9911796707
TMI Blog2009 (1) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments to crew members/staffs. These grounds taken by the assessee are reproduced as under: "1. That on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the disallowance of Rs. 26,09,29,745 being reimbursement of crew salary and other payments made to Alfa Crew. 1.1 That the learned CIT(A) erred in holding that the provisions of s. 40(a)(i) are applicable on the facts and in the circumstances of the case. 1.2 That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the crew deployed with the appellant on secondment, on whose salary taxes were deducted at source under s. 192 of the Act, wherever applicable, were not the employees of the appellant. 1.3 That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the appellant was under statutory obligation to deduct tax at source as per the order under s. 195(2) disregarding the fact that the said order was issued only in the month of March, 2004, i.e., the concluding month of the previous year, and that the appellant had already deducted tax under s. 192, wherever applicable. 1.4 That the learned CIT(A) erred in di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained, and the following remarks were given in Col. 10 of Form No. 3CD: "The assessee wishes to offer its income to tax under s. 44BB of the IT Act, 1961 (being special provisions for computing profits and gains in connection with the business of exploration, etc., of mineral oils). As per the requirements stipulated under sub-s. (3) of s. 44BB, the assessee has maintained the necessary books of account and documentation." 5.4. The assessee had also given the following remarks vide para 6 of note of statement of income which reads as under: "In an unlikely scenario wherein the taxable income of DDL under s. 44BB(1) of the Act is lower than the income computed under s. 44BB(3) of the Act, DDL reserves the right to be assessed under s. 44BB(1) of the Act." 5.5 From the said averment made by the assessee in the return of income, it is, thus, clear that the assessee had claimed it to be assessed under s. 44BB(3) with a rider that in an unlikely scenario wherein taxable income of the assessee determined under s. 44BB(1) of the Act comes to a sum lower than the income computed under s. 44BB(3), the assessee reserved its right to be assessed under s. 44BB(1) of the Act. 5.6 Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the following details: "The assessee company has however, deducted tax at source only on payment of Rs. 2,03,73,617. The payment of TDS has been made to the credit of Government account as per following details. ---------------------------------------------------------- Date of payment/ Amount Amount of TDS Date of credit payment ---------------------------------------------------------- March, 2004 1,16,87,912 5,75,045 31-05-2004 ---------------------------------------------------------- March, 2004 86,85,704 4,27,336 27-10-2004" ---------------------------------------------------------- 5.11 The assessee company was, therefore, required by the AO to explain as to why TDS on balance payment of Rs. 26,66,14,049 was not made, and, accordingly, he required the assessee to show cause as to why expenditure on account of crewing fee debited/paid be not disallowed in view of the provisions of s. 40 (a)(i) of the Act. In reply thereto, the assessee submitted, inter alia, before the AO that the payment made on account of salary of crew to Alfa Crew was the reimbursement of the amount of salary payable to crew employees by the assessee company, and the TDS on such payments wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Crew in pursuance of above contract lo the then Dy. CIT, Circle-I, Dehradun, and the then AO accordingly, directed the assessee company vide order under s. 195(2) in F. No. Dy. CIT/Circle-1/DDN/195(2)/2003-04/3294, dt. 3rd March, 2004 to deduct tax after applying deemed profit rate of 12 per cent on all the payments. The relevant contents of order under s. 195(2) are reproduced hereunder for the sake of convenience: The services being provided by the non-resident company appear to be covered under s. 44BB, accordingly, DDL is directed to deduct tax after applying deemed profit rate of 12 per cent on all payments including reimbursements to be made to the NRC. It is also directed to withhold last invoice until final NOC is issued by this office.' The assessee company has however, grossly disobeyed the above directions issued vide order under s. 195(2) and released payments to Alfa Crew taking totally different ground that the crew were the deemed employees of the assessee company. The payments against services of crew have been made to the Alfa Crew against invoices raised by Alfa Crew without giving any details of the members of crew. The payments against services of crew were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of regular business operations. As such, s. 195 applies not only to the amounts which wholly bear the income character such as salaries, dividends, interest on securities, etc., but also to gross sums, the whole of which may not be income or profits of the recipient such as payments to contractors, sub-contractors, insurance commission, etc. What was to be considered was whether payment of sum to non-resident is chargeable to tax. The sum may be income or income hidden or otherwise embedded therein so the tax is required to be deducted on such payments. The assessee company has made payments to Alfa Crew on the basis of invoices raised by it to assessee company in terms of contract agreement. No details of expenses on account of salary of crew have been obtained by the assessee at the time of making payments nor have been filed in the course of assessment proceedings. It was therefore, not open to the assessee company to decide whether the salary of crew was just reimbursement or income element was there in the amounts mentioned in the invoices of Alfa Crew. The argument of reimbursement to the Alfa Crew is therefore, not all tenable and the assessee company was under statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts to Alfa Crew is disallowed and added to the income of the assessee company. I may also mention that even if the above expenditure was covered under the head salaries it is liable to be disallowed in view of provisions of cl. (iii) of above section as the payments have been made outside India to a non-resident whereon no tax has been deducted under Chapter XVII-B of IT Act." 6. Being aggrieved with the AO's order in disallowing the expenditure of Rs. 26,66,14,049 on account of payment to Alfa Crew against services of crew, the assessee preferred an appeal before the learned CIT(A). 6.1 In the course of hearing before the learned CIT(A), the assessee made submissions, which are narrated by the learned CIT(A) in his order at pages from 8 to 19. The assessee submitted before the learned CIT(A) that the provisions of s. 40(a)(i) come into operation only in respect of an amount chargeable to tax in India. He further submitted that Alfa Crew had seconded personnel to the assessee company and the assessee company had issued appointment letters of various dates to those seconded personnel. As there was a direct employer and employee relationship, the assessee company has held the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employer of the crew members is MI s Alfa Crew and not the assessee company. The payment on account of services of these technicians was being made by the assessee to M/s Alfa Crew after receiving the invoices from M/s Alfa Crew. Thus, no direct payment was made to those technicians by the assessee. From the contract itself, it was clear that the amount paid by the assessee company to M/s Alfa Crew was by way of fees for technical services, which included in its definition supply of personnel, and not on account of any reimbursement. The use of word 'reimbursement' in the agreement between the assessee and Alfa Crew does not imply that the Alfa Crew ceases to be the employer of the technicians employed by it but it is only a measure of the compensation or consideration which Alfa Crew is entitled to receive from the assessee company for providing the services of the technicians. This is also clarified and confirmed in cl. 8.1 of the agreement between the assessee and Alfa Crew. The decision of Hon'ble Delhi High Court in the case of Dy. CIT vs. HCL Infosystems Ltd. (2004) 192 CTR (Del) 108 : (2005) 274 ITR 261 (Del) was thus, not applicable to the facts of the present case. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us discussions and observations made by the AO as well as by the learned CIT(A) in their respective orders. The arguments of the assessee were also summarized in a written submission dt. 17th Nov., 2007 filed before us. 7.2 It was submitted by the learned counsel for the assessee that the objections taken by the AO as well as by the learned CIT(A) to the assessee's claim of deduction of salary of the crew are mainly three-fold. First, as the salary was paid to the crew through Alfa Crew, the authorities below hold that the crew were employees of Alfa Crew and not of the appellant company. Secondly, they hold that the payments of crew salary/expenditure made by the appellant to Alfa Crew constituted income receipts of Alfa Crew. Thirdly, the issue stood concluded by Dy. CIT's order under s. 195(2) and on account of non-compliance to the directions given in that order, the appellant's claim of deduction is straightway hit by the provisions of s. 40(a)(i). 7.3 The learned counsel for the assessee further submitted that all these three assumptions or objections taken by the AO and learned CIT(A) are not justified but are terribly wrong. 7.4 As to the first assumption of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment treasury. (h) Alfa Crew ceased to exercise any supervision or control once they directed the crew to report to the assessee company, and from that point of time onwards the role of M/s Alfa Crew was relegated to being passive employer and for all practical purposes the crew functioned in the employment of the assessee company. 7.5 To support the assessee's case, the learned counsel pointed out certain tests to distinguish between a servant and an agent, and in this connection, he made a reference to the decision of Hon'ble Supreme Court in the case of Piyare Lal Adishwar Lal vs. CIT (1960) 40 ITR 17 (SC) and in the case of Lakshminarayan Ram Gopal & Son Ltd. vs. The Government of Hyderabad (1954) 25 ITR 449 (SC). 7.6 With regard to the interpretation given by the learned CIT(A) to the expression "employer tax liability" occurring in cl. 8 of the agreement, the learned counsel for the assessee submitted that the learned CIT(A) has misread the expression "employer tax liability" as "employees tax liability". Clause 8 of the agreement speaks of employer tax and it speaks of tax liabilities in relation to fees alone. He made a reference to cl. 4 and cl. 5 of the agreement to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment by the assessee company to Alfa Crew of all crew's salary or expenses would be only of the actual crew salaries/expenses incurred by the Alfa Crew and nothing more and (b) the profit element of Alfa Crew in this behalf would be the 5 per cent handling fee that the assessee company would separately pay to the Alfa Crew over and above the reimbursement of actual expenses. He further submitted that the Alfa Crew merely acted as a conduit for disbursement of salaries and other expenses by the assessee company to its crew on the vessel-rig "Belford Dolphin", and Alfa Crew, at best, acted as an agent of the assessee company for the disbursement of salaries and other expenses to the crew. He further contended that the contract between the assessee company and the Alfa Crew was that of supply of manpower and nothing more, and whatever payments were made against services of crew were payments to crew and not to the supplier. The payment was made because the crew attended the vessel-rig and toiled there and not because Alfa Crew supplied the crew. 7.9 With regard to the applicability of the Tribunal's decision in the case of HCL Infosystems Ltd. to the present case, the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court has categorically held that while an assessee who makes payments to non-resident under contract entered into is under obligation to deduct tax at source under s. 195 but that obligation is limited only to appropriate proportion of income chargeable under the Act. In the case of the assessee company, the payment to Alfa Crew by way of reimbursement of actual expenditure on crew salary/expenses was not the income of the Alfa Crew chargeable to tax under the provision of the Act. But, it is the income of the crew employed at Belford Dolphin, and therefore, the tax was required to be deducted in accordance with the provisions of the Act at the point where the payment was made to the crew. He, therefore, submitted that in the present case with regard to the payment of salary or other expenses to the crew, the provisions of s. 192 and not the provisions of s. 195 were applied. He, thus, submitted that the order under s. 195(2) of the Act was not applicable to salary payments, and that it concluded the issue of deduction of tax at source from the payment made of salary is not correct. 7.12 He further submitted that the assessee's contentions in respect of provision of s. 195 vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r crew is erroneous inasmuch as in the light of the scheme of provision relating to the tax deductible at source, the assessee could have withheld tax on the past salary payment as also from the future salary payments. Reference was made to the decision of Tribunal in the case of Vinsons vs. ITO (2004) 83 TTJ (Mumbai) 594 : (2004) 89 ITD 267 (Mumbai). 7.15 He further submitted that as per agreement between assessee company and Alfa Crew, the assessee was contract bound to make three categories of payments as under: "(a) Payment of US $ 869 per day as stipulated in cl. 4 of the agreement. (b) Reimbursement to Alfa Crew of all crew salaries/expenses reasonably incurred by Alfa Crew. (c) Handling fee calculated @ 5 per cent on salaries/expenses as mentioned in (b) above." 7.16 In the light of the nature of aforesaid three categories of payments, the learned counsel for the assessee contended that the AO was not justified to treat these three different kinds of payments as a single payment for the purpose of deducting the tax at source under s. 195 of the Act. The authorities below had erred in including the payment of reimbursement paid by the assessee company to Alfa Crew in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall mean the consideration for the provision of services of technical or other personnel, that is, crew members and would in turn come within the ambit of expression "fees for technical services" as defined under Expln. 2 to cl. (vii) of sub-s. (1) of s. 9 of the Act. He, therefore, submitted that the decision of Hon'ble Delhi High Court in the case of Dy. CIT vs. HCL Infosystems Ltd. is not applicable to the present case on its facts. He placed reliance upon following decisions: (1) Clouth Gummiwerke Aktiengeselischaft vs. CIT (1999) 238 ITR 861 (AP); (2) Cochin Refineries Ltd. vs. CIT (1996) 135 CTR (Ker) 193 : (1996) 222 ITR 354 (Ker); (3) Transmission Corporation of A.P. Ltd. vs. CIT; (4) West Asia Maritime Ltd. vs. ITO (2007) 109 TTJ (Chennai) 617 : (2008) 297 ITR 202 (Chennai)(AT); (5) Poompuhar Shipping Corpn. Ltd. vs. ITO (2007) 108 TTJ (Chennai) 970 : (2008) 297 ITR 219 (Chennai)(AT). 8.1 He further submitted that even if the payments, made by the assessee company to Alfa Crew fall within the ambit of s. 192 of the Act, the assessee still failed to deduct tax at source properly inasmuch as the salary paid by assessee company to crew was not exempted either under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides that the agreement shall be commenced on 10th Oct., 2003 and shall continue upto 31st March, 2004, or as terminated by either party giving to the other party not less than 60 days' prior written notice. The cls. (4), (5) and (8) are relevant clauses which have been emphasized by the Revenue authorities. We, therefore, deem it necessary to take note of the aforesaid three clauses. These are being reproduced here as under: "4. Fee 4.1 The client shall pay to Alfa Crew a fee of USD 869 per day inclusive of VAT if applicable, payable upon receipt of monthly invoices thereon, or as otherwise agreed. This fee shall cover Alfa Crew running costs, such as but not limited to, personnel, office and administration costs/expenses. This fee will be subject to an yearly review but will remain fixed unless otherwise agreed by the parties. 5. Crew expenses 5.1 The client shall reimburse Alfa Crew all crew salaries/expenses reasonably incurred by Alfa Crew in the proper provision of the services in accordance with the client's identification and requests and Alfa Crew shall be entitled to a 5 per cent handling fee thereon as Alfa Crew shall provide the client with evidence of such sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In respect of the payment of reimbursement of all crew salaries or expenses reasonably incurred by Alfa Crew, the Alfa Crew was entitled to 5 per cent handling fee thereon. In other words, the 5 per cent handling fee upon the total sum of crew salaries or expenses reasonably incurred by Alfa Crew was separately payable by the assessee company to Alfa Crew. This makes it clear that the assessee company was obliged to reimburse Alfa Crew of crew salaries or expenses reasonably incurred by Alfa Crew while providing crew service to the assessee company and shall also be liable to pay 5 per cent handling fee thereon to Alfa Crew. The assessee company was also entitled to have evidence of all crew salaries or expenses reasonably incurred by Alfa Crew as the assessee company may reasonably require making it clear that the assessee company was only responsible to reimburse actual crew salary or expenses incurred by Alfa Crew. The Alfa Crew has to provide drilling and marine crew to the assessee company for the operation of the drilling ship as so mentioned in the preamble recital of the agreement. In the agreement, separate payment has been provided on account of services rendered by Alfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has given a certificate to the index of the paper book that the documents placed in the paper book are drawn from the records of the authorities below and no fresh evidence was furnished. The copies of appointment letters are placed at pp. 302 to 379 of the paper book. We have perused the assessment order, and on perusal thereof, we find that nothing has been mentioned by the AO therein with regard to this factum claimed by the assessee that the assessee had produced copies of appointment letters issued to crew employees employed by the assessee for executing work contract entered into with ONGC. The fact that the assessee had produced copies of aforesaid appointment letters before the AO has nowhere been discussed by the AO in the assessment order. The learned Departmental Representative was also not coming with a categorical submission that the copies of the aforesaid appointment letters were not filed before the AO or learned CIT(A). The learned Departmental Representative merely submitted that it was not clear as to which document was produced by the assessee before which authority. We have also gone through the submissions of the assessee made before the learned CIT(A), w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities below have not made any comment or observation or have not discussed anything with regard to these appointment letters issued by the assessee to different employees. No reason has been given as to why the AO as well as learned CIT(A) have failed to take into account the appointment letters issued by the assessee to all its employees including persons provided by Alfa Crew while deciding the issue. Since no adverse or contrary material has been brought by the AO or by the first appellant authority nor any comment upon these appointment letters issued by the assessee to various employees has been made by the authorities below, we are inclined to accept the fact that the assessee had issued appointment letters employing the various employees including crew members provided by Alfa Crew vide the aforesaid appointment letters issued by the assessee to various employees. The list of the expatriate personnel appointed by the assessee as enclosed with the aforesaid assessee's letter dt. 19th July, 2005 filed before the AO, is as under: ---------------------------------------------------- Sl.No. Name Nationality Days ---------------------------------------------------- 1. Anderson ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. Goldie, Mark R British 76 ---------------------------------------------------- 31. Gordon, James J British 86 ---------------------------------------------------- 32. Greenfield, Davil L M British 22 ---------------------------------------------------- 33. Gunn, Andre S British 53 ---------------------------------------------------- 34. Guy, John F British 84 ---------------------------------------------------- 35. Hammond, Michael A British 74 ---------------------------------------------------- 36. Hatten, Peter A Australian 73 ---------------------------------------------------- 37. Hinzie, Richard B USA 67 ---------------------------------------------------- 38. Hogstorm. Sven Swedish 79 ---------------------------------------------------- 39. Hughes, Colin British 78 ---------------------------------------------------- 40. Hutton, Paul N British 76 ---------------------------------------------------- 41. James, Ronald J British 82 ---------------------------------------------------- 42. Karlsson, Karl G Swedish 45 ---------------------------------------------------- 43. Kelly, Patrick Irish 73 --------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------- 73. Woods, Gareth R British 43 ---------------------------------------------------- 13. Copies of appointment letters are placed at pp. 302 to 379 of the paper book filed before us, and these appointment letters are in respect of employees listed above. Thus, it is clear that the aforesaid expatriate employees were directly employed by the assessee on the terms and conditions as incorporated in the appointment letters issued by the assessee to the said expatriate employees. 14. In support of the view that the crew were employees of the assessee company and the assessee company was discharging its own obligation by way of reimbursing the payment of all crew salaries or expenses, the following additional factors besides the averments made in cls. (1), (4), (5) and (8) of the agreement are found to be relevant: (i) Drilling ship known as "Belford Dolphin" was being operated by the assessee company, who was accountable to ONGC with regard to the nature and quality of the crew services. (ii) M/s Alfa Crew did not accept any accountability as respect the nature and quality of the services or performances of crew deployed at drilling ship operated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company entered into a joint venture agreement for technical and financial collaboration with HP, a foreign company. The purpose of the agreement being the provision of technical know-how by HP to the assessee to make and sell certain products of HP in India, the assessee was to pay a lump sum technology transfer fee in consideration of the services and privileges provided by HP and in consideration of the transfer of know-how by HP to the assessee company in relation to HP transfer products, and in consideration for the manufacture right on the HP transfer products, the assessee company was to pay 13 lakh dollars in three equal instalments. Over and above, the assessee was to pay recurring royalty in relation to HPI's manufacture of the HP 9.000 model-822 and 832 computers from the commencement of commercial production. Another part of the agreement was that HP was to depute certain technical personnel to work for assessee in India as provided in art. 10 of the agreement. In consideration of the HP deputing its technical and advisory personnel, the assessee shall reimburse and pay to HP on a monthly basis the actual amount of the salaries and the related employment costs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion period. The assessee had also issued appointment letters to all the crew or technicians, who were deputed and placed at the disposal of the assessee. The services of the technicians were also fully at the discretion of the assessee during the period of deputation inasmuch as they had to work under the control and supervision of the assessee and not of Alfa Crew. The facts of the present case are, thus, quite similar and identical to that of the case of HCL Infosystems Ltd., and as such, the decision of the Co-ordinate Bench of the Tribunal in the case of HCL Infosystems Ltd., is squarely applicable to the present case. It is also pertinent to know that the aforesaid Tribunal's decision in the case of HCL Infosystems Ltd. has been upheld and approved by the Hon'ble jurisdictional High Court reported as Director of ITO vs. HCL Infosystems Ltd. 16. In the case of HCL Infosystems Ltd. vs. Dy. CIT (2002) 76 TTJ (Del) 505, Tribunal, Delhi 'E' Bench, the Tribunal has observed and held as under: "22. We have carefully considered the rival submissions in the light of the material on record. From the facts given by the AO and the CIT(A) on the basis of the submissions and record place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining these employees in India. The assessee shall provide at its cost appropriate accommodation and suitable local transportation to HP's personnel during their stay in India. The assessee shall bear all Indian taxes payable on the abovementioned payments to HP. Any arrangement arrived at between the parties pursuant to cl. 10 above shall be subject to a specific approval of the Government of India and the RBI, HP shall not be obligated to provide any personnel pursuant to above clause until such approvals have been obtained. 24. As per this agreement, the assessee, was to reimburse and pay to HP on a monthly basis the actual amount of the salaries and related employment costs incurred by HP in deputing and maintaining these employees in India. The technicians deputed desired to receive their salary in US dollars. For the convenience of these technicians, HP made the monthly salary in USA for which debit notes were sent to the assessee for reimbursement. Thereupon, the assessee completed all the formalities for remittance of the salary of these technicians as reimbursement to HP. The assessee, therefore, approached the AO for issue of NOC to remit the salary to HP as reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment is correct then the assessee is not liable to deduct tax at source under s. 192 of the Act as the foreign company i.e., HP was liable to deduct tax at source from the salary of the technicians. The learned counsel also found support from the Circular No. 720 of the CBDT, dt. 30th Aug., 1995, where it was clarified that each section relating to tax deduction at source under Chapter XVII of the Act deals with a particular kind of payment to the exclusion of all other sections in that chapter and that the payment of any sum shall be liable to deduction of tax only under one section. Having regard to the above facts and circumstances of the case, we are of the view that the assessee was fully justified in holding the view that it was not liable to deduct tax at source. The view taken by the assessee was directly supported by the letter of the Asstt. CIT, Special Circle 30(1), Mayur Bhavan, New Delhi, who informed the assessee that the income chargeable under the head 'Salary' is not covered by the provisions of s. 195 of the Act. Even if the assessee is liable to deduct tax at source, the default was not deliberate and was created due to the wrong information received from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1), informed the assessee that the reimbursement of salary was not covered by the provisions of s. 195 of the Act. There is therefore no reason to hold that the assessee was in default for non-deduction of tax under s. 195 of the Act. 29. Having regard to the above facts and circumstances of the case, we hold that the assessee cannot be deemed to be an assessee in default under s. 201(1) and also not liable to interest under s. 201(1A) of the Act. We order accordingly." 17. The aforesaid decision of the Tribunal in the case of HCL Infosystem Ltd. has been approved and upheld by the Hon'ble jurisdictional Delhi High Court in the case of Dy. CIT vs. HCL Infosystems Ltd. by observing and upholding as under: "Judgment As pointed out by the Tribunal, the IT Department after a lapse of six years issued notices requiring the assessee to show cause why the remittances made by it to Hewlett Packard (USA) in respect of salaries paid by HP (USA), on behalf of the assessee to four 'foreign technicians'/expatriates, be not treated as 'fee for technical services' and why the assessee should not be treated as an assessee in default for not deducting tax from the said payment under s. 195 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently be covered fully by the above Explanation.' In our opinion, it cannot be said that the Tribunal has committed an error. In any event, there is no substantial question of law which requires consideration as the Tribunal has arrived at a finding on the material placed on record. Hence, the appeal is dismissed." 18. At this juncture, we find it necessary to examine the reason given by the AO in not following the aforesaid decision of the Tribunal in the case of HCL Infosystems Ltd. The AO in his order has stated that in the course of hearing before him, the assessee placed reliance upon the said decision of the Tribunal in the case of HCL Infosystems Ltd. However, the AO did not feel inclined to follow the same by observing that the decision of the Tribunal in the case of HCL Infosystems Ltd. does not apply to the facts of the case of the assessee company as in the assessee's case, the payments have been made to Alfa Crew as against invoices raised by it while as per the facts of the case of HCL Infosystems Ltd. relied upon by the assessee, it appears that the payments were made to the employees concerned. This observation made by the AO is prima facie found to be totall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the assessee and the technicians. Thus, the reason given by the learned CIT(A) in not following the decision of HCL Infosystems Ltd. has no legs to stand. 20. The next reason given by the AO in not accepting the assessee's claim that the reimbursement payment made to Alfa Crew towards salaries/expenses of the crew is covered by s. 192 of the Act is that even if the payments were covered by s. 192, there was a clear default in deduction of tax at source on payment against services of crew as because of the invoices raised by Alfa Crew on account of salaries of crew were raised on monthly basis indicating that the payment to crew was being made on monthly basis but the assessee had failed to deduct tax at source from the said monthly payment under s. 192 of the Act. The AO further observed that the s. 192 casts the liability upon the assessee to deduct tax at source on the date when salary paid, and as such it is quite beyond understanding as to how assessee could decide not to deduct tax at source at the time of making the first payment for the reason that the stay of crew in India would not exceed 90 days in the relevant financial year. The assessee's failure to deduct tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes it further clear that TDS instalments of each month need not necessarily be accurate, as otherwise the expression 'increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year' will have no meaning. Let us take an example of a salaried employee, who is supposed to pay annual tax of Rs. 30,000 based on the salary income earned in the month of April of the financial year. The employer has to deduct, according to the Revenue authorities, tax @ Rs. 2,500 per month. If, in the month of December, the employee gets arrears of salary, bonus, etc. which doubles the tax liability, the employer would be liable to deduct Rs. 5,000 towards tax every month as against Rs. 2,500 deducted earlier. Neither the assessee nor the employer could have anticipated this position in the month of April. The only recourse is to deduct higher tax from the month of December onwards, so as to cover up the deficiency. Under these circumstances, can it be said that the employer is a defaulter and failed to deduct the tax, so as to charge interest @ 15 per cent on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very month was paid without considering ultimate liability of tax in the relevant year and considering the provisions of s. 192(3) of the Act. "4. The argument of the learned Authorised Representatives that the crew were deemed employees of the assessee company and payments against their services were covered by s. 192 is not tenable but even if the payments against their services were covered by s. 192, there is a clear default in deduction of tax at source on payments against services of crew. All the invoices raised by Alfa Crew on account of salary of crew have been raised on monthly basis which indicates that payment to crew was being made on monthly basis. Mobilization of drillship was started on 8th Aug., 2003 as the first invoice bearing No. 1800000046, dt. 2nd Sept., 2003 was raised for US $ 6,00,166 on account of salary of crew. The amount of invoice was due to be paid by 16th Sept., 2003 i.e., within 14 days from the date of issue. The s. 192 casts upon liability to deduct tax at source on the date when salary is paid. As such, it was obligatory on the part of the assessee to deduct tax under s. 192 when the amount was paid in view of the provisions of sub-ss. (1) and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act was referred to the High Court. The Hon'ble High Court decided this issue against the assessee. It was observed in that case that the two supervisors were deputed only for the purpose of rendering technical services. In that case, it was the responsibility of non-resident company to do the job of erection of conveyor belts through their engineers, and for that purpose, the two supervisors were deputed for a period of two working days. From the facts of this case, it is, thus clear that these two supervisors were discharging their duties under the control and supervision of the non-resident company, which was responsible for doing the job of erection of conveyor belts through their engineers. Though, on the other hand, in the case before us, deep water drilling rig known as "Belford Dolphin" taken on charter hire basis from Dolphin Drilling (P) Ltd. was operated by the assessee to conduct drilling operation in the offshore waters of India for ONGC and the crew members provided by Alfa Crew manned the drilling unit under the control and direction of the assessee company as per contract agreement entered into with ONGC. This is further strengthened by the individual appointment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he vacuum industry was not carried out by the assessee in the course of which the assessee had employed these two personnel of foreign company but the personnel did work for the foreign company. As discussed above, the facts of the present case are quite different inasmuch as the present assessee did not obtain the services of the personnel from Alfa Crew in the course of providing any service in the nature of technical services defined under Explanation s. 9(1)(vii) of the Act but the crew members were placed at the disposal of the assessee for the purpose of manning the drilling unit operated by the assessee in the offshore waters in pursuance to the contract entered into with ONGC. Thus, this decision does not give any assistance to the Revenue on facts. 26. The learned Departmental Representative has also relied upon the following two Tribunal decisions: (1) West Asia Maritime Ltd. vs. ITO (2008) 297 ITR (AT) 202 (Chennai); (2) Poompuhar Shipping Corpn. Ltd. vs. ITO. 27. In the case of West Asia Maritime Ltd. vs. ITO, the payment of hire charges in respect of ship owned by non-resident, in the light of the fact that option to purchase vessel was not exercised till end of ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is to be deducted, and it is the statutory obligation of the person responsible; for payment of such sum chargeable to tax, to deduct tax thereon before making payment. Here, in the present case, it is the case of the assessee that the payment of crew salary and expenses is not chargeable to tax as fees for technical services in the hands of Alfa Crew, and as such the question of deducting tax at source under s. 195 of the Act did or could not arise. This decision would have gone against the assessee only after it is found that the payment of salary crew and expenses paid to Alfa Crew were chargeable to tax in the hands of Alfa Crew and thus, the tax was deductible under s. 195 of the Act. In this case, it has also been observed that the s. 195 provides for deduction of tax at source subject to regular assessment, and the purpose of s. 195 is to see that on the sum which is chargeable under s. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary' after wherever it was found due after considering the income exempted under s. 10(6)(viii) of the Act, the AO has not made any adverse finding against the assessee's claim that the payment made to crew members by way of salary or expenses was exempted from tax under s. 10(6)(viii) of the Act inasmuch as the non-resident crew member did not stay into India in the aggregate for a period of 90 days or more in the relevant financial year. This aspect of the question has not been adversely commented upon by the learned CIT(A) also. On perusal of s. 10(6)(viii), it is clear that any income chargeable under the head salaries received by or due to any non-resident as remuneration for services rendered in connection with his employment on a foreign ship where total stay in India does not exceed in the aggregate a period of 90 days in the relevant previous year is not includible in the total income of that non-resident assessee. It is not in dispute that the crew members were employed on a foreign ship known as "Belford Dolphin" taken on charter by the assessee non-resident company from its group company M/s Dolphin Drilling Ltd. incorporated in Singapore. The details of stay of some o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances of the case the learned CIT(A) erred in holding that the appellant had no liability to pay a sum of Rs. 35.72 crores to Dolphin A.S. in respect of the management rights of the drillship. 2.2 That on the facts and in the circumstances of the case, the learned CIT(A) erred in commenting that the claim of the appellant was an afterthought aimed at inflating the operating cost in order to get its tax liability reduced." 33. In the course of assessment proceedings, it was noticed by the AO that the assessee has debited an amount of Rs. 10,18,72,035 in the P&L a/c being part of total payment of Rs. 35,72,02,369 paid for acquiring management rights in drillship "Belford Dolphin". However, in the return of income, the assessee claimed the deduction of entire sum of Rs. 35,72,02,369 paid for acquiring management rights of drillship "Belford Dolphin" to Dolphin A.S. of Norway. The entire amount was claimed as revenue expenditure in the return of income and, in support of which, the assessee placed reliance on several Courts' decisions vide para 4 of notes to the computation of income, which reads as under: "Dolphin A.S. was the manager of Belford Dolphin. DDL has acquired this ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Dolphin A.S. the assessee company has eliminated recurring revenue expenditure. The assessee's contentions and claims were not found to be convincing or tenable by the AO for the various reasons discussed by him in paras 4.3 to 4.7 of his order which are reproduced hereunder for ready reference: "4.3 The arguments set forth are however, neither convincing nor tenable because the drillship was mobilized on 9th Aug., 2003 for being deployed on site for execution of contract work in pursuance of agreement dt. 10th Oct., 2003 for charter hire of drillship entered into by the assessee with Dolphin Drilling (P) Ltd. (owners of the bareboat). There is no mention in the agreement dt. 10th Oct., 2003 that managerial rights over drillship were with some other company. On going through above agreement, it clearly transpires that Dolphin Drilling (P) Ltd. was having absolute rights and ownership of the drillship as such condition has nowhere been stipulated in the contract agreement that the assessee company will have to acquire management rights from any other company for operation of drillship. It is clearly mentioned in cl. (a) of para 9 of that agreement, which deals with the condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dt. 20th June, 2000 and subsequent amendment dt. 30th Nov., 2000 over the Drillship from Navis Explorer A.S., the parent company. Para (B) of agreement indicates that vessel was sold by Navis Explorer A.S. (which was later merge into Dolphin A.S.) to Fred Olsen Drilling A.S. on 30th Nov., 2001. The above conditions of agreement are very confusing and it is nowhere mentioned in the agreement that management rights were acquired by Dolphin A.S. Neither event-wise details of transfer of drillship and managerial rights are given not copy of any of the agreements mentioned in the agreement dt. 17th Sept., 2004 have been produced for verifications even after being specifically asked about. It is therefore, not possible to verify as to whether the Dolphin A.S. was in fact having managerial rights over the vessel. The agreement bears dt. 17th Sept., 2004 which is after five and half months after the previous year relevant to assessment year in question was over. Had there been in fact managerial rights with Dolphin A.S., it is quite beyond understanding as to how could the Drillship be mobilized and put to use for the entire previous year without any such agreement and payment of manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ss. 5 and 9 of IT Act, the income accrued in respect of ship is chargeable to tax in India. Moreover, neither the assessee company had applied for determining income of recipient company under s. 195(2) nor the recipient company applied for under s. 195(3) or 197 for exemption or lower determination of profit rate. The sum paid by assessee company to non-resident company was clearly a revenue receipt in the hands of recipient NRC and thus was liable to TDS under s. 195 as it is covered by the term 'other sum' which has been paid to a non-resident and outside India. In view of the above provisions the amount paid is not allowable as expenditure under s. 40(a)(i) of IT Act: As regards argument of the learned Authorised Representatives, that sum is a revenue receipt in the hands of recipient company Dolphin A.S. and therefore, was clearly chargeable to tax under the provisions of IT Act, particularly in view of the provisions of s. 9(1)(i) and 9(1)(vi) of IT Act. 4.6 Moreover, para 5 of art. 7 of DTAA between India and UK provides that while determining profits of a permanent establishment, actual expenditures will be allowed subject to the provisions of para 6 and 7 of that art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going through the paper book filed by the assessee before the learned CIT(A) including the agreement dt. 17th Sept., 2004 between the assessee and Dolphin A.S., the learned CIT(A) confirmed the AO's order by concluding as under: "(c) The foregoing discussion goes to establish that the appellant has raised this claim to avail a chance to get its tax liability reduced and has done so with the culpable knowledge of its falsity as is established from the consideration of the alternate claim that the assessment of its total income cannot exceed 10 per cent of the revenue received by it from ONGC, This apprehension of the appellant clearly indicates a culpable state of mind recognizing the fact that the claim in its return of income is false and may not be accepted. Since I am of the opinion that there was no liability to pay to DAS on account of the purported agreement, the question of its being of capital or revenue nature does not arise. Taking into account all the facts and circumstances of the case, the AO was, in my opinion, right in disallowing the claim of the appellant. It is, however, noticed that the appellant has debited only Rs. 10,18,72,035. Appellant gets relief of Rs. 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in" is genuine and/or whether the assessee had incurred liability to pay any consideration for acquiring alleged management rights of drillship "Belford Dolphin" to Dolphin A.S.? 37.2 In this connection, the learned counsel for the assessee has invited our attention to the various agreements entered into between different concerns from time to time with regard to the management rights over the drillship Known as "Belford Dolphin" with a view to buttress his argument that historically, ownership rights and management rights in drillship known as "Belford Dolphin" vested with separate entities from time to time. He further submitted that the historical state of affairs about management rights in drillship may be traced in the impugned order of the learned CIT(A), who has discussed and noted the history of ownership rights and management rights in Belford Dolphin being vested with separate entities from time to time. The learned counsel for the assessee submitted that the practice of separate management rights was already there for more than five years before the assessee company stepped in and charter-hired drillship for the purpose of executing the contract work with ONGC and acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 17th Oct., 2003 but the agreement was made effective as of 1st Aug., 2003. The agreement to acquire drillship on charter hire basis is dt. 10th Oct., 2003, though the drillship had already been mobilized on 9th Aug., 2003 and this agreement was even made before the written agreement with ONGC was made on 17th Oct., 2003. Thus, the subsequent agreement confirming and ratifying the acts, deeds and things already done by the parties to the agreement cannot be held to be non-genuine only for the reason that the agreement in writing was made at a point of time later than the date of its commencement. The AO has not made any enquiry from Dolphin A.S. about the transaction in question. The averments recited in the agreement have not been proved to be false or bogus by bringing out, any adequate or sufficient evidences or materials on record by the Revenue authorities. The Revenue authorities have drawn conclusion merely on presumption or suspicion that the agreement made after about one year from the date of transaction was executed with a view to reduce the assessee's tax liability without establishing their stand with any adequate or sufficient or proper evidences or materials. We, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect for the authorities below to doubt a valid agreement duly signed by both the parties to the agreement. 37.5 We have carefully perused the history of management rights in the drillship "Belford Dolphin" as narrated by the learned CIT(A) in his order, and on perusal thereof, we find that the assessee has raised a contention that the management rights were acquired by different entities from time-to-time. The copy of management agreement allegedly entered into by different entities from time to time has been filed by the assessee before us. The AO has doubted the genuineness of the agreement entered into between the assessee and Dolphin A.S. for one of the reasons that the fact of management rights vesting with some other entities was not mentioned in the charter hire agreement entered into between the assessee and Dolphin Drilling (P) Ltd., but that reason in itself cannot be a basis to hold so unless some materials rebutting the assessee's case are brought on record. We observe that the AO has failed to make any enquiry about the correctness of the chronological events or history of management rights explained by the assessee. Unless and until a proper enquiry from the respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditures against contract receipts and there was no mention of any expenditure on account of acquiring managerial rights. After considering the facts of the present case, we find that this reason given by the authorities below has no substance as the total amount paid for acquiring managerial rights was capitalized in the books and it is only in the return of income filed after the end of the previous year that the total expenses for acquiring managerial rights were claimed as revenue expenditure. It is, thus, clear that at the time of proceedings under s. 195(2), the assessee did not decide to claim the expenses as revenue expenditures but instead the expenses were capitalized in the books. Thus, not mentioning of any expenditure of acquiring managerial rights in the projected figures submitted in the course of proceedings under s. 195(2) cannot be a valid reason to reject the assessee's claim by treating the claim of the assessee to be sham and bogus or afterthought. 37.7 The learned CIT(A) has also raised a doubt whether the consideration amount for acquiring alleged management rights had gone to swell the revenues of Dolphin A.S. or any invoice was ever raised by Dolphin A.S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given by learned CIT(A) is set aside and rejected. 37.9 In the light of the discussion made above, we remit this issue back to the file of the AO for his fresh adjudication after making necessary enquiry or verification as observed hereinabove by us. While adjudicating the issue afresh, the AO shall also decide all other aspects of the issue other than the aspect relating to the genuineness of the assessee's claim of deduction on account of management rights in the drillship. The other aspect of this issue arising in the present case as revealed from the orders of the authorities below and the submission of the assessee would, amongst others if any, be that whether expenditure for acquiring management rights would be revenue or capital in nature, and whether the same is liable to be allowed as deduction under the Act if found to be of revenue in nature, and whether the assessee will otherwise be entitled to get depreciation allowance if expenditure is found to be of capital in nature? The AO shall decide all aspects of this issue as per law by way of passing a speaking and reasoned order. Needless to say that the AO shall grant sufficient and/or reasonable opportunity to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
