct Tax u/s 195:
The primary issue was whether the assessee was liable to deduct tax at source u/s 195 from payments made to various non-resident parties and if the assessee could be considered as an assessee in default u/s 201(1). The assessee, an Indian company engaged in the business of running aircrafts, had entered into agreements with International Leasing Finance Corporation (ILFC) and other non-resident entities for leasing aircrafts and related services. The Assessing Officer held that supplemental rent payments made by the assessee to ILFC fell within the exclusionary provisions of section 10(15A) of the Act effective from 1-4-96 and were chargeable to tax, thus requiring deduction of tax at source. However, the Tribunal concluded that the supplemental rent payments did not fall within the exclusionary provisions of section 10(15A) and were not chargeable to tax, thus the assessee was not liable to deduct tax at source.

2. Grossing Up of Tax Rates:
The Tribunal found the Assessing Officer's action of grossing up the tax rates to be arbitrary and illegal. Grossing up should only be applied when tax is determined with reference to net payment. Since no tax was deducted at source by the assessee, the question of grossing up did not arise. The Tribunal deplored the arbitrary action of the Assessing Officer and directed that such actions should not be repeated.

3. Validity of NOCs:
The assessee argued that NOCs issued by the Assessing Officer permitted them to remit payments without deduction of tax at source. However, the Tribunal held that the NOCs issued were not orders u/s 195(2) and were null and void as the authority to issue such NOCs vested only in the TDS Officer. The NOCs were merely for compliance with RBI requirements and had no legal sanctity under the Income-tax Act.

4. Classification of Payments:
The Tribunal examined various payments made by the assessee to non-resident entities for training, repairs, and exchange of spare parts. It was held that payments for training of personnel were fees for technical services and chargeable to tax. Payments for repairs of engines and other equipment were also considered fees for technical services. However, payments for exchange of spare parts required further examination to distinguish between purchases and service charges. The Tribunal directed the Assessing Officer to examine invoices and tax only the payments related to services or repairs.

5. Period of Limitation:
The Tribunal held that orders u/s 201(1) must be passed within a reasonable period, which it determined to be 4 years from the end of the assessment year. Consequently, the order for the financial year 1994-95 was quashed as it was passed beyond the reasonable period, while orders for financial years 1995-96 to 1998-99 were upheld as they were within the reasonable period.

Conclusion:
The Tribunal allowed the appeal for the financial year 1994-95 and partly allowed the appeals for financial years 1995-96 to 1998-99, setting aside the demands raised by the Assessing Officer for payments made to ILFC and other non-resident entities. The Tribunal also directed the Assessing Officer to recompute the tax liability without grossing up the tax rates and to examine the invoices related to payments for exchange of spare parts.