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Applicability of section 40(a)(i) of IT Act

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Court :
ITAT DELHI

Brief :
The payment by way of reimbursement of salary and expenses payable outside India or to a non-resident is chargeable under the head “salaries”, and the same is not covered by section 40(a)(i) but is covered by section 40(a)(iii) and in respect of which, tax is deductible at source under section 192 and not under section 195.

Citation :
Dolphin Drilling Ltd. v. ACIT ITA No. 1572/Del/2007

22. This aspect of the matter whether there was any failure on the part of the assessee to deduct tax at source from the payment of salary to crew members assessable under the head ‘salaries’, in the relevant year, within the meaning of section 192 of the Act has not been dealt with by the Id. CIT(A) except by holding that the assessee’s case is covered by section 195 of the Act 22. Now, we proceed to deliberate upon the decision relied upon by the ld. DR before us, and after making deliberation upon them, we, find that these decisions give no assistance to the Revenue’s case as discussed hereinafter. 23. The first decision relied upon by the ld. DR is in the case of Clouth Gummiwerke Aktiengesellschaft vs. GET reported in 238 ITR 861” (supra). In this case, the assessee was a non-resident company. The assessee agreed to do the job of erection of conveyor belts through their engineers. As per agreement, the assessee was to depute two supervise for a period of two working days for belt changing and erection of new belts, and the lump sum amount of DM 33,000 was paid towards the charges, and the engineers were provided free boarding, lodging and transport facilities apart from air fare. The assessee then carried out the erection and issued a bill for DM 33,000 and DM 32,542. The A.O. hold that the amount of DM 33,000 and DM 32,542 would be subject to taxation and advise the assessee to deduct the tax. The assessee paid the tax of Rs. 1,19,450/- and Rs. 120,674/- respectively, and the amount was remitted thereafter. The assessee then filed the return in which it was claimed that these amounts were not taxable. The A.O. hold that these amount were taxable since the payments were covered by section 9(l)(vii) of the Act However, Commissioner agreed with the assessee. On appeal, the Tribunal held that the payments were taxable u/s 9(1)(vii) of the Act At the instance of the assessee, a question whether the amount was paid for technical services and would be treated as income u/s 9(l)(vii) of the Act was referred to the High Court The Hon’ble High Court decided this issue against the assessee. It was observed in that case that the two supervisors were deputed only for the purpose of rendering technical services; In that case, it was the responsibility of nonresident company to do the job of erection of conveyor belts through their engineers, and for that purpose, the two supervisors were deputed for a period of two working days. From the facts of this case, it is thus, clear that these two supervisors were discharging their duties under the control arid supervision of the non-resident company,, which was responsible for doing the job of erection conveyor belts, through their engineers. Though, on the other hand, in the case before us, deep water drilling rig known as “Belford Dolphin” taken on charter hire basis from Dolphin Drilling Pvt. Ltd. was operated by the assessee to conduct drilling operation in the Offshore Waters of India for ONGC and the crew members provided by Alfa Crew manned the drilling unit under the control and direction of the assessee company as per contract agreement entered into with ONGC. This is further strengthened by the individual appointment letters issued by the assessee to each crew member. The present case is the case where Alfa Crew provided the crew to the assessee and not the services of crew members In the course of executing any work entrusted to Alfa Crew by the assessee for consideration. Thus, this case relied upon by the Id DR is distinguishable on the facts. However, on the other hand, the facts of the present case are quite identical to the facts of the case in the case of HCL Infosystems Pvt. Ltd. of the ITAT Delhi Bench, which has been approved and’ confirmed by the jurisdictional Delhi High Court reported in 274 UR 261(supra) as discussed above herein. 25. The next case relied upon by the ld/DR is the case of Cochin Refineries Ltd. vs. CIT reported in 222ITR 354. ln that case, Cochin Refineries requested a foreign company F, to evaluate whether the coke produced from the blend of vacuum bottoms and clarified oil from Bombay High crude was suitable for making anodes fox the aluminum industry. The tests were carried out in the USA in regard to which assessee made payment of Rs. 7,69,614/-. The assessee also paid Rs. 1,19,303/- and Rs. 38,271/- which were payments in the nature of reimbursement of the payments made to the personnel of the said consultant F. All these payments were assessed u/s 9(l)(vii) of the Act. On a reference, the Hon’ble High Court held that the services rendered by the foreign company F, would be in the nature of technical services and would, therefore, consequently be covered fully by the Explanation to section 9(l)(vii) of the Act, and even with regard to the two payments of Rs. 1,19,303 and Rs. 38,271/- in the nature of reimbursement of payments made to the personnel, no different situation would be available because these payments would be part and parcel in the process of advice of a technical character and would fall for coverage only within the meaning of the above Explanation. From the facts of the case, it is, thus, clear that the payment made to the personnel were in the course of or in the process of obtaining advice of a technical character from the foreign company F. The very act of valuation whether the coke produced from a blend of vacuum bottoms and clarified oil form Bombay High crude was suitable for making anodes for the vacuum industry was not carried out by the assessee in the course of which the assessee had employee these two personnel of foreign company but the personnel did work for the foreign company. As discussed above; the facts of the present case are quite different inasmuch as the present assessee did not obtained the services of the personnel from Alfa Crew in the course of providing any service in the nature of technical services defined under Explanation section 9(l)(iii) of the Act but the crew members were placed at the disposal of the assessee for the purpose of manning the drilling unit operated by the assessee in the Offshore Waters in pursuance to the contract entered into with ONGC. Thus, this decision does not given any assistance to the revenue on facts. 26. The Id. DR has also relied “upon the following two Tribunal decisions:- 1. West Asia Maritime Ltd. vs. HO reported in (2008) 297 ITR (AT) 202 (Chennai) 2. Poompuhar Shipping Corporation Ltd. vs. ITO, International Taxation II reported in (2008) 297 ITR (AT) 219 (Chennai). 27. In the case of West Asia Maritime Ltd. vs. ITO (supra), the payment of hire charges in respect of ship owned by non resident, in the light of the fact that option to purchase vessel was not exercised till end of year, was held to be the payment for use of ship, i.e., die equipment, and thus, the hire charges were taxable in India as royalty and cannot be treated as business income. The assessee’s claim that payment made under the agreement cannot be termed hire charges falling within article 12 of the DTAA between India and Cyprus, was rejected by saying that the assessee was not entitled to decide unilaterally the taxability of the hire charges in India in the proceeding u/s 195 of the Act This decision has nothing to do with the issue before us whether reimbursement of crew salary and expenses is covered by section 192 or otherwise 195 for the purpose of section 40(a) (i) of the Act The issue before us, as already stated above, is fully covered by the decision of jurisdictions! High Court of Delhi confirming the decision of Tribunal in the case of HCL Infosystems Ltd. (supra). 28. The next decision cited by the Id. DR is m the case of Poonripuhar Shipping Corporation Ltd. vs. ITO, International Taxation II (supra). This case is related to the issue whether sum is chargeable is tax is to be decided by the A.O. and not by person responsible: for payment for the purpose of deducting tax at source. This appeal had arisen from the A.O. ‘s order treating the assessee in default in respect of tax directed to be deducted at source, within the meaning of section 201 of the Act and not rendered in the context of A.O/s right to disallow the expenses by invoking sections 40(a)(i) or otherwise 40(a)(iii) of the Act We are concerned with the disallowance of expenditure within the meaning of section 40(a)(i) or 40(a)(iii) while making the assessment, and not with regard to the A.O.’s action in treating die assessee to be in default for not deducting the tax at source, within the meaning of section 201(1) and 201 (A) of the Act This case will also not help the revenue to decide the controversy whether (he reimbursement of crew salary or expenses paid by the assessee is amounted to payment towards technical services or towards salary of the concerned employees chargeable to tax under the head ‘salaries’ for me purpose of allowing or otherwise of deduction in the assessment. 29. The decision of Hon’ble Supreme Court in the case of Transmission Corporation of AP. Ltd. vs. CIT (supra) is also of no assistance to the department in as much as in this, case .a preposition that has been laid down is that income tax on the gross sum chargeable to tax is to be deducted, and it is the statutory obligation of the-person responsible for payment of such sum chargeable to tax, to deduct tax. thereon before making, payment: Here, in the present case, it is the case of die assessee that the payment of crew salary and expenses is not chargeable to tax as fees for technical services in the hands of Alfa Crew, and as such the question of deducting tax at source u/s 195 of-the Act did or could not arise. This decision would have gone against the assessee only after it is found that the payment of salary crew and expenses paid to Alfa dew was chargeable to tax in the hands of Alfa Crew and thus, the tax was. deductible u/s 195 of the Act. In this case, it has also been observed that the section 195 provides for deduction of tax at source subject to regular assessment, and the purpose of section 195 is to see that on the sum which is chargeable u/s 4 of the Act, for levy and collection of income tax, the payer should deduct income tax thereon at the rates in force, if the amount is to be paid to a non resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected. The income would ultimately be computed under the Act at the time of regular assessment From the said decision, it is, thus clear that in order to invoke section 195, it is to be established that the sum paid to non-resident is chargeable under the Act; and if it is found to be not chargeable under die Act, the provision of section 195 would not be applicable. /In the present case, in the light of the discussions made above and in the light of the decision of the ITAT Delhi Bench in the case of HCL Infosystems Pvt. Ltd. (supra); which has been approved by the Hon’ble jurisdictional High Court, we have taken a view mat the payment of crew salaries and expenses is chargeable to tax under the head “salaries” in the hands of the concerned crew employees and the tax was, thus, deductible at source u/s 492-of the Act, and not u/s 195 of the Act. In this appeal, we are concerned about that the applicability of rigour of section 40(a)(i) or 40(a)(iii) to decide whether the payment made by the assessee towards crew salary or expenses can be allowed as deduction. In the light of the view we have taken above that the payment by way of reimbursement of crew salary and expenses is chargeable under the head ‘salaries’, we may hold that the payments in question are not covered by section 40(aX0 of the Act but is covered by section 40(a)(iii), which is applicable to any payment which is chargeable under the head ‘salaries’, payable outside India or to a non-resident. 30. The A.O. has taken an alternative stand that even if the payments in question are covered under the head ‘salaries’ it is liable to be disallowed in view of the provisions of section 40(a)(iii) of the Act as the payments were made outside India or to a non resident wherein no tax was deducted under Chapter XVII B of the Act by the assessee. However, on the other hand, the assessee has submitted that the assessee has duly deducted the tax at source from the payment chargeable to tax under the head ‘salaries’ under Chapter XVIIB of me Act. The AO has not examined the matter and pointed out any material to say that the assessee has not deducted the tax at source from the aforesaid payments chargeable under the head ‘salaries’. The assessee’s contention is that the assessee has deducted tax at source from me payment chargeable .under the head ‘salary’-after, whoever it was found due after-considering the income exempted under section 10(6)(viii) of the Act, the A.O. has not made any adverse finding against the assessee’s claim that the payment made to crew members by way of salary or expenses was exempted from tax u/s 10(6)(viii) of the Act in as much as the non resident crew member did not stay ‘into India in the aggregate for a period of 90 days or more in the relevant financial year. This aspect of the question has not been adversely commented upon by the Id. CIT(A) also. On perusal of section 10(6Xviii), it is clear that any income chargeable under the head salaries received by or due to any non resident as remuneration for services rendered in connection with his employment on a foreignship where total stay in India does not exceed in the aggregate a period of 90 days in the relevant previous year is not includible in the total income of that non resident assessee. It is not in dispute that the crew member were employed on a foreignship known as “Belford Dolphin” taken on charter by the assessee non resident company from its group company M/s. Dolphin Drilling Ltd. incorporated in Singapore. The details of stay of some of the crew members in India does not exceed in the aggregate period of 90 days as per the details submitted by the assessee before the A.O. Therefore, in respect of the crew members, who did not stay in India exceeding in the aggregate a period of 90 days, the payment made to them chargeable to tax under head “salary” would be exempted, and the assessee was not liable to deduct tax at source in respect of the said payments .chargeable under the head “salary” u/a 192 of the Act. 31. To sum up, m the light of the discussion made, and for the reason given, above and respectfully following the decision of jurisdictional High Court of Delhi in the case of Director of Income-tax vs. HCL InfosyStems Ltd. (supra) affirming the-decision-of the Tribunal, Delhi ‘E’ Bench m the case of HCL Infosystems Ltd. vs. DCJT (supra), we hold that the payment by :way of reimbursement of salary or expenses of crew members employed, by the assessee are not to be, treated as “fee for technical services” but are the remittances by way of “salaries” chargeable to tax under the head “salaries”, in respect of which tax was deductible at source under section 192 of the Act and not under section 195 of the Act, and since whatever tax found to be payable in India on “salaries” paid to crew members has been deducted u/s 192 of the Act, we find no reason to impute default on the part of die assessee for failure to deduct tax at source under section 195 of the Act as the case is covered by section 40(a)(iii) of the Act and not section 40(a)(i) of the Act We, therefore, hold mat no disallowance of payment of salary or expenses to crew members is called for We direct accordingly.
 

CA Devanshi Gandhi (Ajani)
on 17 March 2009
Published in Income Tax
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