2012 (7) TMI 118 - HC - Income Tax

TDS - assessing authority has issued certificates authorizing the payment without deduction of tax - after the issuance of the said certificate the assessee made payments as against each invoices without any deductions Held that - Under section 197, there is no obligation on part of payer to pay tax as long as certificate issued under section 197 is in force and not cancelled and - payer cannot be treated as an assessee in default even if tax is found payable under Act - assessee could not have deducted tax at source - he cannot be treated as a defaulter under law - He is not an assessee in default as understood under Section 201 of the Act - In favour of assessee

Summary

Issues Involved:
1. Whether the technical services rendered under the contract were liable to deduction of tax at source under Section 195 of the Income Tax Act.
2. Whether the payments made under the management services agreement were fees for technical services and deemed income under Section 9 read with Article 12 of the DTAA between India and Singapore.
3. The effect and validity of the certificate issued under Section 197 of the Income Tax Act.

Detailed Analysis:

1. Deduction of Tax at Source under Section 195:
The Tribunal held that the technical services rendered under the contract between the assessee and its counterpart abroad were not liable to deduction of tax at source under Section 195 of the Act. This decision was challenged by the revenue, citing the judgment of the Karnataka High Court in Jindal Thermal Power Company v. DCIT and the Supreme Court in Ishikawajma Harima Heavy Industries Limited v. Dy. CIT. The Tribunal found that the lower authorities were not justified in raising the demand under Section 201 of the Act because the assessee had acted based on the certificates issued under Section 197 (1), which stated no tax was required to be deducted. The High Court upheld this view, stating that the assessee cannot be treated as an assessee in default as long as the said certificate stands.

2. Payments as Fees for Technical Services:
The assessing authority and the Appellate Commissioner had determined that the payments made under the management services agreement were fees for technical services (FTS) and thus deemed income under Section 9 read with Article 12 of the DTAA between India and Singapore. The Tribunal, however, found that the management services rendered by LLAH involved training that made available technical knowledge, expertise, skill, and know-how to the assessee, thus falling under the category of FTS. Despite this, the Tribunal concluded that the assessee was not required to deduct tax at source under Section 195, thus no interest under Section 201 (1A) was leviable. The High Court did not delve into this issue further due to the primary finding that the assessee was not required to deduct tax at source.

3. Effect and Validity of the Certificate under Section 197:
The learned Additional Solicitor General argued that the certificates issued under Section 197 were not conclusive and could be overridden by regular assessment proceedings. However, the Tribunal and subsequently the High Court held that once a certificate under Section 197(1) is issued, the payer is under no obligation to deduct tax at source until such certificate is canceled. The High Court clarified that while the certificate provides immunity under Section 201, it does not prevent the assessing officer from reexamining the chargeability of income in regular assessment proceedings. The High Court concluded that the assessee could not be treated as an assessee in default due to the existence of the certificate under Section 197.

Conclusion:
The High Court dismissed all appeals and cross objections, upholding the Tribunal's findings that the assessee was not required to deduct tax at source under Section 195 due to the certificate issued under Section 197. Consequently, the assessee could not be treated as an assessee in default, and the proceedings initiated under Section 201 were deemed unsustainable and illegal. The High Court also noted that the findings regarding the nature of the payments (whether as fees for managerial services or reimbursement of expenses) and the applicability of the DTAA were not inquired into, leaving the door open for these issues to be addressed afresh if necessary.