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TMI Blog2019 (10) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... hence, is allowable as revenue expenditure. 2. Disallowance of reimbursement of expenses under section 40(a)(ia) of the Act in upholding the disallowance made by the Additional Commissioner of Income tax. Range 8(3) (AO) of reimbursement of certain expenses made to non-residents including group entities of the Appellant under section 40(a)(i) of the Act on account of alleged non- deduction of taxes at source under section 195 of the Act. 2.1 Reimbursement of Demurrage Expenses of INR 2,59,99,105 in upholding the disallowance of reimbursement of demurrage and sh ipment costs amounting to INR 2,59,99,105 made to TOTSA Total Oil under section 40(a)(i) on account of non-deduction of taxes at source under section 195 of the Act. in upholding the action of the learned AO in characterising such reimbursement of demurrage and shipment costs as fees for technical services (FTS') taxable under section 9(1)(vii) of the Act. in not appreciating the fact that the payments to TOTSA Total Oil are pure cost reimbursements and do not contain any service element. in disregarding the order of the Commissioner of Income tax (Appeals) dated 18 March 2013 for AY 2008-09 in Appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. No. 1271/M/2013 dated 20.12.2017, therefore, in the said circumstances, the expenses are liable to be allowed in the interest of justice. However, on the other hand, the Ld. Representative of the revenue has refuted the said contention. The copy of order passed by the Hon'ble ITAT in ITA. No. 1271/M/2013 dated 20.12.2017 titled as Total Oil India P. Ltd. ACIT is on the file and the relevant issue has been discussed in para no.2 which is hereby reproduced as under.:- "2. The 1st ground raised in this appeal by the assessee is against the order of the Ld. CIT(A) confirming the disallowance of Rs. 8,42,189/- of EDP expenses considering the same as capital expenditure. 2.1 During the course of assessment proceedings, the assessee submitted before the AO that it has debited Rs. 8,42,189/- as EDP expenses and included it in 'Miscellaneous Expenses'. The AO following the judgment of the Hon'ble Rajasthan High Court in the case of CIT vs. Arawali Constructions (P) Ltd. 259 ITR 30 (Raj) disallowed the said EDP expenses of Rs. 8,42,189/-. 2.2 In appeal, the Ld. CIT(A) agreed with the findings of the AO and dismissed the appeal of the assessee. 2.3 Before us, the Ld. counsel of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pack (P) Ltd. Vs. ITO (86 Taxmann.com 74). Therefore, the claim of the Assessee is liable to be allowed. On the other hand, the Ld. Representative of the revenue has refuted the said contention. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.: - "8.2 The submission made by the appellant has been examined. It is noticed that the entire submission made by the appellant is under the presumption that the amount represents pure re-imbursement and hence it does not have any element of income. Accordingly, it is not liable to tax in India. Once, the amount is not liable to tax in India, there is no liability on the appellant to deduct taxes u/s 195 as held by Supreme Court in GE Technology Centre vs CIT 1(327 ITR 456) (SC)] and Transmission Corporation (supra). On the other hand, the AO has held the amount to be in the nature of FTS and hence liable to tax in India u/s 9(I) (vii) of the Act mandating deduction of tax from this amount u/s 195. The first issue which arises for determination is whether the amount can be treated as pure re-imbursement or FTS. 8.2.1 The appellant has reimbursed demurrage charges to TOTSA Total Oil ('TOTSA') ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id in respect of Indian ports and the shipping lines involved are foreign ship owners. Freight income generated in India is a taxable income under Income Tax Act and hence, any payment of freight to a non-resident will invite TDS u/s 195. Generally, freight income of non-residents visiting Indian ports is governed by section 172 and hence, if the ship owner has paid taxes u/s 172, then the provisions of section 195 will not apply. However, most of the time, while the actual freight is covered by section 172 by the non-resident, the demurrage charges are not included as they are raised subsequent to the leaving of the port and are charged separately from the clients. 8.3 The present ease represents a similar scenario where the invoice for the demurrage has been raised separately. Clearly, the non-resident ship owner has not included this amount while paying taxes u/s 172. Hence, had the appellant paid the demurrage amount directly to the ship owner, he was liable to deduct taxes u/s 195. If TOTSA made a payment on behalf of the appellant, then TOTSA should have made a payment net of taxes and the appellant should have deposited the requisite tax to Indian Tax authorities. The liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been changed now specifically in view of the decision of Bombay High Court in the case of CIT Vs. Dempo and Co. P. Ltd. (381 ITR 303). The relevant finding has been given in para no. 46 to 54 which is hereby reproduced as under.: - "46. A bare perusal thereof would indicate as to how this provision covers the case of an assessee who is a non-resident and engaged in the business of operation of ships. That stipulates a sum equal to 7½% of the aggregate of the amount specified in sub-section (2) of section 44B as deemed to be profits and gains of such business chargeable to tax under the head "Profits and Gains of Business or Profession". It is the explanation which refers to the demurrage and for the purpose of sub-section (2) of SRP 62/79ITXA989.15.doc section 44B. It clarifies that the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature shall for the purposes of sub-section (1) deemed to be the profits and gains of the business, namely, shipping business chargeable to tax under that head. The amounts which are paid or payable whether in or out of India t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident in shipping business. 48. The resident assessee contended before the Division Bench in Orient (Goa) (supra) as well as the Division Bench which made the referring order that section 172 of the Income Tax Act has a bearing and an important one on the obligation to deduct tax at source. Therefore, it is the recipient's position and the perspective in which the recipient's income would be taxed will have to be borne in mind. The non-resident shipping company in respect of it's income would be in a position to rely upon section 44B and consequently section 172. However, we do not see how there is an obligation to deduct tax at source on the resident assessee/Indian company before us. While computing the income of the non-resident Indian / foreign company, assistance can be derived by such non-residents from section 44B if they are in shipping business. It would also be in a position to rely upon section 172 but the responsibility of the person making payment to a non-resident in sub-section (1) of section 195 cannot be SRP 65/79 ITXA989.15.doc avoided in the manner set out in other cases. The scheme as above operates only to cases covered by section 172 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer, the master is unable so to do, he has to make satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf. A port clearance cannot be granted to the ship until the tax assessable under the section is duly paid or satisfactory arrangements have been made for the payment thereof. 4. The assessee in this case is the Aluminium Company of Canada which had time- chartered the ship and on whose behalf its shipping agent, the respondent, had executed the guarantee bond. Since the Company is a non-resident and the ship carried goods which were shipped at a port in India, the conditions specified in sub-section (1) are satisfied and the provisions of Section 172 will apply for the purpose of levy of tax, notwithstanding anything contained in the other provisions of the Income-tax Act. 5. The charging provision is contained in sub-section (2) of Section 172, the relevant part of which provides that where a ship belonging to or chartered by a non-resident carries goods shipped at a port in India, one-sixth of the amount paid or payable "on account of such carriage" to the owner or the charterer or to any person on his behalf sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment in advance of the tax" leviable for that assessment year and the difference between the sum so paid and the amount of tax found payable by him on such assessment, shall be paid to the assessee or refunded to him. The "ad hoc" assessment made under Section 172(4) of the Act is superseded and a "regular assessment" is made as per the provisions of the Act. In such a case, it is only proper and appropriate to hold that all "the provisions" of the Act in the determination of the tax liability including the ancillary or incidental or consequential matters pertaining to it are necessarily attracted. 8. Section 172(7) of the Act provides that payment made under the section shall be treated as a payment in advance of the tax leviable for that assessment year. It only means that such payment would be treated as advance of the tax leviable. Such payments are treated on a par with advance income tax payments. It is implicit from the tenor and phraseology employed in Section 172(7) of the Act to the effect, "payment made under the section .... shall be treated as a payment in advance of the tax leviable for that assessment year" that in substance, a legal fiction is created by which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch heading. We hold that the Income Tax Appellate Tribunal was justified in holding that since the payment made under Section 172(4) of the Act is, by fiction, treated as advance tax, all the provisions in respect of the advance tax will apply and if on regular assessment made under Section 172(7) of the Act, there is any excess payment made by the assessee, then the assessee would be entitled to it and also interest thereon under Section 214 of the Act. We answer the question referred to the High Court in the affirmative, in favour of the assessees and against the Revenue. ....." 52. Lastly, in the case of GE India Technology Centre Private Limited vs. Commissioner of Income Tax and Anr. reported in (2010) 10 SCC 29 the Hon'ble Supreme Court of India had an occasion to consider the ambit and scope of section 195 of the IT Act. After reproduction of the section, as it stood at the relevant time, the Hon'ble Supreme Court of India held as under:- "6. Under Section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the I.T. Act in the case of non-residents only and not in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the appropriate proportion of income flows from the words used in Section 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act. 11. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle ofSection 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. 12. Reference to ITO(TDS) under Section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. In our view Sections 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under the provisions of the Act" in Section 195(1). 16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. 17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. 19. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the SRP 76/79ITXA989.15.doc case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non- residents by which the Department is able to keep track of the remittances being made to non-residents outside India. 20. We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, Section 195 uses the word `payer' and not the word " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 18 of this judgment accords with the conclusion reached by us. 54. The difficulty is presented only when provisions are not read together and harmoniously so also without bearing in mind the setting and placement thereof in the chapters. These chapters of the Income Tax Act cover several aspects in relation SRP 78/79 ITXA989.15.doc to imposition, levy, assessment, collection and recovery of tax on the income specified above. To the extent contrary to above, we overrule the view in Orient Goa's case (supra). The question referred is answered accordingly. Since the question above is referred to us, having answered it, let the Appeals be now listed for hearing before appropriate Division Bench." 9. On appraisal of the above mentioned finding, we noticed that the earlier finding in the case CIT Vs. Orient (Goa) Pvt. Ltd. has been overruled by this decision, therefore, in view of the decision of Hon'ble High Court in the case of CIT Vs. Dempo (supra), we set aside the finding of the CIT(A) on this issue and allowed the claim of the assessee. ISSUE NO. 2.2 10. Under this issue the assessee has challenged the disallowance of payment of license charges on account of non-deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the transfer of the copy righted article. Without going into the merits whether the said payment will fall within the nature of "Royalty" under the newly amended provision brought with retrospective effect or not, we are of the opinion that, at the time of making of the payment there was no such provision under the law to tax such payment of computer software as "Royalty". In fact, as pointed out by the ld. CIT(A) in the case of "Motorola Inc" (supra) was there wherein it was held that if the licensees is not allowed to exploit the computer software commercially which they had acquired required under the license agreement and only the copy righted software which by itself was an article and not any copy right therein, then, the payment made for copy righted article which represented the purchase price cannot be considered as "Royalty" under the provisions of section 9(1)(vi) of the Act. Once that is so, then it is very difficult to hold that the assessee should have deducted TDS on such payment when there was no clear cut law that such a payment would be taxable in India. Here, the maxim of "lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software." Thus, respectfully following the proposition laid down by the Hon'ble Delhi High Court, we hold that the assessee was not liable to deduct TDS on such payment. Therefore, no disallowance u/s 40(a)(i) is called for in the present case." 11. In view of the decision of the Hon'ble Mumbai ITAT in the case of Shinhan Bank Vs. DDIT(IT) (76 Taxmann.com 42) dated 04.07.2016, we are of the view of the assessee was not under obligation to deduct the TDS on such payment, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o repeat the same. ISSUE NO. 1 15. Under this issue the revenue has challenged the allowance of the claim of assessee in connection with the reimbursement of salary cost of related relocation expenses made on account of availing personnel services from its AEs who has been India on an assignment. The Ld. Representative of the revenue has argued that the such type of payment falls within the ambit of Section 195 r.w.s. 9(1)(vii) of the Act and the Explanation to Section 9(2) of the I.T. Act, 1961, therefore, CIT(A) has wrongly allowed the claim of the assessee, hence, the finding of the CIT(A) is wrong against law and facts and is liable to be set aside. However on the other hand, the Ld. Representative of the assessee has refuted the said contention. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.:- "9 Ground no. 5.2 relates to non-deduction of TDS on reimbursement of salary costs and related relocation expenses of Rs. 6,47,96,467. During the year, the appellant has availed personnel services from various associate enterprises based on its requirements. For this, the appellant has entered into an arrangement with the companies whose man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees remained on the payrolls of the AEs and their salary and other related costs were reimbursed by the Appellant to the AEs, instead of paying to the employees. Accordingly, time Appellant had reimbursed a sum of us 6,37,87,105 to its AEs towards salary and related costs of such personnel and Rs. 10,09,452 towards relocation expenses. The appellant has contended that it had discharged its TDS obligations under section 192 of the Act on salary amount payable to the employees (paid through the AEs and not to employees directly due to administrative convenience). 9.3.2 The Appellant has contended that the salary, relocation and other related charges paid by way to the AEs had no element of mark-up involved (i.e. cost to cost reimbursements). Further, the AEs have merely provided their personnel/ employees to the Appellant no services have been provided by the AEs. Accordingly, in the absence of any services being provided by the ALs there is no question of withholding tax on recharge of the employees' salary costs (on which taxes have been deducted under section 192 of the Act) reimbursed to them on a cost-to-cost basis. 9.3.3 To substantiate that merely the salary cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the hands of the F Co and hence, withholding under section 195 was not applicable. 9.3.5 The appellant has further contended that the learned AO has relied on the decision in the case of Centrica India Offshore Private Limited, without appreciating that the Said decision is not applicable to the facts of the instant ease. In the said decision, it was held that the amounts payable to the foreign entity were taxable as fees for technical services in India, since specified conditions were not satisfied. 9.4 The contention made by the appellant has been examined and the facts of the case have been perused. Perusal of the decisions quoted by the appellant as well as the AO lead to a conclusion that if rendering of service by employees would constitute technical service if the employees work on behalf of the non-resident. If the employees work under the supervision and control of the appellant company, then the service rendered by them cannot be held to be fee for technical service. 9.5 In this regard, the contract entered into by the appellant with the companies deputing then manpower has already been submitted. The appellant has also submitted the letter issued by these co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be in the nature of FTS on account of following 4) The CIOP and seconded employees were to oversee the quality of service rendered by vendors to the overseas entities, which would fall within the scope of the technical or consultancy services. (5) It was admitted by the petitioner that the reason for entering into the secondment agreement was to provide support for the initial years of operation, till the necessary skills were acquired by the resident employee group; (6) The activity of the secondment was to make available their know-how acquired in the field to the petitioner for future consumption. The skills and knowledge required to ensure that the tasks entrusted were carried out diligently; (7) None of the documents placed on record revealed that the petitioner could terminate the secondment arrangement, there was no entitlement or obligation clearly spelt out whereby the petitioner had to bear the salary cost of these employees. The seondees could not sue the petitioner for default in payment of their salary. 9.7.1 None of conditions mentioned above is found to be existing in the case of the appellant where the employment is a full time employment by the seconded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngapore) Ptd Ltd (Intertek) are Singapore resident eligible to treaty benefit. The India-Singapore Treaty comprises of FTS clause with a requirement of 'make available' i.e. the fee would be in the nature of FTS only if the services make available technical knowledge, skill, experience or process to the appellant. The nature of service has been examined and the invoice raised by Intertek and SGS has been examined. It is seen that Intertek inspects the Crude for various chemical and visual parameters and provides a report in the desired form to the appellant for which certain payments are made. Without going in to detailed analysis of the service as well as the requirements of the 'make available clause', it is clear that while the above services do constitute FTS as per section 9(1)(vii), they do not make available any kind of technical knowledge, skill, experience or process to the appellant. A report is merely provided to the appellant after the testing carried out by the non-resident at its own facility. Under the circumstances, the amount cannot be treated as FTS within the scope of India-Singapore DTAA. 11.3 The SGS, Singapore also provides similar services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Hon'ble Mumbai Tribunal in case of Linklaters LLP (supra). The facts are not distinguishable at this stage. Accordingly, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. ISSUE NO. 3 19. Under this issue the revenue has challenged the allowance of claim of the assessee in connection with the payment of membership and subscription fees, registration charges, training charges, conference and seminal expenses paid to foreign entities falls within the ambit of Section 195 r.w.s. 9(1)(vii) and the explanation to Section 9(2) of the I.T. Act, 1961. However, on the other hand, the Ld. Representative of the assessee has refuted the said contention. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.: - "12.4 The submission made by the appellant has been examined. It is seen that membership of various trade related journals is a business requirement and the other party does not render any technical or consultancy service as contemplated tinder section 9(1)(vii) of the Act. The only sharing of knowledge is through the journals whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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