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Indirect Taxes
Excise & Customs -Case Law update
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AUTHORITY FOR ADVANCE
RULINGS
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Non-resident – Liability to
tax in India – Setting up liaison office in India
Angel Garment Ltd., In re –
[2006] 287 ITR 341 (AAR) : 157 Taxman 195
A non-resident company
having its registered office in Hong Kong proposing to set up a liaison
office in India for purchase of goods for purpose of export cannot be held
to have any taxable income in India as per provisions of Act in view of
Explanation 1(b) to section 9(1)(i).
Facts
The applicant, a
non-resident company incorporated in Hong Kong, proposed to set up a liaison
office in India for collecting information and samples of garments and
textiles from manufacturers, traders and exporters and passing on the
information to the head office in Hong Kong and co-ordinating and acting as
the channel of communication between the applicant and Indian exporters and
follow up with Indian exporters for timely export of goods. The entire
expenses of the proposed liaison office were to be met through remittances
from the applicant’s head office in Hong Kong. On these facts the applicant
applied to the Authority for an advance ruling on the question whether the
applicant could be said to have received income taxable in India.
Ruling
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A plain reading of the
provision of clause (b) of Explanation 1 to section 9(1)(i) would show
that no income shall be deemed to accrue or arise to a non-resident
through or from operations which are confined to the purchase of goods in
India for the purpose of export.
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Admittedly, in the
instant case, the proposed activities of the liaison office is confined to
purchase of goods for the purpose of export. It is immaterial whether the
export of goods is to Hong Kong or to any other country because clause (b)
of Explanation 1 to section 9(1)(i) does not specify that the export
should only be to the country of which the applicant is a tax resident. In
view of the above, it was ruled that looking to the nature of the proposed
activities to be carried on and the nature of the powers of the liaison
office which was proposed to be set up in India by the applicant, a
non-resident company, it cannot be held to have earned any income taxable
in India under the provisions of the Act.
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Section 195, read with
section 9, of the Income-tax Act, 1961 and Article 12 of the Double Taxation
Avoidance Agreement with U.S.A.
IMT Labs (India) (P.) Ltd.,
In re – [2006] 287 ITR 450 (AAR): 206 CTR 304: 157 Taxman 213
Periodical payments made by
a resident to a non-resident in America, having no office/establishment in
India, in connection with use of software developed by him on internet,
being ‘royalties and fees for included services’ as per Explanation to
sections 9(1)(vi) and 9(1)(vii), are chargeable to tax in India under
Article 12 of DTAA with USA as also under section 9 and, therefore, are
subject to tax deduction at source.
Facts
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The applicant, an Indian
company, entered into an agreement with a non-resident American company
for securing license of a particular software, which the applicant was
entitled to use. The applicant had to pay license fee for the same to the
American company. According to the applicant, the said company did not
have any establishment/office in India and, therefore, the payments
received by it from the applicant, for allowing it to download and use the
software, were covered under Article 7 of the DTAA, i.e., business
profits, which were not chargeable to tax in India.
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On these facts, the
applicant sought ruling of the Authority as regards the question as to
whether periodical payments made by it to the American company in
connection with the use of software developed by it on internet were
subject to tax deduction at source under DTAA with USA.
Ruling
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A plain reading of para 6
of Article 7 of DTAA would show that where profits include items of
income, which are dealt with separately in other articles of the
Convention, the provisions of those articles shall not be affected by the
provisions of this article. Therefore, it follows that if the periodical
payments fall under any other article of the DTAA, they will have to be
dealt with under that particular article.
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From the study of the
clauses of the ‘License Agreement’, it is seen that license is granted
essentially for the use of the ‘Smarter child’ software on the American
company’s server platform only, for the purpose of producing, hosting and
distributing ‘Interactive Agent’ applications. License fee to be paid
monthly, is termed as royalty in clause (4) of the agreement. The payment
of royalty is based on the number of sessions for which the equipment is
utilized for the licensed purpose. As per clause (6) of the agreement, the
American company has to provide one qualified staff member to assist the
licensee with the transfer of technical information, provided, however,
such services shall not exceed an aggregate of 16 working hours and such
technical assistance will be provided at the premises of the American
company. Further, the American company’s management personnel shall assist
the applicant’s management by making introduction to content providers
currently featured in the Smarter Child Application. The American company
is also duty-bound to provide the applicant, e-mail support not exceeding
4 hours per month. However, there is no separate fee being charged for
these technical services which are covered by the definition of included
services as per para (4) of Article 12 of the DTAA with USA notified vide
Notification No. GSR 990(E) dated 12-12-1990. Para (3)(b) of Article 12
defines the term ‘royalties’ which means payments of any kind received as
consideration for the use of, or the right to use any industrial,
commercial or scientific equipment. The ‘Smarterchild’ application
(software) on the American company’s server platform is scientific
equipment, licensed to be used for commercial purposes. Therefore,
payments made for producing and hosting ‘Interactive Agent’ applications
would be covered by the expression ‘royalties’ as used in Article 12.
Further, the technical and consultancy services being rendered by the
provision of services of technical personnel and e-mail support is covered
by the description of ‘Fees for included services’. These are ancillary
and subsidiary to the application and enjoyment of the use of or the right
to use the scientific equipment for commercial purposes. What remains to
be seen is whether the payments being made to the American company fall
within the meaning of ‘royalty’ and ‘fees for technical services’ as
defined in section 9(1). After carefully reading the provisions of section
9(1), it is found that meaning of the term ‘Royalty’ as used in
Explanation 2 to clause (vi) of sub-section (1) of section 9, is at par
with the term ‘royalties’ as used in Article 12(3)(b). The term ‘fees for
technical services’ as used in Explanation (2) of clause (vii) of
sub-section (1) of section 9, is at par with the term ‘fees for included
services’ as used in Article 12(4)(a).
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In view of that position,
the payments being made by the applicant to the American company, are
chargeable to tax in India, under Article 12 as also under section 9.
Inasmuch as it is concluded that the periodical payments made by the
applicant to the American company are in the nature of ‘royalties and fees
for included services’ and taxable under Article 12 of DTAA, the said
payments cannot, therefore, be treated as business income.
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A plain reading of
section 195(1) would show that any person responsible for paying to a
foreign company (i) any interest; or (ii) any other sum chargeable under
the provisions of the Act (except salary) is required to deduct income-tax
at the time of credit of such sum to the account of the payee or at the
time of actual payment thereof, whichever is earlier. The expression ‘any
other sum chargeable under the provisions of this Act’ would mean a sum on
which income-tax is leviable. In other words, the said sum is chargeable
to tax and could be assessed to tax under the Act. The only consideration
would be whether payment of the sum to the non-resident is chargeable to
tax under the provisions of the Act. The sum may or may not be income or
income hidden or otherwise embedded therein. The scheme of tax deduction
at source applies not only to the amount paid, which wholly bears ‘income’
character, but also to gross sums, the whole of which may not be income or
profits of the recipient.
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In the light of the
foregoing discussion, it was ruled that periodical payments made to the
non-resident company, having no office/establishment in India, in
connection with the use of software developed by it on internet, being
‘royalties and fees for included services’, are subject to tax deduction
at source under the DTAA.
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Section 5, read with
section 90, of the Income-tax Act, 1961 and Article 16 of DTAA with U.K.
British Gas India (P.)
Ltd., In re – [2006] 206 CTR (AAR) 385: 157 Taxman 225
The salary paid by the
applicant to its employees lent by it to its U.K. based group company shall
not be taxable in India, if the same has been offered for tax in U.K. in
pursuance of the DTAA and the applicant shall not deduct tax at source from
salary of these employees in India, provided it is satisfied from the
details and particulars furnished under section 192(2) that taxes have been
paid on such payments in the U.K.
Facts
The applicant, an Indian
company, had lent two of its employees ‘N’ and ‘M’ to its group company in
UK on deputation. During the period of deputation, they continued to be on
the payrolls of the applicant and would regularly receive salary in India
from the applicant and also receive certain allowances from the UK company.
The applicant sought advance ruling on the questions as to whether the
salary received in India by the two employees was taxable in India or not
and whether any taxes were to be deducted by the applicant from the Indian
salary or not.
Ruling
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The provision of section
5(1) very clearly states that the total income of a non-resident includes
all income from whatever source derived, which is received in India by or
on behalf of such person. This leaves no manner of doubt that the Indian
salary of the concerned employees of the applicant is taxable in India. In
fact, the applicant has also fairly conceded that the salary received by
‘N’ and ‘M’ in India is chargeable to tax here. But it is contended by the
applicant that because of the provisions of the DTAA, no tax is actually
payable in India.
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Because of their
residence in U.K., ‘N’ and ‘M’ are liable to pay income-tax in that
country. These two persons are presently exercising their employment in
the U.K. Therefore, the provisions of clause (1) of Article 16 of the DTAA
would be attracted in their case. Since they are drawing their salary in
respect of employment being exercised in the U.K., they shall be taxable
in that country.
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There is no doubt that it
is open to the applicant to take recourse to Article 16 of the DTAA with
U.K., which would prevail over the provisions of section 5(2)(a) of the
Income-tax Act. It is, in fact, seen from the pleadings of the applicant,
that in his tax return filed in the U.K. for the financial year 2003-04,
‘N’ has also included the salary received by him during this period in
India. Thus, he has offered the Indian salary also for tax purpose in the
U.K.
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Chapter XVII deals with
collection and recovery of tax. The purpose of the provisions of this
Chapter, as contained in section 190, is that prior to the regular
assessment being made, the tax on income shall be payable by deduction or
collection at source or by advance payment, etc. A question arises whether
tax at source can be deducted under this Chapter only if the income is
taxable under the Act. At the time of paying salary to its employee, the
employer shall deduct applicable income-tax therefrom, but if the employee
is serving more than one employer simultaneously, he has a choice of
furnishing details of salary received from one employer and other
particulars with regard to it, to the other employer who shall take these
into account for the purpose of making deduction of tax at source. The
employee has to furnish these details and particulars in the prescribed
form and manner. In the instant case, ‘N’ and ‘M’ are permanent employees
of the applicant and are at the same time temporarily serving a U.K. based
company. They are simultaneously receiving salary from both. Therefore,
they are covered by section 192(2).
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In the light of the above
discussion, the salary paid by the applicant to its employees lent by it
to its U.K. based group company shall not be taxable in India, if the same
has been offered for tax in U.K. in pursuance of the DTAA and the
applicant shall not deduct tax at source from salary of these employees in
India, provided it is satisfied from the details and particulars furnished
under section 192(2) that taxes have been paid on such payments in the
U.K.
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High Court
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Provision of Cellular
Mobile Telephone facility – Whether fees for Technical Services – Whether
liable to TDS
Skycell Communications Ltd. vs. Deputy Commissioner of Income-tax [2001] 251
ITR 53 (Mad.)
Fact
The petitioners were
engaged in the business of providing cellular mobile telephone service to
subscribers. The Chief Commissioner of Income-tax issued a direction to his
subordinates to treat the payments made to the petitioners by their
subscribers as coming within the definition of “fees for technical services”
in section 194J read with section 9(1)(vii), Explanation 2, of the
Income-tax Act and require the firms and companies subscribing to the
petitioners’ network, to deduct tax at source on the payments made by them
to the petitioners.
Decision
Fees for technical services
is not defined in section 194J of the Income-tax Act, 1961. Explanation (b)
in that section provides that that expression shall have the same meaning as
in Explanation 2 to clause (vii) of sub-section (1) of section 9. This
definition shows that consideration paid for the rendering of any
managerial, technical or consultancy service, as also the consideration paid
for the provision of services of technical or other personnel, would be
regarded as fees paid for “technical service”. The definition excludes from
its ambit consideration paid for construction, assembly, or mining or like
project undertaken by the recipient, as also consideration which would
constitute income of the recipient chargeable under the head “Salaries”.
Thus while stating that “technical service” would include managerial and
consultancy services, the Legislature has not set out with precision as to
what would constitute “technical” service to render it “technical service”.
Having regard to the fact that the term is to required to be understood in
the context in which it is used, “fees for technical services” could only be
meant to cover such things technical as are capable of being provided by way
of service for a fee. The popular meaning associated with “technical” is
“involving or concerning applied and industrial science”. “Technical
service” referred to in section 9(1) contemplates rendering of a “service”
to the payer of the fee. Mere collection of a fee for use of a standard
facility provided to all those willing to pay for it does not amount to the
fee having been received for technical services. When a person decides to
subscribe to a cellular telephone service in order to have the facility of
being able to communicate with others, he does not contract to receive a
technical service. What he does agree to is to pay for the use of the
airtime for which he pays a charge. The fact that the telephone service
provider has installed sophisticated technical equipment in the exchange to
ensure connectivity to its subscriber, does not on that score, make it
provision of a technical service to the subscriber. What applies to cellular
mobile telephone service is also applicable in fixed telephone service.
Neither service can be regarded as “technical service” for the purpose of
section 194J.
Though the High Court will
not normally entertain any writ petition with regard to tax liability of
assessees unless the statutory remedies are first availed of, if the
question raised is one of a pure construction of a provision of the Act
which on the face of it, has been grossly unreasonably construed and
jurisdiction is sought to be asserted by the Revenue on the basis of such
erroneous construction, the relief sought is not to be refused.
[Author’s Note: Though this
is an old decision, it is being digested here as it is a landmark decision
on interpretation of the term “Fees for Technical Services” used in section
9(1)(vii)]
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Tribunal
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Deduction of tax at source
from payment for purchase of software to non-residents – Not liable for TDS
u/s 195
Mphasis BFL Ltd. vs. ITO
[2006] 9 SOT 756 (Bang.) [A.Y. 2000-01 to 2002-03]
Facts
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The assessee-company was
engaged in the business of development of computer software.
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The A. O. found that the
assessee had made payment for purchase of software to non-residents and
had not deducted tax at source from such payment.
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In response to a
show-cause notice issued to explain the reasons for not deducting tax at
source, the assessee submitted that it had not acquired any copyright of
the software but had only acquired a copyrighted programme. The assessee
further submitted that the transaction was that of the outright purchase
of software which could be compared to the sale of a book or a CD wherein
the customer would gain a right only to use copyrighted article but not to
reproduce and sell the same, and, thus, it was under no legal obligation
to deduct tax in terms of section 195.
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The A. O. referred to the
definition of royalty, as given in Explanation to section 9(1)(vi), and
held that the payment in question was made by the assessee to the
non-residents by way of royalty and, thus, the assessee was liable to
deduct tax at source. The A. O., therefore, raised demand under section
201 against the assessee.
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On appeal, the
Commissioner (Appeals) upheld the impugned order.
Decision
On Second Appeal, the
Tribunal held in favour of the assessee as follows:
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A similar issue had been
decided by the Bangalore Bench of the Tribunal in the cases of Samsung
Electronics Co. Ltd. vs. ITO [2005] 94 ITD 91 and Lucent Technologies
Hindustan Ltd. vs. ITO [2004] 3 SOT 757. The Tribunal in the case of
Samsung Electronics Co. Ltd. ruled that a readymade off the shelf computer
programme does not grant any right to utilise the copyright of the
computer programme and, accordingly, the payments for its import would not
constitute royalty income in India and no tax needs to be deducted under
section 195.
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Similarly, the Tribunal
in the case of Lucent Technologies Hindustan Ltd. (supra) held that there
was no liability to deduct tax in India on software, which is a
copyrighted product as distinguished from copyright. The Tribunal also
held that the payments for hardware and software were lump sum payments
and no separate consideration should be attributed towards software as
‘royalty’.
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Therefore, payment made
for import of software was not by way of royalty and, thus, tax was not
required to be deducted at source. Hence, the demand raised under section
201 for non-deduction of tax at source was cancelled.
Cases referred to
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Performing Right Society
Ltd. vs. CIT [1977] 106 ITR 11 (SC),
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Hyderabad Industries Ltd.
vs. ITO [1991] 188 ITR 749/59 Taxman 202 (Kar.),
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Andrey Yule & Co. Ltd.
vs. CIT [1994] 207 ITR 899 (Cal.),
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Tata Consultancy Services
vs. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132 (SC),
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Samsung Electronics Co.
Ltd. vs. ITO [2005] 94 ITD 91 (Bang.),
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Lucent Technologies
Hindustan Ltd. vs. ITO [2004] 3 SOT 757/82 TTJ (Bang.) 163
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Ericsson Radio System vs.
Dy. CIT [IT Appeal Nos. 815 and 1798 (Delhi) of 2001] (SB). [2005] 95 ITD
269 (Delhi) (SB)
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Non-resident assessee –
Ambit of section 44D – Nature of receipts – Whether Fees for Technical
Services – Validity of revision u/s 263
General Electric
International Inc. vs. ACIT, International Taxation [2006] 102 ITD 218
(Mum.) [A.Ys. 1994-95 and 1997-98]
The Assessing Officer
treated receipts shown by assessee from three Indian projects as business
income following Tribunal’s order for earlier assessment years wherein
assessee’s own case on identical facts, it was held that where assessee had
incurred reasonable amount on purchased labour or purchased material for
contracts, income earned by assessee on those contracts would be outside the
mischief of section 44D. The DIT, by invoking his powers under section 263,
set aside assessment holding that relevant income was in nature of fees for
technical services and was, therefore, assessable under section 44D. On
facts, the order of Assessing Officer could not be said to be erroneous and
prejudicial to interest of revenue therefore, the order of DIT was not
sustainable.
Facts
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The Assessing Officer had
treated the receipts shown by the assessee from three Indian companies as
business income by following the Tribunal’s order in the assessee’s own
case for earlier assessment years.
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The Director
(International Taxation), however, by invoking powers under section 263
held that relevant income was in nature of fees for technical services
under section 44D and not business income.
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He further held that said
income could be taken out of purview of section 44D only when ratio of
expenditure involved under heads ‘purchased labour’, ‘purchased material’
and ‘direct labour’ is more than 50 per cent of gross receipts; and that
in respect of assessment year 1987-88, the ratio of expenditure against
receipt was 70 per cent, while ratios in respect of assessment years
1994-95 and 1997-98 were 25.41 per cent and 45.60 per cent, respectively,
which was less than 50 per cent and, therefore, order of the Assessing
Officer was erroneous and prejudicial to the interest of revenue.
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He, therefore, set aside
the said order and directed the Assessing Officer to make fresh assessment
in accordance with directions issued by him.
Decision
On Appeal, the Tribunal
held in favour of the assessee as follows:
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The DIT had wrongly
assumed jurisdiction under section 263. The percentage ratio worked out by
the DIT was not correct. There was no lack of application of mind on the
part of the Assessing Officer on that issue.
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In the decision of the
Tribunal in the assessee’s own case for assessment years 1981-82 and
1982-83, it was held that in the absence of precise agreements, the
question as to whether or not services rendered by the company fell within
the definition of the term ‘fees for technical services’ would be
determined by having regard to the working of profit on the respective
projects submitted by the company and those projects in respect of which
the company had incurred a reasonable amount on ‘purchased labour’ and/or
on ‘purchased material’ would primarily be in the nature of repair
contracts and not merely technical services and, accordingly, those would
be outside the mischief of section 44D.
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In the decision of the
Tribunal in the assessee-company’s own case for the assessment year
1987-88, which decision had been accepted by the department and not
carried further to the High Court, it was held that the income earned by
the company on contracts with each Indian concern was outside the scope of
provisions of section 44D as it had incurred a reasonable amount on
purchased labour or purchased material for those contracts.
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The Assessing Officer
further held that in view of fact that the assessee-company had incurred
reasonable amounts on purchased materials or purchased labour and applying
the ratio of the decision of ITAT, it was clear that the same fell outside
the provisions of the Indo-US Tax Treaty, read with section 44D and
section 9(1) and the same was to be taxed at 65 per cent of net.
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It was clear that the
Assessing Officer had carefully gone through the orders of the Tribunal
for earlier assessment years and he had consciously followed such orders.
He had also recorded a finding that the assessee-company had incurred
reasonable amount on purchased material and purchased labour. Apparently,
similar issue had been decided by the Tribunal in the earlier assessment
years and, therefore, the Assessing Officer was bound to follow the
Tribunal’s orders.
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If the Assessing Officer
has followed the Tribunal’s order, the Commissioner cannot revise the
Assessing Officer’s order by invoking his powers under section 263.
Further, it is an established legal position that if there is proper
application of mind on the part of the Assessing Officer and the Assessing
Officer has adopted a view, which is a possible view, the Commissioner
cannot invoke his jurisdiction under section 263 for substituting his own
view in place of the view adopted by the Assessing Officer.
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Therefore, considering
the entire facts and circumstances as also the legal position, the order
passed by the DIT for the assessment year 1994-95 was not sustainable and
it could not be said that the Assessing Officer’s order was erroneous and
prejudicial to the interest of the revenue. The DIT’s order was,
therefore, liable to be quashed.
Cases referred
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Malabar Industrial Co.
Ltd. vs. CIT [2000] 243 ITR 83/109 Taxman 66 (SC),
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Russel Properties (P.)
Ltd. vs. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 (Cal.),
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K.N. Agrawal vs. CIT
[1991] 189 ITR 769/56 Taxman 24 (All.),
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CIT vs. Orissa State
Financial Corporation [1993] 203 ITR 747 (Ori.),
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CIT vs. Gabriel India
Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.)
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Jhulelal Land Development
Corpn. vs. Dy. CIT [1996] 56 ITD 345 (Bom.).
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TDS u/s 195 from the
Travelling, Lodging & Boarding and Local Conveyance Expenses of Foreign
Technicians directly incurred by the assessee in India – Contention accepted
but matter remanded to A.O. to ascertain the facts
Mahindra & Mahindra Ltd.
vs. Deputy Commissioner of Income-tax [2005] 1 SOT 896 (Mum) [A.Y.
1999-2000]
Facts
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The assessee-company
entered into agreements with various foreign companies for supply by these
foreign companies of technical information and also for sending technical
skilled personnel to put into commercial use the information supplied.
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As per the agreements,
the assessee was to make payment for visits of managerial personnel on the
basis of man hours at hourly rate basis and was supposed to bear cost of
airfare, accommodation and meals supplied, laundry, local transportation.
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The assessee, on basis of
certificate of chartered accountant, did not deduct tax on expenses
incurred by it on airfare, lodging, boarding and local travelling for
foreign technicians visiting India.
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The Deputy Commissioner
held that the expenses incurred by the assessee were nothing but a part of
total consideration and, therefore, the assessee was liable to deduct tax
on that. The assessee was held to be in default and was directed to pay
TDS due along with applicable interest under section 201(1A).
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On appeal, the
Commissioner (Appeals) upheld the order of the Deputy Commissioner.
Decision
On Second Appeal, the
Tribunal held as follows:
The contention of the
assessee that the expenses were incurred by the assessee directly and not
reimbursed to the foreign parties or their technicians was accepted but as
no evidence was furnished in support of the said contention, in the interest
of justice, the matter should go back to the Assessing Officer to examine
the said assertion of the assessee and, accordingly, the order of the
Commissioner (Appeals) was set aside and the matter was restored to the file
of the Assessing Officer to decide the issue afresh after examining the
contention of the assessee regarding direct incurring of expenditure and
then pass necessary order as per law in the light of the judgments in the
case of CIT vs. Tata Engg. & Locomotive Co. Ltd. [2000] 245 ITR 823 and IAC
vs. Tata Iron & Steel Co. Ltd. as per IT Appeal Nos. 6277 to 6287 of 1987
and 737 (Bom.) of 1988 dated 16-11-1995 after providing adequate opportunity
of being heard to the assessee.
Cases referred to
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Cochin Refineries Ltd.
vs. CIT [1996] 222 ITR 354/[1997] 93 Taxman 145 (Ker.),
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Steffen, Robertson &
Kirsten Consulting Engineers & Scientists vs. CIT [1998] 230 ITR
206/[1997] 95 Taxman 598 (AAR),
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J.B. Boda & Co. (P.) Ltd.
vs. CBDT [1997] 223 ITR 271/[1996] 89 Taxman 311 (SC),
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Transmission Corpn. of
A.P. Ltd. vs. CIT [1999] 239 ITR 587/105 Taxman 742 (SC),
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CIT vs. Tata Engg. &
Locomotive Co. Ltd. [2000] 245 ITR 823/[2001] 114 Taxman 141 (Bom.)
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IAC vs. Tata Iron & Steel
Co. Ltd. [IT Appeal Nos. 6277 to 6287 (Bom.) of 1987 and 737 (Bom.) of
1988 dated 16-11-1995].
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