2007 (2) TMI 265 - AT - Income Tax

Tax deducted u/s 195 - Disallowance u/s 40(a)(i) - Payments made in foreign currency - Non-resident - agreement with ONGC and hardy Exploration and Production (India) Inc. ( HEPII ) to drill oil wells in Indian waters off the coast of India - assessee has deducted tax @ 4.2% on the bare boat charges only - HELD THAT - The purpose of sub-section (1) of section 195 is to see that the sum which is chargeable under section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected. Further, the rights of the payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. The only thing required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient or for determination of the appropriate proportion of such sum so chargeable or for grant of certificate authorising the recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source. We have already clarified in the initial portion of the order that the provisions regarding computation of income and tax cannot be mixed up and confused with the provisions regarding deduction of tax at source. We rail to understand what prevented the assessee from making an application u/s. 195(2) and claim the so called benefits u/s. 44BB. We are at a loss to understand how the assessee sitting in his own office can take such a decision that whatever payments it was making to the non-residents ultimately would be covered u/s. 44BB, even when such non-resident had never filed any return. We think, by adopting this course of action the assessee tried to decide everything on his own ignoring all statutory provisions. We find that the issue is covered squarely against the assessee by the decision of the Tribunal in the case of HNS India VSAT Inc. v. Dy Director of Income-Tax (International Taxation) 2005 (5) TMI 259 - ITAT DELHI-A where it was held that when the assessee had not deducted tax from the payment made to non-residents against various jobs relating to installation and no application u/s. 195(2) was made then the assessee was under obligation to deduct tax at source and having failed to make any such deduction the Assessing Officer was fully justified in disallowing payments by invoking the provisions of section 40(a)(i). We think it is immaterial whether some tax has been deducted or not and in any case whatever tax has been deducted by the assessee corresponding credit has already been allowed by the lower authorities. Similar view was taken by the Mumbai Bench of the Tribunal in this case of Satellite Television Asian Region Ltd. v. DCIT 2006 (1) TMI 172 - ITAT BOMBAY-G . We find no merit in the appeal filed by the assessee. In any case, no harm is going to be caused to the assessee due to this disallowance because proviso to section 40(a)(i) itself makes it clear that whenever the so-called tax is deducted and paid to the Government, the assessee would get the deduction accordingly even in the subsequent year. Thus, we find nothing wrong with the order of the ld. CIT(Appeals) and confirm the same. In the result the appeal is dismissed.

Summary

Issues Involved:
1. Confirmation of addition under section 40(a)(i) of the Income-tax Act, 1961.
2. Obligation to deduct tax at source under section 195 of the Act.
3. Applicability of section 44BB of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Confirmation of Addition under Section 40(a)(i):
The primary issue was whether the Commissioner of Income-tax (Appeals) erred in confirming the addition of Rs. 45,40,61,871 under section 40(a)(i) of the Income-tax Act, 1961. The Assessing Officer had disallowed this amount because the assessee had deducted tax at a lower rate than prescribed. The assessee argued that only the income portion of the payments made in foreign currency was subject to TDS, relying on the Supreme Court decision in Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587. However, the Assessing Officer and the Commissioner of Income-tax (Appeals) held that tax must be deducted on the gross sum paid to non-residents, as per the provisions of section 195(1). The Tribunal upheld this view, stating that the assessee had not complied with the provisions of Chapter XVII-B, which mandates tax deduction on the gross amount unless determined otherwise by the Assessing Officer under section 195(2).

2. Obligation to Deduct Tax at Source under Section 195:
The Tribunal analyzed the provisions of section 195, which requires tax to be deducted at the rates in force on any sum chargeable under the Act paid to non-residents. The assessee contended that tax should only be deducted on the income portion of the payments. However, the Tribunal emphasized that section 195(2) allows the payer to apply to the Assessing Officer to determine the appropriate proportion of the sum chargeable to tax. Since the assessee did not make such an application, the obligation was to deduct tax on the entire payment. The Tribunal cited the Supreme Court's decision in Transmission Corporation of A.P. Ltd. v. CIT, which clarified that the obligation to deduct tax is on the gross amount unless determined otherwise by the tax authorities.

3. Applicability of Section 44BB:
The assessee argued that the payments made to non-residents were covered under section 44BB, which prescribes a presumptive profit of 10% on the aggregate amount for non-residents engaged in the business of supplying plant and machinery on hire for oil exploration. The Tribunal noted that section 44BB is a computation provision applicable to non-residents filing returns in India. The Tribunal agreed with the Department that the applicability of section 44BB to the non-resident parties could not be determined in the assessee's case, as the non-residents had not filed returns. The Tribunal emphasized that the determination of whether section 44BB applies requires a detailed examination of the non-resident's business activities, which can only be done if the non-resident files a return.

In conclusion, the Tribunal dismissed the appeal, confirming the addition under section 40(a)(i) due to the assessee's failure to deduct tax at the prescribed rate on the gross payments made to non-residents. The Tribunal held that the provisions of section 195(2) were not optional and that the assessee was required to deduct tax on the entire payment unless a lower proportion was determined by the Assessing Officer. The Tribunal also clarified that the applicability of section 44BB could not be determined in the assessee's case without the non-resident parties filing returns.