2002 (2) TMI 320 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 195 of the IT Act, 1961, for remittance of salaries to foreign technicians.
2. Determination of the nature of payments as 'fee for technical services' or 'salary'.
3. Liability of the assessee for non-deduction of tax at source under Section 195.
4. Jurisdictional validity of the AO's order.

Summary:

1. Applicability of Section 195 of the IT Act, 1961, for remittance of salaries to foreign technicians:
The assessee initially applied for a no-objection certificate (NOC) u/s 195 to remit salaries to foreign technicians, which was rejected by the AO on the grounds that Section 195 does not apply to salary payments. Subsequently, the assessee obtained permission u/s 192 and remitted the salaries after obtaining the necessary permissions from the Reserve Bank of India.

2. Determination of the nature of payments as 'fee for technical services' or 'salary':
The AO held that the entire arrangement constituted a transfer of technical know-how from HP to the assessee, and the payments, including salary reimbursements to HP, were considered 'fee for technical services' as per Explanation 2 to Section 9(1)(vii) of the Act and Article 12.4 of the DTAA between India and the USA. The CIT(A) upheld this view, noting that the technicians remained employees of HP and that the reimbursement was for technical services.

3. Liability of the assessee for non-deduction of tax at source under Section 195:
The Tribunal found that the assessee was justified in believing that the payments were not covered by Section 195 based on a letter from the Asstt. CIT stating that income chargeable under the head 'salary' is not covered by Section 195. The Tribunal noted that the technicians were under the control of the assessee during their deputation, and the salary payments were treated as salary borne by the assessee, with tax correctly deducted at source u/s 192. The Tribunal also referenced the CBDT Circular No. 720, which clarifies that each section under Chapter XVII of the Act deals with a particular kind of payment to the exclusion of all other sections.

4. Jurisdictional validity of the AO's order:
The assessee contended that the AO who passed the impugned order lacked jurisdiction as the returns for TDS were filed in the jurisdiction of Dy. CIT, Spl. Range IX, New Delhi, and not with the Dy. CIT, Cir. 23(2). The Tribunal did not specifically address this jurisdictional issue in the final decision.

Conclusion:
The Tribunal concluded that the assessee was not liable to deduct tax at source under Section 195 of the Act and could not be deemed in default under Section 201(1) or liable to interest under Section 201(1A). The appeal was allowed in favor of the assessee.