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TMI Blog2015 (8) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... icle, by the Appellant to its group company, Lionbridge Technologies Inc. USA is not in nature of royalty in the hands of recipient under Income Tax Act read with the Double Taxation Avoidance Agreement between India and USA and therefore the question of withholding doesn't arise. Your appellant therefore prays that tax liability under section 201(1) at Rs. 24,88,039 and interest liability under section 201(1A) at Rs. 12,68,900 be deleted". 2. The brief facts of the case are that Lionbridge Technologies Inc, USA has entered into an agreement with Microsoft inc. USA and Skillsoft (which are referred as Vendors) for the purchase of Standard off the Shelves Software to be used by Lionbridge entities across the globe. Lionbridge US had made the payment to the vendors for the purchase of software, which in turn was reimbursed by the various group entities using the software. The Lionbridge USA allocated the cost of the software amongst various group entities based on headcounts i.e. the number of desktop in each office. The said allocation was made on cost and no mark-up was charged by the Lionbridge US. The assessee being one of the group entity, made the payments to Lionbridge USA a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relied upon the order of the CIT(A). 6. The Ld. DR was required by us to clarify and to bring on record, whether any assessment was made in the hands of the Lionbridge US to bring the amount received from Lionbridge India i.e. assessee to tax in India. In response, the Ld. DR submitted that no assessment has been made in the hands of the Lionbridge US, nor it has been held as taxable in the hands of the US company. 7. We have heard the rival contention and also perused the relevant finding given in the impugned order. Lionbridge USA has entered into an agreement with vendors like Microsoft inc. for the purchase of Standard off Shelves Software to be used by Lionbridge group entities across the globe. The cost of the purchase of the softwares has been allocated amongst various group entities based on allocation key of number of desktop in each office. The said allocation was made at cost and no mark-up was charged. Accordingly, all the group entities had reimbursed their share of cost to the Lionbridge USA. In support, the copy of the agreement along with invoices by the Vendors and allocation key has been placed in the paper book. It has not been disputed that the cost of reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most important expression in Section 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the I.T. Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the I.T. Act. It may be noted that Section 195contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this Court in Transmission Corporation (supra) in which this Court has observed that the provision of Section 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon. 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in Section 195(1). The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. [See : Vijay Ship Breaking Corporation and Others Vs. CIT 314 ITR 309] 9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income "chargeable under the head salaries". Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a nonresident any sum "chargeable under the provisions of the Act", which expression, as stated above, do not find place in other Sections of Chapter XVII. It is in this sense that we hold that the I.T. Act constitutes one single integral inseparable Code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the I.T. Act. If the contention of the Department that any person making payment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the I.T. Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an "expenditure". Under Section 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the I.T. Act. In a given case where t ..... 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