DY CIT 11 (3)(1), MUMBAI vs. TOTAL OIL INDIA PVT LTD., MUMBAI

Whether on the facts and circumstances of the case and in law, the Ld CIT(A) was justified in deleting the disallowance of Rs 4.63 crores made on account of non deduction of TDS u/s 40(a)(i) on demurrage charges ignoring the fact that these charges form part of freight income of ship owners which is chargeable to tax in India?

Whether on the facts and circumstances of case and in law, the Ld CIT(A) was Justified in deleting the disallowance of Rs 8.20 crores made on account of non deduction of TDS u/s 40(a)(i), ignoring the fact that these payments were made to group entities and not made to persons deputed in India?

Whether on the facts and circumstances of case and in law, the Ld CIT(A) was justified in deleting the disallowance of Rs 8.20 crores ignoring the fact that the group entities retained their rights over the persons deputed in India?

Whether on the facts and circumstances of case and in law, the Ld CIT(A) was justified in ignoring the decision of Hon'ble ARR in the case of Verizon Data Services India Pvt Ltd. (ARR No 856/2010) and AT & S India Pvt Ltd (2006) 287 ITR 421 wherein it was held that the reimbursement is in the nature of FTS and the fact that taxes are paid under the head 'Salaries' is of no consequence? 6. he appellant prays that the order of the Id. CIT(A) on the above grounds be set aside and that of the AO be restored

The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

Fact in brief is that return of income declaring total income of Rs.163,52,03,440/- was filed on 30.11.2016. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on P a g e | 3 ITA No.6997/Mum/2019 & C.O. 57/Mum/2021 Dy.CIT-11(3)(1) Vs. Total Oil India Pvt. Ltd. 10.07.2017. The assessee is engaged in importing and reselling LPG and certain solvents and manufacturing and marketing of industrial and automotive lubricants. The assessment u/s 143(3) of the Act was finalised on 25.12.2018 at Rs.176,35,97,010/- after making certain disallowances. Further fact of the case are discussed while adjudicating the ground of appeal filed by the revenue.

During the course of assessment the assessing officer noticed that the assesse company has made certain payments to non-resident entities located outside India without deducting tax at source as per provisions of Section 195 of the Act. The detail of such payment made to non-resident under the head demurrage charges are as under:

The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee after following the decision of ITAT, Mumbai in the case of the assessee itself for assessment year 2010-11. 5. During the course of appellate proceedings before us the ld. D.R supported the order of lower authorities. On the other hand, the ld. Counsel submitted that identical issue on similar fact has been adjudicated by the ITAT, Mumbai in the case of the assessee itself for assessment year 2010-11 to 2015-16 and also placed copy of these order in the paper book.

Heard both the sides and perused the material on record. During the year under consideration the assessee had claimed demurrage charges claimed as reimbursement to various non-resident entities as per detail given above in this order. The assessee submitted that demurrage charges was made on cost to cost basis without any mark- up and had no element of income, therefore, no taxes was required to be deducted u/s 195 of the Act on such reimbursement. With the assistance of ld. representative we have also perused the decision of the ITAT, Mumbai vide ITA No.4135/Mum/2016 for A.Y. 2010-11 dated

Similarly, in the case of A. S. CLITTRES D/5 I/S GARONNE AND OTHERS vs. COMMISSIONER OF INCOME TAX, KERALA-II reported in (1997) 9 SCC 546 , once again, after reproduction of section 172 of the IT Act, the Hon'ble Supreme Court of India SRP 68/79ITXA989.15.doc explained the scheme of the section in the following words:-

The Scheme of Section 172 of the Act appears to be this: Section 172(1) of the Act gives a right to the Income Tax Officer to levy and recover tax in the case of any ship belonging to a non-resident, in a summary manner, (ad hoc assessment) notwithstanding anything contained in the other provisions of the Act. It is an absolute right conferred on the assessing authority. The assessee has no right to object to the same. Normally, this will be assessment of the assessee for the year. But, under Section 172(7) of the Act a right is given to the assessee to claim before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment, according to the provisions of the Act, in a regular manner be made. Thus, a right is given to the assessee to opt for a regular assessment although a "rough and ready" or a "summary assessment" has already been made under Section 172(4) of the Act. It is a valuable right. If the assessee exercises the right conferred on him under section 172(7) of the Act, the Income Tax Officer is bound to make an assessment of the total income of the previous year of the assessee and the tax payable on the basis thereof "should be determined in accordance with the other provisions of the Act" and any payment made under the section (earlier) "shall be treated as a 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.

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 the payments have been treated as advance tax. That is the purpose for which the legal fiction is created. In construing the said legal fiction, it will be proper and necessary to assume all those facts on which alone the fiction can operate. The law on the point has been stated in innumerable decisions of this Court. In Mond. Iqbal Madar Sheikh v. State of Maharashtra (1996) 1 SCC 722 a three-number Bench of this Court stated the law thus: "..... The effect of a legal fiction by deeming clause is well known. Legislature can introduce a statutory fiction and courts have to proceed on the assumption that such state of affairs exists on the relevant date, because when one is bidden to treat an imaginary state of affairs as real he has to also imagine as real the consequence which shall flow from it unless prohibited by some other statutory provision."

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:- "

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 the case of residents. Failure to deduct the tax under this Section may disentitle the payer to any allowance apart from prosecution under Section 276B. Thus, Section 195imposes a statutory obligation on any person responsible for paying to a non- resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the I.T. Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums

The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the I.T. Act read with Rule 30 of the I.T. Rules 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the I.T. Act. In addition, he would also be liable under Section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

The 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. contemplates 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 nonresident. This obligation being limited 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.

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.

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 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 SRP 73/79 ITXA989.15.doc to whether

Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 SRP 74/79 ITXA989.15.doc has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195(1).

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.

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.

If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax.

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 nonresidents. 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.

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 "assessee". The 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 assesseein-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 the payer is an assessee he will definitely claim deduction under the I.T. Act for such SRP 77/79ITXA989.15.doc remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-Section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage."

In the view that we have taken, it is not necessary to refer the judgment of a Division Bench of the Delhi High in the case of Emirates shipping Line, FZE vs. Assistant Director of Income Tax reported in (2012) 349 ITR 493 . Suffice it to note that the view taken by the Division Bench and particularly in paras 17 and 18 of this judgment accords with the conclusion reached by us.

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.”

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.”

During the course of assessment the assessing officer noticed that assesse has made reimbursement of salary on account of availing personnel services from its associate enterprise without deducting tax. The detail of such reimbursement to the amount of Rs.820,30,029/- is as under:

The assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assesse. The relevant part of the decision is reproduced as under:

On the other hand, the ld. Counsel contended that C.C.C.E. & S.T. P a g e | 18 ITA No.6997/Mum/2019 & C.O. 57/Mum/2021 Dy.CIT-11(3)(1) Vs. Total Oil India Pvt. Ltd. distinguishable from these case law as the assessee company has merely reimbursed the salary of the employees deputed by the associate enterprise without any mark-up on cost to cost basis. He also submitted that due taxes have already been deducted on the entire salary cost u/s 192 of the Act and provision of Sec. 195 is not applicable to these cases. He also submitted that foreign associate enterprise of the assessee company has merely provided their personnel/employees to the assessee and no services have been provided by the foreign associate enterprise. It is also contended that assessee has only availed services of employees who were on the payroll of its foreign associate enterprise. However, for the administrative convenience the employees remained on the payroll and related cost were reimbursed by the assessee to the foreign associate enterprise on a cost to cost basis. The ld. Counsel has also referred the decision of Hon’ble Delhi High Court in the case of Pr. CIT VS. Boeing (I) Pvt. Ltd. (2023) 146 taxmann.com 131 (Delhi) wherein held that Sec. 195 has no application once nature of payment is determined as salary and deduction of tax at source has been made u/s 192 of the Act. The ld. Counsel has also referred the decision of Hon’ble (IT)(2022) 139 taxmann.com 595 (Karnataka). The ld. Counsel has also referred the decision of ITAT Delhi in the case of Ernst & Young U.S. LLP Vs. ACIT (IT) (2023) 153 taxmann.com 95 (Delhi – Trib.) wherein after considering the decision of Hon’ble Supreme Court in the case of C.C.C.E. & S.T. Bangalore Vs. Northern Operating Systems (P) Ltd. (2022) 138 taxmann.com 359 (SC) held that cost to cost reimbursement on account of secondment of employees is not fees for technical services as defined under Article 12 of India USA Double Taxation Avoidance Agreement. The ld. Counsel has also referred the decision of ITAT in the case of the assessee itself for A.Y. 2017-18 and 2018-19 vide ITA No. 97 & 96/Mum/2023 dated 03.11.2023 wherein after following the earlier

Heard both the sides and perused the material on record. During the year the assessee had reimbursed a sum of Rs. 820,30,029/- to its foreign associate enterprise towards salary and related cost of employees secondment to the assessee company. However, the AO treated the same as services of technical nature rendered by the associate enterprise to the assessee company for which assessee is required to deduct tax u/s 195 of the Act. During the course of appellate proceedings the ld. Departmental Representative has referred the decision of Hon’ble Supreme Court in the case of C.C.C.E. & S.T. Hon’ble Supreme Court held that where employees were seconded to assessee by group entities the assessee was service recipient for manpower recruitment and assessee would be liable to pay service tax. We find that this case was discussed by the ITAT Delhi in the case of Ernst & Young U.S. LLP Vs. ACIT (IT) (2023) 153 taxmann.com 95 (Delhi – Trib.) as referred supra in this order and that case was in the context of manpower recruitment and supply of services for which the assessee was recipient of services and was liable to pay service tax. That judgment was rendered in context of service tax which is distinguishable from the fact of reimbursement of expenses made on cost to cost basis in the case of the assessee. The ITAT Delhi has also discussed and distinguish the facts of the decision in the case of Centrica India Offshore Pvt. Ltd.

We have further noticed that similar issue on identical facts has been adjudicated in favour of the assessee constantly in the earlier year by the ITAT Mumbai for assessment year 2010-11 to 2018-19. With the P a g e | 20 ITA No.6997/Mum/2019 & C.O. 57/Mum/2021 Dy.CIT-11(3)(1) Vs. Total Oil India Pvt. Ltd. assistance of ld. Representative we have perused the decision of ITAT for assessment year 2017-18 & 2018-19 dated 3.11.2023. The relevant operating part of the decision is reproduced as under:

We have also perused the decision of the ITAT in the case of the assessee company for the A.Y. 2010-11 which was followed in the subsequent years. In the A.Y. 2010-11 the ITAT has also considered the P a g e | 21 ITA No.6997/Mum/2019 & C.O. 57/Mum/2021 Dy.CIT-11(3)(1) Vs. Total Oil India Pvt. Ltd. Terms and conditions of assignment of seconded employees which indicate that during the period of deputation with the assessee company, the AE does not have any control over the non-resident employees who is functioning under the control and management of Indian party. Further deputation is not carrying out any activity mandated by the AE or any activity on behalf of the AE.

The ITAT in the A.Y. 2010-11 has also discussed that how the case of Centrica India Offshore (P) Ltd. as referred supra is distinguishable from the facts of the case of the assessee company. The relevant operating part of the decision of the ITAT is in the case of the assessee company for A.Y. 2010-11 vide ITA No. 4300/Mum/2016 dated 09.07.2019 is also reproduced here as under:

On appraisal of the above mentioned finding, we noticed that the employees who were serving in India or deputed in India had already deducted tax at source u/s 195 of the Act. The provision of TDS is not applicable on reimbursement of deputation expenses to foreign AE. The CIT(A) has relied upon the decision in the case of Burt Hill Design (P) Ltd. Vs. DDIT (IT) (79 Taxmann.com 459). The facts are not distinguishable at this stage. No law contrary to the law relied by the Ld. Representative of the assessee has been produced before us. In view of the said circumstances, 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.”

The appeal of the revenue is dismissed.

The Ld AO be directed to compute tax payable by the Assessee under section 115 O of the Income-tax Act, 1961 ('the Act') at the rate prescribed in the DTAA between India and France respect of dividend paid by the Assessee to non-resident shareholders i.e Total Marketing Services and Total Holding Asie, tax resident of France,

The Ld. AO be directed to allow the deduction for cess paid on income tax and dividend distribution tax.

Since, we have dismissed the ground of appeal of the revenue against the decision of ld. CIT(A) on the issue of disallowance of demurrage charges and reimbursement of expenses while adjudicating the appeal of Revenue in this order vide ITA no.6997/Mum/2019, therefore, grounds of cross objection 1 to 3 of the assessee have become infructuous therefore the same stand dismissed.

Ground No. 4 & 5 are not pressed therefore the same stand dismissed.

In the result, the appeal of the revenue is dismissed and the Cross Objection filed by the assessee is also dismissed.