9911796707
TMI Blog2006 (3) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... under the loan agreement referred to above, does not detract from the fact that the primary liability of payment towards goods and services lie with the assessee-company and it is the assessee-company who has to process the claims and initiate the payment process in terms of the various agreements. The fact also remains that the payments have been made in this case for and on behalf of the assessee. It is the executing agency which triggers the payment and while passing a bill direction for deduction of tax as per section 195 while making a payment could be made by the assessee. No payment could have been released without the officers of the assessee-company passing the bills consequent to claim made by the contractor. Delay in passing of the entries in the books of account for whatever reason does not erase the fact that the payments have been made in the impugned assessment years. Once the payment is made section 195 of the Act is attracted. Thus we uphold the finding of the first appellate authority and dismiss this ground of the assessee. In our considered opinion the judgments relied on by the learned Standing Counsel for the revenue, to drive home the point that the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been brought out by the Assessing Officer to prove that the permanent establishment has in fact income which is attributable to it in this transaction is devoid of merit. The correspondence filed by the learned Standing Counsel speaks otherwise. This brings us to article 7 of DTAA. A plain reading of article 7 show that only that portion of income which is attributable to the permanent establishment in this country is taxable in this country. Definitely the entire contract cannot by any stretch of imagination be treated as income which is attributable to the permanent establishment. At best, the supervisory charges which formed less than 3 per cent of the total value of the contract can be said to be attributable to the permanent establishment. The profit arising out of these service contracts, if any, has to be considered as taxable income in the hands of the non-resident company. Liability to deduct tax in terms of section 195 - Applying the ratio of the judgment of the jurisdictional High Court in the cases of Visakhapatnam Port Trust and Sundwiger EMFG Co. [ 2003 (2) TMI 35 - ANDHRA PRADESH HIGH COURT] , we have held that this is a contract of sale and that no portion of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in default for that particular assessment year. Thus we uphold the order of the first appellate authority though not only for reasons mentioned by him but also for the reasons given by us in our order above. In the result, while the appeals of the assessee are allowed, the appeals filed by the Revenue are dismissed. - HON'BLE D. MANMOHAN, JUDICIAL MEMBER AND J. SUDHAKAR REDDY, ACCOUNTANT MEMBER For the Assessee : S. Ravi For the Revenue : J. V. Prasad ORDER J. Sudhakar Reddy, Accountant Member. 1. These are cross appeals filed against the common order passed by the Commissioner of Income-tax (Appeals)-V, Hyderabad vide his order dated 29-11-2002 for the assessment years 1999-2000 to 2002-2003. 2. As the issues arising in all these appeals are common, for the sake of convenience, they are heard together and disposed of by way of this common order. 3. Brief facts of the case are given below. The assessee is a State Government undertaking, which came into existence with effect from 1-2-1999 after restructuring of the erstwhile Andhra Pradesh State Electricity Board (hereinafter referred to as APSEB). Japan Bank for International Co-operation (hereinafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pan. The scope of contract clearly envisaged that Sumitomo Corporation would supply the various items of plant and machinery and equipment specified in the contract agreement. This agreement did not envisage the erection and commissioning of the pump turbines by Sumitomo Corporation or BHEL. This was an agreement exclusively for the sale and supply of the pump turbines and the connected equipment. The contract envisages that out of the total consideration payable to Sumitomo Corporation, a sum equivalent to 360 Million Yen relates to charges for supervisory Engineers for assembly erection, testing including field testing and commissioning as per Schedule I, Statement 7 of the Contract. This related to the supervisory charges payable for the assembly of the turbines. Out of the total consideration, another payment of 345.6 Million Yen related to charges for Supervisory Engineers for assembly erection, testing and commissioning and field-testing of generators and controls as per Schedule 2, Statement 2 of the Agreement. APSEB entered into an independent contract with PES Engineers for the purposes of erecting and commissioning the generators, turbines and the other equipment. 3.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee contended as follows. 3.5 In so far as that portion of the consideration relatable to sale of equipment is concerned, there was no question of deduction of any tax at source, inasmuch as the same was towards capital acquisition. Consequently there would be no liability to deduct taxes at source. The supply of equipment by Sumitomo Corporation to the assessee did not result in any income chargeable under the provisions of the Income-tax Act and hence the basic condition of the provisions as contained in sub-section (1) of section 195 of the Income-tax Act was not satisfied. The title to the equipment was transferred by Sumitomo Corporation to the assessee at the time such equipment was actually loaded free on board at the port of shipment. The equipment was imported into India by the assessee and necessary taxes and duties were paid by the assessee to the tax authorities in relation to such import. This is evidenced by the contract documents as well as other documents like the Bills of Lading etc. In other words, no part of the sale price would form part of taxable income under the purview of the Income-tax Act. Further paragraph 1 of Article 7 of the DTAA between Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances to Sumitomo Corporation, EPDC BHEL in these four years had been grossed up and brought to tax at 48%. 3.8 Aggrieved the assessee filed appeals before the Commissioner of Income-tax (Appeals) raising the following grounds: (i) On the facts and the circumstances of the case, the ACIT erred in passing an order under section 201(1) of the Act and in determining the appellant's liability as Rs. 166.82 crores. (ii) The order passed by ACIT is contrary to the provisions of the Act in violation of the principles of natural justice. (iii) The ACIT ought to have given an opportunity of hearing to the appellant before passing the order, and in the absence of it the order as such is void ab initio and requires to be set aside. Further the ACIT did not provide adequate opportunity to the appellant to furnish necessary documentary evidence and submissions to show that the appellant was not liable to deduct tax at source under section 195 of the Income-tax Act. (iv) The ACIT failed to appreciate that the appellant had not made any payments to Sumitomo Corporation and as a matter of fact, Sumitomo Corporation had not been given any credit in the books of account maintained by the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced inasmuch as the ACIT has taken irrelevant facts into consideration in deciding the issue. (xi) The ACIT erred in finding that the appellant has claimed the benefit of section 44BBB. The appellant had only pointed out that Sumitomo Corporation had paid tax in respect of 10% of the contract price for the erection of plant and machinery, testing and commissioning portion only. Insofar as the sale of equipment is concerned, the appellant had rightly claimed that no tax is deductible as there is no element of income comprised therein as is liable for tax under the provisions of the Act. (xii) The ACIT erred in holding that in the absence of an application under section 195(2) of the Act, there was liability to deduct tax, without appreciating that in the case of sale of equipment, the said section did not apply. (xiii) The ACIT erred in holding that the entire revenues arising out of the contracts are income chargeable to tax and further erred in grossing up the entire revenues as per the provisions of section 195A of the Income-tax Act, 1961. 3.9 The Commissioner (Appeals), on a consideration of facts of the case held at para 12.6 of his order that the contracts in question were n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) that the contracts were not on a turnkey basis, but were contract of sale of goods. 4. The learned Senior Standing Counsel for the Revenue Shri J.V. Prasad made elaborate submission and in his written submissions at para 1 submitted that brief facts as set out above which are extracted from paras 1 to 23 of the written submissions of the assessee are undisputed facts except to the extent of the perception of the appellant that the contracts relating to: (a) Pump turbines, inlet valves, motor generator sets, associated auxiliary control and ancillary equipment. (b) Gas Insulated Switchgear. (c) 400 KV LPE Insulated Power Cables were either only sale and supply contracts related to supervision of erection, commissioning and testing or were related to third parties like BHEL, EPDC and D T and were not turnkey projects, does not put the picture in the correct perspective. 5. We first deal with the grounds of appeal of the assessee. The first issue is whether section 195 is applicable to the facts of the case in view of the complexity and multiplicity of agreements between various parties on terms of payment. Grounds 2, 3, 4 and 5 of the assessee's appeals dealing with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iting to payee's account or alternatively at the time of actual payment to the payee only. He submitted that in the case of the assessee no payment was made by the assessee to Sumitomo Corporation. He emphasized on the fact that the Government of India established an irrevocable letter of credit drawn on Bank of India, Japan in favour of Sumitomo Corporation. As and when Sumitomo Corporation in Japan made dispatches it used the present documents to Bank of India, Tokyo and obtained payments against irrevocable Letter of Credit established in Japan. The Japan Bank for International Co-operation (hereinafter called as 'JBIC') reimbursed the payments to Bank of India, Tokyo Branch. The Government of India treated the same as loan from JBIC. Government of India lent this money to the Government of A.P. The Government of A.P. identified APSEB as an agency to implement Srisailam Left Bank Power Station Project and directed the amount to be treated as loan owed by APSEB to the Government of Andhra Pradesh. He further submitted that the Government of A.P. after a lapse of several months used to issue Government orders giving clear instructions to the assessee as to the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Pump Turbines etc. wherein it is stipulated that Sumitomo Corporation is to supply goods and services in consideration of payment to be made by the assessee. Under clause 4 the assessee covenants to pay Sumitomo Corporation the contracted price at the time and in the manner mutually agreed to between them. Clause 1 of the Supplement to contract agreement states that the contract was arranged in accordance with the loan agreement between the Government of India and the Overseas Economic Co-operation Fund of Japan dated 10-2-1988. Clause 2 stipulates that payment to Sumitomo Corporation shall be made through an irrevocable letter of credit to be issued by the Bank of India, Tokyo, or as prescribed by the loan agreement dated 10-2-1988 (Yen component) and Rupees component payment to BHEL to be made through documents. Thus he submitted that the bids of Sumitomo Corporation for the various contracts were accepted by the assessee and that Sumitomo Corporation was the contractor and the assessee the buyer and further that the assessee was solely responsible for payment to the non-resident and that such payment was to be made as mutually agreed to between the parties. The contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s connection, the learned A.R. of the appellant argued that no payment was made by the appellant either directly or indirectly. The payment was actually made in Japan on the strength of L/C established by the Government of India with the Japanese Bank (Bank of India, Tokyo Branch) and hence, the appellant was in no position to make a deduction of tax at source from such payment. 14.2 I have duly considered the submissions made by the appellant, but I am not inclined to accept the same. The provisions of section 195(1) do not speak of direct or constructive payment. The fact remains that the payment was made in accordance with the terms of agreement in which a specific condition was there that JBIC would release fund only for the Power Project under consideration owned by the appellant. Therefore, irrespective of the mode of payment, the fact remained that payment was made for and on behalf of the appellant only and it was the responsibility of the appellant to ensure that in case of such payment, adequate provision is made for ensuring that the TDS as per law in force is effected before releasing such payment. If considered necessary, the appellant could have communicated with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, the payment could be made either in cash or by the issue of a cheque or a draft or by issue of any other instruction, method or procedure adopted with the knowledge and approval of the payer. Obviously, when APGENCO was the owner of the assets, it was the payer even though the payment was made by the Fund in pursuance of a loan agreement, which ultimately burdened the appellant with the amount paid as loan. 15.1 In this connection, one must keep in mind that the source of payment are not a matter of consideration for the purpose of effecting TDS. Hence it is not important to know as to who provided the funds or who released the payment. But what is important is for and on behalf of whom the payment was released. Moreover, the expression any other mode , in my opinion, refers to the alternative procedure of payment rather than payment in kind. This is because, payment in cash or cheque or draft are nothing but different procedures for making the money pass from the payer to the payee. In case of cheques and drafts, the bank acts as the medium of transfer of money. In the present case, the special procedure for payment adopted is slightly different from the conventional procedure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venants to pay the contractor in consideration of providing goods and services the contract price at the time and in the manner mutually agreed to by the contractors and the Buyer. The fact that the contract is arranged in accordance with the loan agreement between the Government of India and the Overseas Economic Co-operation Fund of Japan (OECF) dated 10th February, 1988 concerning the Yen credit ID-P 43 (Project Aid) for Srisailam Left Bank Power Station Project and that the fact that the payment to the contractor shall be made through an irrevocable letter to credit to be issued by the Bank of India, Tokyo or as otherwise prescribed under the loan agreement referred to above, does not detract from the fact that the primary liability of payment towards goods and services lie with the assessee-company and it is the assessee-company who has to process the claims and initiate the payment process in terms of the various agreements. The fact also remains that the payments have been made in this case for and on behalf of the assessee. It is the executing agency which triggers the payment and while passing a bill direction for deduction of tax as per section 195 while making a payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the turbines and generators and this work was done by M/s. PES Engineers for whom separate contractual payment was made. Similarly he submitted that installation of 400 KV Gas Insulated Switchgear was done by L T. He submitted that for both these contracts supervision charges are payable to Sumitomo Corporation for supervising the erection, testing and commissioning of generators/switchgears. The total quantum of these charges in relation to the value of these equipment is hardly 2 to 3 per cent as furnished in Annexure I to the written submissions i.e., in the case of main generating equipment the percentage of supervision charges in contract value is 2.63 per cent and in the case of 400 KV Gas Insulated Switchgear the percentage is 2.91 per cent. Thus he contended that the quantum of payment made by way of supervisory charges is insignificant compared to the very value of the equipment. He relied on the jurisdictional High Court's decision in the case of CIT v. Sundwiger EMFG Co. [2003] 262 ITR 110 (AP) and submitted that supervision was incidental to the sale of plant and machinery and, therefore, it must be treated as part of the sale price. Reliance was also placed on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reads as follows: To design, manufacturing of proto type, testing at manufacturer's works before dispatch, customs clearance, delivery up to the project site, laying and installation, testing and commissioning of the equipment in accordance with the specifications and documents at the site of the proposed Power Station. Thus he argued that it is of little consequence that separate agreements were entered into between the assessee and the nonresident after the acceptance of the tenders spelling out the above scope of the contracts. It is the department's case that the contracts were for execution of work on a turnkey basis and that the goods were put in a deliverable state only in India. He relied on the following judgments: (1) Narsee Nagsee Co. v. CIT [1959] 35 ITR 134 (Bom.) (2) Chhaganlal Savchand v. CIT [1966] 62 ITR 133 (Bom.) (3) ILR 1954 Rajasthan 778 at 794 (DB) (4) Padamsi v. Shankar AIR 1926 Nagpur 410 (5) Daulatram Rameshwarlal v. B.K. Wadeyar AIR 1958 Bom. 120 (DB) (6) Vasantha Viswanathan v. V.K. Elayawar [2001] 8 SCC 133. (7) C.G. Krishnaswami Naidu v. CIT [1966] 62 ITR 686 (Mad.) (8) CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad.) (9) Stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed outside India and hence sale has taken place outside India. (ii) As far as the supply part of XLPE contract is concerned, it is submitted that clause 9 of the agreement between APSEB and Sumitomo Corporation envisaged the passing of title on FOB basis and so the title has passed outside India. From this there is no question of erection and commissioning of XLPE cables as the cables were fully manufactured when they were put on board and nothing further was to be done. He pointed out that unlike the other two contracts in the case of XLPE cables, there is no fee for supervision and commissioning and thus they were in deliverable state when they have been put on ship and nothing was required to be done. (iii) He once again referred to the decision of the Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. and submitted that therein it was held that in the case of contract for sale, the mere fact that the seller does certain acts even after the sale or retains certain amount of control over the assets sold even after the sale, it does not mean that the sale has not taken place earlier. He specifically referred to page 423 of the judgment which reads as follows: But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at variance with the contract then only the contract would survive and thus, the process through which the parties passed through which ultimately resulted in the contract being reduced to writing and override the agreement itself. He referred to the Indian Contract Act and Specific Relief Act to support the view that where there is no ambiguity in the terms of a contract it is impermissible to look into the documents exchanged during negotiations. Thus he submitted that the contract does not envisage any type of works contract but it is a case of simple sale contract. 14. We have carefully considered the rival submissions. The principles that emerge from the various case laws relied upon by both the parties can be summarized as follows: (1) In the case of FOB contracts, the property in the goods passes on to the seller when the goods are put on board unless it is intended otherwise by the parties: (2) Intention of the parties has to be gathered from the terms of the contract. In this case there are three contracts. The first relates to pump-turbines, inlet valves, motor generator sets, associated auxiliary control and ancillary equipments. The second contract relates to 400 KV Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional ground wherein it submits that both the Assessing Officer and the first appellate authority have committed an error by coming to a conclusion that the contracts in question are supply contracts and not turnkey contracts. The learned Standing Counsel finds fault with the Assessing Officer's findings. Before we go into the question of admissibility of this additional ground the word turnkey in Oxford Concise Dictionary is termed as of or involving a complete product or service ready for immediate use. Going by the literal meaning, it appears that purchase of any machinery or even a small item like ceiling fan would tantamount to turnkey contract for it is to be a complete product which is ready for immediate use. Taking the example of a ceiling fan, once the ceiling fan is purchased it is at a place where the buyer requires the same to be installed and after fixing the blades to the motor and the pipe on which the motor is hung the product becomes completely operational on operating the switch. Thus purchasing a plant and machinery in this sense of the term can be called a turnkey job. Definitely it is distinct from the term works contract. The issue of consideration should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's paper book. Payments for this contract are under the following heads: (1) Port Clearance, Inland Transportation and Unloading at the site. (2) Storage, Laying, Termination, Testing and Commissioning Scope of work at page 73 reads as follows: Clearance and Handling charge, Inland transportation, Inland transit Insurance and Unloading and stacking at Buyer's site/warehouse, storage and supervision at site laying, termination, testing and commissioning of 5 circuits of 400 KV 1,000 sq. mm. XLPE cables (3 cables per circuit with the connected accessories) as set out in detail in these contract documents. In the agreement No. 1/88-89 between APSEB and EPDC International Ltd. executed on 10-2-1988, reference to the scope of services under Article 3 which is as follows: 3.1 Scope of services of retainer consultant for transfer of technology and know-how for engineering and project implementation of 990 MW, Srisailam Left Bank Power Station Project. The Retainer Consultant shall perform the services under this contract in accordance with the technical bid and terms of reference set forth as follows: 3.2 Scope of services by the retainer consultant. 3.2.1 The Retainer Consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project. The Retainer Consultant shall provide 8 (Eight) copies of his reports and drawings, if any prepared by him as part of his service. 3.2.14 The Retainer Consultant shall also review progress reports prepared by APSEB covering various areas of work with reference to scheduled programmes pinpoint slippages and suggest corrective action required for restoring the schedule. 3.2.15 The Retainer Consultant shall also supply typical design memoranda relating to similar type of pumped storage Hydroelectric Schemes of comparable size for reference in APSEB/CEA/CWC as supplemental consultancy service subject to mutual consent. 3.2.16 The Retainer Consultant shall undertake other design and engineering works which may be entrusted to him by APSEB/CEA/CWC as supplemental consultancy services, subject to mutual consent. 3.2.17 The Retainer Consultant shall provide the latest technical know-how to CEA/CWC in design and engineering of pumped storage projects in addition to Srisailam Left Bank Power Station, if so desired by these organizations, as supplemental Consultancy Service subject to mutual consent. 3.2.18 The Retainer Consultant shall assist APSEB/CEA/CWC in submitting and rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case. The Hon'ble jurisdictional High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP) considered the following points: The assessee, the Visakhapatnam Port Trust, exported a large amount of iron ore. In order to speed up export operations it decided to install a plant known as bucket wheel reclaimer. A German company tendered the contract for the supply of the equipment. An agreement was entered into between the German company and the Port Trust whereby the German company understood to supply the equipment and to delegate an engineer to supervise its installation. A company in Poona was employed to fabricate a steel plate (boom). The equipment supplied by the German company was to be embedded on the steel plate and delivered at Visakhapatnam. The assembling at the Visakhapatnam Port was to be done at the expense of the Port Trust. The term erection used in the contract meant payment of wages to the German supervising engineer and his travel expenses. Under clause 12(a) of the contract, the purchase price for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is just 2.63% of the total cost of the main generating equipment and 2.91% of the cost of 400 KV Gas Insulated Switchgear. As the jurisdictional High Court has considered a number of judgments and had come to a conclusion and as we are applying the ratio of that judgment to the facts of this case, we do not wish to go into the various other judgments quoted by both the parties in this regard. 16.3 As regards the test of be applied for ascertaining the situs, the Hon'ble Gujarat High Court in the case of C.I.T. v. Saurashtra Cement Chemical Industries Ltd. [1975] 101 ITR 502 has relied on the judgment of the Hon'ble Supreme Court in the case of Delhi Cloth General Mills Co. Ltd. v. Harnam Singh AIR 1955 SC 590. At page 511 the Court observed thus: In view of this clear-cut pronouncement of the Supreme Court, it is obvious that the amount of the unpaid price cannot be said to be a loan advanced by the non-resident company to the assessee-company nor can the non-resident company be said to be a lender to the assessee-company so far as that amount was concerned. Since the non-resident company cannot be said to have lent the amount of unpaid purchase price to the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a was concerned, all that the company did was to send a representative when the contract was signed in India. Barring that action so far as the performance of the contract was concerned, the non-resident company nowhere came near the shores of India or territories of India. It puts the goods on board the ship concerned at a port in Europe. It received all the price in Europe and that too in terms of foreign currency. The plant was not to be erected or put up by the non-resident company but the assessee-company was to set up the plant in India. Even the instalments were to be paid in foreign currency. So far as the unpaid price was concerned, the amount was to be paid by bills of exchange drawn in a foreign country and accepted by the assessee-company in India. Thus, most of the elements of this contract are found to be most densely grouped with the country, namely, Italy, where the non-resident company, Messrs Ansaldo is carrying on its business of supplying plant and machinery and hence the debt which the assessee-company owed to the non-resident company was not an asset held by the non-resident company in India. Therefore, the interest which was payable in respect of this debt wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imated the income from such activity, paid taxes thereof and that there was no liability on the Appellant. The case of the assessee is that Sumitomo Corporation has recognized that it is liable to tax in respect of the installation work undertaken and has estimated its income under section 44BBB of the Act and filed is returns. It is, therefore, the case of the assessee that if the quantum was wrongly assessed then it is a matter for the Assessing Officer of Sumitomo Corporation to deal with the same and reliance is placed on the judgment the Gujarat High Court in the case of CIT v. Rishikesh Apartments Co-operative Housing Society Ltd. [2002] 253 ITR 310. His submission is that as the assessee has already paid the taxes, there is no liability on the appellant. The Revenue submits that the payment of advance tax by Sumitomo Corporation does not come to the rescue of the assessee as the impugned order is one passed under section 201 of the Act and not one which is passed under any regular assessment. 18.1 The judgment of the Hon'ble Gujarat High Court in the case of Rishikesh Apartments Co-operative Housing Society Ltd. is not applicable to the facts of the case as per the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed as under: If the Revenue is permitted to levy interest under the provisions of section 201(1A) of the Act, even in a case where the person liable to pay the tax has paid the tax on the date due for the payment of the tax, the Revenue would derivate undue benefit or advantage by getting interest on the amount of tax which had already been paid on the due date. Such a position in our opinion cannot be permitted. 19.1 The contention of the learned counsel for the Revenue that the statutory provisions do not support the contentions of the assessee, in our considered opinion, is also not correct. 19.2 What is to be understood is that tax deduction at source is only provisional payment. The jurisdictional High Court in the case of Superintending Engineer, Upper Sileru had brought out this view at page 776 which reads as follows: It should also be borne in mind that whatever tax is deducted at source under section 195 from out of the gross sum is not irretrievably lost to the recipient. It is only a provisional payment which will be made to the Central Government to the credit of the recipient. The provisions of the Act enable the recipient, whether such recipient is a resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be from the date on which tax has to be deducted to the date on which the deductee filed his return of income and paid tax thereon. Otherwise, if after deductee filed his return and the assessments are completed or barred by limitation or accepted without any further demand then, to ask the tax deductor to deduct tax now and remit it to the Government and issue the certificate to the deductee and the deductee again going before the Department for refund of this tax with interest is nothing but an idle formality which is not contemplated under the scheme of the Act. TDS is termed as provisional payment by the jurisdictional High Court and once the interest of the revenue has been protected by the factum of the deductee filing the return and paying the taxes, it cannot be said that any person continues to be in default. The proposition that when no portion of the gross sums estimated can be considered as income accrued or arisen in India then liability to deduct tax under section 195 does not arise, is supported by the decision of the ITAT reported in Maharashtra State Electricity Board v. Dy. CIT [2004] 90 ITD 793 (Mum.) as well as in the case of Raymond Ltd. v. Dy. CIT [2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees - Held, yes - Whether employer -assessee could be faulted for holding an honest opinion that conveyance allowance was not to be included in computation of income of employees while deducting tax at source so as to be declared as an assessee deemed to be in default and charged interest under section 201(1A) - Held, no. In the case of Gwalior Rayon Silk Co. Ltd. v. CIT [1993] 140 ITR 832 (MP) it is held as follows: Held also, that where the regular assessment of an employee had been completed and the amount of tax was fully paid, the ITO (TDS) had no jurisdiction under section 201 to demand further tax from the employer in respect of tax sort deducted relates to such employee. In CIT v. M.P. Agro Morarji Fertilizers Ltd. [1989] 176 ITR 282 (MP) it was held that: Where the regular assessment of an employee had been completed and the amount of tax fully paid by him, the Income-tax Officer (TDS) has no jurisdiction under section 201 of the Income-tax Act, 1961, to demand further tax from the employer in respect of tax short-deducted relating to such employee. 19.4 In case the Revenue feels that during the period of default i.e. the actual date on which the tax is due for dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CAIT v. Plantation Corporation of Kerala Ltd [2001] 247 ITR 155 (SC). As per the Explanation, the Principal Officer and the Company of which he is the Principal Officer, which does not deduct tax shall be deemed to be an assessee in default if such tax has not been paid by the assessee direct. The word then clearly denotes the intention of the Legislature that the Principal Officer and the company shall not be considered to be assessees in default if the tax due is paid directly. The use of the word 'and' denotes cumulative conditions one of which is direct payment by deduction. Even under section 201(1A), simple interest at the rate of 12% is leviable from the date on which the tax was deductible to the date on which the tax is paid. The payment herein may be a direct payment by the assessee concerned. The word 'paid' does take into its fold the payment made directly by the assessee concerned. The Revenue's contention that it is not possible for it to ascertain the assessment details of the deductee and that the T.D.S. Officer cannot verify whether the deductee offered this turnover/income to tax is not tenable for the reason that, the information can be easily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax payable by the non-residents on the total income chargeable under the provisions of the Act. We can only express the hope that the Central Board of Direct Taxes gives instructions to all the ITOs to expedite regular assessments on non-residents, from whom tax is deducted at source, giving top priority and facilitate smooth course of international trade involving large magnitude of trading operations. The tax authorities will do well to make an accelerated assessment on non-residents under section 194 of the Act, should circumstances require such a course in order to ensure that the non-residents get back expeditiously excess amounts of tax, if any, deducted at source under section 195. Thus even for the payment which is made for value of cost of goods purchased in the course of regular trade, tax should be deducted at source under section 195 of the Act. 19.8 The learned Standing Counsel has rightly pointed out that the very same assessee was party to the judgment in the case before the Hon'ble A.P. High Court as well as the Hon'ble Supreme Court on the issues and despite suffering adverse decision in these cases has been careless in the present issues also. 20. Now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Referring to the letters shown by the learned Standing Counsel, he submitted that the offices of Sumitomo Corporation at Chennai and Delhi merely acted as post office. The letters of transmittal and Power of Attorney executed show that it is a convenient location for dispatch of the notices etc. (3) The learned counsel for the assessee's case is that the contract envisaged designing, drawing and manufacturing of various sophisticated equipment and the question was whether the Liaison office has undertaken any of these activities. His case is that as no part of the manufacturing activity was done in India and as the Liaison offices did not carry out any managerial function and thus they did not constitute a permanent establishment. He referred to the correspondence on which Department relied on to show that all the processes of decision making which is key in any managerial function had taken place outside India and application of mind was entirely outside India. The mere act of receiving letters from the appellant and others and transmitting the same to Japan or receiving communication from other places and forwarding the same to the assessee, as per the learned counsel, did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en accrued to Sumitomo Corporation which is attributable to work done in India. He further relied on the judgment of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 and submitted that the instruction issued by the CBDT is binding on the Revenue. While conceding that in that circular the Board was considering the case of oil exploration companies, he submitted that the instructions analogous principle is applicable and at any rate the facts of the present case show that the value of supervision work in India is only between 2% to 3% of the total contract value which is much less than what is assumed in the instruction i.e., 10%. 21. The learned standing counsel for the Revenue, on the other hand, disputed the contention of the assessee and submitted that the first appellate authority has erred in scaling down the estimation to the rate of 15%. He vehemently contended that the Commissioner (Appeals) has failed to give any basis for restricting and adopting the said rate especially when it is not a case of regular assessment. He contended that the T.D.S. Officer has no jurisdiction to assess the income in its pure, simple and stri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of the TDS Officer cannot be found fault with on this score. 22. The first question that arises for our consideration is whether the non-resident has a permanent establishment in India and if so, any part of the transaction and profit thereon is attributable to the said permanent establishment. Before we go into these facts, we extract below for ready reference Article 5 and Article 7 of the Double Taxation Avoidance Agreement between India and Japan. Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory (e) a workshop; (f) a mine, an oil or a gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or other sales outlet; and (j) an installation or structure used for the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise. 8. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. 9. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article. The undisputed fact is that the non-resident Sumitomo Corporation has filed its return in India and has paid advance tax and assessments were made. While so, we do not understand as to how the learned counsel for the assessee argues stating that there was no permanent establishment in this country. A plain reading of the Double Taxation A voidance Agreement at any rate does not contemplate that each and every work has to have a separate and independent permanent establishment. 'Permanent Establishment' is an inclusive definition and under article 5(4) there is deeming provisions which in our view applies to this case. The deductee had a place of management as well as a building site for more than six months, and it suo motu filed its returns of income. Thus on this sole fact itself, we uphold the contention of the learned standing counsel. Thus the finding of the first appellate authority that the assessee has per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident is chargeable to tax as income under the Act and, hence, he does not find it necessary to make an application under section 195(2). The ITO, on the other hand, may be again honestly under the impression that the gross sum of money includes some portion chargeable under the IT Act. Could it be said that, under such circumstances, the person responsible for making the payment could be punished or penalized by requiring him to pay the tax deductible on the entirety of the gross sum. The answer is clearly negative. We cannot accede to the contention of the learned counsel for the revenue that the ITO is entitled to call upon the Electricity Board to pay tax deductible under section 195 in respect of the entirety of the payments made to M/s. Charmilles Engineering Works Ltd in R.C. 203 and to M/s. Oerlikon Engineering Company in R.C. 205. It must be remembered that the order was passed under section 201 of the Act. For the purpose of determining the tax in respect of which the person responsible for making the payment could be deemed to be in default, the ITO must determine the tax only on the appropriate proportion of income chargeable under the Act. There is no prohibitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o parties are on a principal to principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them but where: (a) the purchases made by the resident are outright on his own account. (b) the transactions between the resident and the non-resident are made at arm's length and at prices which would be normally chargeable to other customers, (c) the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or (d) the payment to the non-resident is made on delivery of documents and is not dependent in any way of the sales of the effected by the resident. It can be inferred that the transactions are on the basis of principal to principal. Paras 2 3 of the Circular reads as follows: 2. Non-resident company selling goods from aboard to its Indian subsidiary- (i) A question may arise whether the dealings between a non-resident parent company and its Indian subsidiary can at all be regarded as on a principal to principal basis since the former would be in a position to exercise control over the affairs of the later. In such a case, if the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position the Comptroller Auditor General have agreed to drop the objection referred to above. The jurisdictional High Court has made it abundantly clear that the requirements for treating the assessee as being in default extends only to the portion of income chargeable under the Act. Thus the issue is answered in favour of the assessee by applying the ratio of the judgment of the jurisdictional High Court. Thus the argument of the learned counsel for the assessee that at best, certain percentage of the amount received towards services which is 2.63% in the case of main generation equipment and 2.91% in the case of 400KV Gas Insulated Switchgear can only be considered as income attributable to permanent establishment and this alone can form the basis for holding that the person is liable in terms of section 195 of the Act is upheld. 26. This leaves us with ground Nos. 9 10 which read as under: (ix) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 10(6A) clearly exempts the grossing up in such cases. 26.3 The learned Standing Counsel for the Revenue submitted that the reliance on section 10(6A) and 10(6B) is not relevant or is not applicable to the facts of the case as no evidence was filed by the assessee that the agreement between the assessee and the foreign company was approved by the Central Government and it is not shown that the tax payable by the Foreign Company is the responsibility of the Government or the Indian concern under the terms of agreement. 27. Considering the rival submissions as well as the additional ground filed by the assessee, we find that the agreed position is that there is no categorical covenant whereby it is stipulated that either the Government of India or the assessee has undertaken the liability to pay taxes of the deductees on to themselves. On the contrary, the assessee has specifically denied that it would undertake the liability to pay the taxes. When there is no specific agreement then it follows that only the non-resident company is responsible for paying the income-tax on the transaction or the income that accrued to it and none else. Thus the case of grossing up simply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals) erred in considering the payments made to BHEL as payments made as per section 194C of the Act. 28.1 After hearing both parties on this issue, we find that the ratio of the judgment of the jurisdictional High Court in the case of Visakhapatnam Port Trust is in favour of the assessee. Relevant extracts are already given above. In that case the jurisdictional High Court held that the agreement between the German Company and the Poona Company did not also amount to the German Company having permanent establishment in India as there was neither any identity of interest nor identity of character nor of personality nor was there any unit for profit making between the Poona Company and the German Company so that the former may be treated as the Indian agent of the latter. In any event BHEL is a public sector company and there is no allegation by the Revenue that it has not filed its returns of income or that it is an assessee in default for that particular assessment year. Thus we uphold the order of the first appellate authority though not only for reasons mentioned by him but also for the reasons given by us in our order above. 29. In the result, while the appeals of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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