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2010 (3) TMI 167 - HC - Income TaxTDS 195 - mobilization and demobilization costs reimbursed by the appellant to VOAMC - Tribunal holding that in terms of the provisions of Section 195 of the Act, the payer is obliged to deduct tax at source in respect of any sum paid to a non-resident and the payee was not required to determine whether the said sum is chargeable to tax or not under the provisions of the Act - HELD THAT - In the present case, the plea of the VOAMC (the resident/non-resident) that it is not liable to pay any tax in India has been accepted by the income tax authorities. No doubt, the return filed by it was processed u/s 143(a)(i) . From this, it was sought to be contended by the learned counsel for the Revenue that there is no determination of the issue involved. Fact remains that by accepting the return as filed, the VOAMC has been refunded tax at source by the assessee herein and the implication that it is not liable to pay tax. In case, higher authority passes any order to the contrary, it would be open to the income tax authorities, in the case of the assessee also, to treat the assessee in default . However, as of today, the position is that VOAMC is not treated as liable to pay any tax. We, thus, answer the question No. 1 in favour of the appellant/assessee holding that the assessee was not liable to deduct tax at source under Section 195(1) of the Act in respect of the mobilization and demobilization costs reimbursed by the appellant to VOAMC. The assessment proceedings in VOAMC are reopened and the final view taken is that the VOAMC is assessable to tax, the assessee herein would also be treated as assessee in default , which would attract the consequences provided under Section 40(a)(i).
Issues Involved:
1. Liability to deduct tax at source under Section 195(1) of the Income Tax Act. 2. Obligation to deduct tax at source as per Section 195 of the Act. 3. Non-applicability of Section 40(a)(i) of the Act in view of Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty. Detailed Analysis: Issue 1: Liability to Deduct Tax at Source under Section 195(1) The Tribunal held that the appellant was liable to deduct tax at source under Section 195(1) of the Income Tax Act for mobilization and demobilization costs reimbursed to VOAMC. The appellant argued that the reimbursement was not chargeable to tax in India, and hence, no tax was deductible at source. The Tribunal's interpretation of Section 195 was that the payer must deduct tax at source if payments are made to a non-resident, regardless of whether the payment is chargeable to tax in the hands of the recipient. The High Court examined the Supreme Court's judgment in Transmission Corporation of AP Ltd. and concluded that the obligation to deduct tax at source arises only when the payment is chargeable to tax in India. The Court noted that the Tribunal did not consider whether the payment was chargeable to tax in India in the hands of VOAMC. The High Court held that the appellant was not liable to deduct tax at source under Section 195(1) for the mobilization and demobilization costs reimbursed to VOAMC, as the income tax authorities had accepted that VOAMC was not liable to pay tax in India. Issue 2: Obligation to Deduct Tax at Source as per Section 195 The Tribunal opined that it was not necessary for the payer to determine whether the payment was chargeable to tax in India. The High Court disagreed, stating that the obligation to deduct tax at source under Section 195 arises only when the payment is chargeable to tax in India. The Court emphasized that the payer must move an application to the Assessing Officer if they believe the payment is not chargeable to tax or is chargeable at a lower rate. The High Court reiterated that the determination by the Assessing Officer under Section 195(2) is tentative, and if it is ultimately found that the recipient is not liable to pay tax, the payer would not be treated as in default. Issue 3: Non-applicability of Section 40(a)(i) in View of Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty The Tribunal did not adjudicate on the issue of non-applicability of Section 40(a)(i) in view of Article 24 of the Indo-Netherlands Double Tax Avoidance Treaty. The High Court noted that since the Tribunal's order was set aside on the first two issues, it was not necessary to address this issue, rendering it academic in the present case. Conclusion: The High Court allowed the appeal, setting aside the Tribunal's order. It held that the appellant was not liable to deduct tax at source under Section 195(1) for the mobilization and demobilization costs reimbursed to VOAMC, as the income tax authorities had accepted that VOAMC was not liable to pay tax in India. The Court also emphasized that the obligation to deduct tax at source arises only when the payment is chargeable to tax in India, and the determination by the Assessing Officer under Section 195(2) is tentative.
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