DIT-1, INTERNATIONAL TAXATION vs. ALCATEL LUCENT WORLD SERVICES INC

r THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: November, 2013 + ITA 330/2012, ITA 338/2012 & ITA 339/2012 DIT-I, INTERNATIONAL TAXATION Petitioner versus ALCATEL LUCENT USA, INC. •Respondent + ITA 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 & ITA 340/2012 DIT-I, INTERNATI®M%jcATiON •Petitioner versus ALCAT|L LUCENT WORLD SERVICES INC ....Respondent Advocates who appeared in this case: ' ' ForthePetitioner. : MrN. P/Sahni, Advocate. f For the Responded : Mr M. S. Syali, Advocate with Mr Mayan^Nagi, Ms \ Husnai;Syali,lAd^cates. J- CORAM:- HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE R.V.EASWAR JUDGMENT R.V.EASWAR. J For orders see ITA 327/2012. R.V.EASWAR, J BADAR DURREZ AHMED, J NOVEMBER 7, 2013/hs ITA'Nos.328-330 & 336-340/2012 Page 1 ofI 2013:DHC:7845-DB

r ; • 1'-. ' !• '1. . I- f PE HIGH COURT.OF DELHI AT NEW DELHI Judgment delivered on: f' November, 2013 •H- , ITA 327/2012, ITA|30/2012, ITA 338/2'012 &ITA 339/2012 , : DIT-I,INTEm4TiONAL taxation:- Petitioner versus ALCATEL LUCENT USA, INC. Respondent •+ ITA 328/2012, ITA 329/;20iav'IT'A^;>336/2012, ITA 337/2012 & , ' BITJ, "•••I Ht ALCAfElL, LUCENT W.pmpjSfRVICES IINC ....Respondent 1 1 j;. j r'r"' f: >j *)"-•. kI Advocateswho appeared in this case: ji p « For to Petitioner I ; MtN. P;!sSil)l%.S«:cgSate. ' ' 1 r\ TV/f-T\/T.'i.'O iCi/oVt^-^.Qr'. t'A nirrSrci For the Respondent.|, . HON'BLE MR JUSTICE • .TUPGMENT la.V.VASWAR, J • • • 1. These ai-e nine appeals filed by the Revenue under Section 260A of th(? Income Tax Act, 1961 (hereinafter refened to as 'the Act'). They are directed against the coiimion order passed by the Income Tax Appellate Paze 1 of33 ITA NVS.327-330 &336-340/2012 ^ ' 2013:DHC:7845-DB

I \ ^ -. Tribunal on 21.10.2011 in ITA Nos. 3821 to 3824/del/2011 and ITA Nos. 3825 to 3829/de1/2011. There are two respondents in these appeals (i) Alcatel Lucent USA, INC. and (ii) Alcatel Lucent World Services INC! In respect of the first assessee, the assessment years involved are 2004-05 to 2007-08 and in respect of the second assessee, the assessment years involved are 2004-05 to 2008-09. 2; 1nth On lO^'^ July, 2Q;]#'^th^^c^pt'|&a^ substantial question-oflaw, cojfliiijnWall tte|g'g|i|ls: - • ''Whetherjin^^ cf%i^^S^e the 1pi f was taken4a#..ii4tladvmatter by consent. The facts is ^eajyiSay be ^e]^a^|e^q|pe^catel Lucent USA, INC., is atax-resid^'of USA and^s p^bfjrfe-Alcatel Lucent Group. It supphed teleconi'equipments^ to customers in India in the year under consideration, which is the FYE 31.03:2006, relevant to the assessment year 2007-08. It would appear that the aforesaid group started its bperations in India in 19.82 in terms ofan agreement with ITI Limited,, a. public sector undertaking- which was engaged in the • manufacture of telephones. Thereafter a jk)int venture was established J -i / ^ r'j>^ \ •' " '% • Tribuhapegmto error in J:ioldtng'the asses^&w^ not liable tipaymterest in terms ofiSMjion 234B ofthe Iricome TaxAcp" 1 I, ITANo.327 c42012 relating to this Ir !'( ^ ITA Nos.327-330 & 336-340/2012 Page 2 of33 ' 2013:DHC:7845-DB

'i • with C-DOT at Chemiai, besides establishing a research centre at Bangalore. On 27.02.2009; a survey under Section 133 A of the Act was conducted in the premises-of Alcatel Lucent India Ltd., which is the Indian subsidiary and which according to the income tax authorities constituted the permanent establishment (PE) of the assessee in India. The Indian subsidiary provided marketing support services to the assessees. Based on the^.rhaf|i;ml^ the assessing .sJ?"' S, officer in charge alsessmeffifc^Alcater'^^^ France, which • r, % r. was another nggshiiJ^tompan^^i^ngirMI^ same^^&or concluded e Taxation e to tax in r^&ms of the Doub US and was liab Avoidance Agreement betweemlndiaj'jM'd 4 u • • I? India-on the ilpome earnedithereiiiA ''B,'asM,.Qn\these fuellings of the •1^ # assessing officercharge of ..the-as'sejs^meht of Alcatel - Lucent France, the assessing^omcerjj^ m charge of the assessment of the present assessee issued notices under Section 148 of the Act for the assessment years 2004-05 to 2007-08. It may be added that similar reassessment notices under Section 148 were also issued to the other assessee concerned in the present appeals, i.e. Alcatel Lucent World Services ING, for the very same assessmerit years; in addition, for ' the assessment year 2008-09, a notice under Section 142 (1) was also -,. ITA Nos.327-330 & 336-340/2012 Page 3 of33 2013:DHC:7845-DB

issued to that company. Apparently, these notices were issued, on the groundthat income chargeable to tax in India hEid escaped assessment. 4. In response, both the assessees herein filed returns of income for all the assessment years declaring "nil" income. In the returns, the following note was appended, explaining why the assesses took the position that it was not liable to tax in India:. "a) Alcatel-Lu^nt^Si^AM^.IlC'Mffatel J%cent Inc." or the C^.^ak)0J is u^g^mpariy j,^^o^rpqrated in USA0^'lt^ii'^'a tax'ftsi&dm df'USA to be/^qV'&rned by ' the proyisipns "J^ouble Taxation Avoidance^ Agrepnent betw0.n \India • ' • aidUSACtheDTAA'):\^^h^ ' ' b) c) I • • ''hi'VPP Alcatel Lucent InS^^^^not have any office, Remises or othM^^fjf^^^^ business in J^adia. D^nng th&^-ye(^';'imd^M:^^ Mcatel Lu&^nt to 'kiS£j§r^hustotners en^fgec0^jielecom. businSs^^%ke^,^Bs^^.ofi^^Jf§^g^yw made from for the same were af^osS^^^^^ffgym^side of India. In view of above, the Company does not have any taxable presence in India and hence no portion of its business profits is taxable in India. The present return of income is being filed under protest and in pursuance to the notice " issued under section 148 of the Indian Income- tax Act,. 1961 ("the ;Act") by the Assistant Director of Income-tax, Circle -1(1), International Taxation, Drum Shape Building, I.P. Estate, New Delhi. The return is beingfiled ITANos.327-330 & 336-340/2012 Page 4 of33 2013:DHC:7845-DB

only with a view to comply with the said notice. The act of such compliance is not an admission of any sorts that Alcatel Lucent Inc. had any taxable income in India for the year under consideration. The return is being filed without •prejudice to the Company's contention that the notice issued to it is without jurisdiction and bad in law. The return is being filed without : prejudice to the legal rights the Company-has under law to contest the above notice, including the right to challenge the extra territorial application of the Act in the present case. The • act of filing^^&^-fMf^^irB'-.c^pliance to the 'k' rt7n W/ /-Wl1 ^ Tyj C !/y/! /TO A1^ /l fO1 Indian <t^!Tax whdtsomer." / v u a i \ % 5. The asslssiiig officer however, did) not accept th^"'assissee's stand !}}- and in the assessment order pasqed ^oi^ S^!i03.2010 -attributedjS.5% of the I| ' 1 ' f sale proceeds If tlie hardware^'as,profit a^^^ to the|PE in India, which came to ?24,0£f6j&52-38/- for the assessment year^2p07-08. Similai re-assessments .were of both the assessees. In the re-assessment order, in addition to the aforesaid income, the assessing officer also directed that interest under Sections 234A, 234B and 234C shall be charged. Demand notices were accordingly issued.... ITA Nos.327^330 d 336-340/2012 ^ 2013:DHC:7845-DB

.1 .! ?• 6. Appeals were taken-by the assessee in respect of all the assessment years .before the CIT (Appeals). Three grounds were taken in the appeals. The first ground was that the'assessing officer en'ed in computing the income of the assessee as was done in the re-assessment orders; the second ground was that onthe facts and in the circumstances ' of the case Eind in law, the assessing officer erred in levying interest under Section 234B that the^ej^ire consideration in the hands ofappe0ii}:0^s source under .Section 195 offiieMt"; th^®]|^eound was againstfjh|^initiation of "• • ilfiiiit.1 js! "i/- penalty proce^ings for allegedi;GQife]||ll^nt ofincome. . I • §!| trail I I i;|ij 5 y!, 6% j 7. Before lie CIT (Appeal^J&|a^J|e did not press t|e appeals in % .,'5, / respect ofthe fist grq^d^^ellll^r^ ofthe •%, . income attributabll^tj^fc' Jndiai ^0hly g]:ou^'No.2 which was ^ \ ,r XV' ^ ^ ^ directed against the levy of%ie||sggidg3p^^^ 234B of the Act, was , pressed, the contention being that it was the liability of the purchasers of the telecom equipment in India to deduct income tax at the applicable rates from the remittance made to the assessee under Section 195 of the , Act, that in view of the language employed in Section 209(l)(d) the assessee was entitled to take credit for the tax which was "deductible" at ITANOS.327-330 &336-340/2012 Page 6of33 2013:DHC:7845-DB

nA source while computing its liability for paying advance tax and if the amount of tax so "deductible" by the payer in India is given credit, there was ho amount of advance tax payable by the assessee, and if that is so there was no question of the assessee being liable to pay any interest under Section 234B. Several authorities were cited before the CIT (Appeals) in support of the above contention including the judgment of a Division Bench of this'-courti inSBmectm.. • ... rpj .r- 'i • • Civil IncQiworatedFandsMitsubisMBjitf^i It was submitted b^re the'^glllil,^^ court held th^ Section 195 plapil^||||Jation on the pay|r to deduct II.. 330 ITR 578, •% l^'that in 'this, j'^dgment, this tax at source Ikt the rates in fDidilroialthe payments I # payer has defaillted in dMucMgmeKlaifiitdiwas';^^^ to the'Income Tax mad^ and if the i j ^ 1, '1 . 5 -x h. 0 Department to ta%^'^<^'''Bgainst the p^pi. uMea ^%etion 201 of the Act, but no action can be taKen foi iecoveEy«t)X.the''mterest under Section 234B from the non-resident a.ssessee. It was further held in this decision that the non-resident Avill, no doubt, be liable to pay the income tax on the income assessed upon it, but it cannot be held liable for payment of any advance tax thereon if the tax deductible by the, payer in India exceeds the amount'of advance tax payable on the estimated income. It was further held that the position would be so even if the income tax ITANos.327-330 & 336-340/2012 Page 7 of33 2013:DHC:7845-DB

was not in fact deducted from the remittance because Section 209 •(l)(d) of the Act permitted the non-resident assessee to take credit, while computing its advance tax liability, for the amount of income tax that was "deductible" from the remittance, though not actually deducted. It was furthermore held in the judgrnent that once it was found that the liability was that of the payer under Section 201 of the Income Tax Act, whichrpermittedptlvery^pfthfe^ax froi^^ the payer by 'treating him as a#a,sses'^e ixi de!Mt and, alSGC^r^pdy^ry of interest # i;- • f i' sr i f %• under Section 2'ai««|:l'A) for the. default ,in not deductdpg %e tax, there l -E'- ^ 'I • can be no liability fastened 'u]iioji|M^|ion-resident assessee to pay I I I I interest unde]|section 234B. | • \ ^ • I • '4 " 8. The CIT (|Lppeai'0tHfi.®P^®d assessee based on the language em|;lo^si-inSectiona^^ lead ^^ylth Section 195 of the Act and on the basis ofthe5juB:gmgi||gied-above and held as follows: "In this case, it is undisputed that .the tax on the entire 'income received by the appellant ^yas required to he deducted at appropriate rates by the respective payers u/s 195(2) of the Income-tax Act. Had the payer made the deduction of tax at the appropriate rate,, the net tax payable by the appellant would have been Nil. Therefore, it is clear that there wqs no liability to pay advance tax by the appellant. I have carefully gone through the various judgments relied upon by the appellant in- this regard. The • ITANOS.327-330 &336-340/2012 ' P<^ge8of33 2013:DHC:7845-DB

jurisdictional High court i.e. Hon'ble Delhi High Court, in recent judgment dated 30^'^ August 2010 in the case of Director ofIncome-ta^ vs. Jacabs CivilIncorporated/' Corporation i (2010) 330 ITR 578 (Del has Held that section 195 puts an obligation on the ' payer, i.e., any person responsible for paying any tax resident, to deduct tax at source at the rates in force from such payments and if payer has defaulted in deducting tax at source, the department can, take action against the payer under the provisions of section 201. In.such a case, the non-resident is liable • to pay tax but there of payment of advance-tax liable to pay interest ji/!s 23'^ "^01^ hecotirii^df d^f^ of the payer in deMictin^ax sow ce from the^^B^higts made to the app^laS^" ''i , '''''!✓ %. • # I' ^ i 'I 9. The Refenue' carried the mattei, m appeal before the fncome Tax I . " I o Appellate Tnbiinal. All the nine apl)eks?if0ur in the case ofAlcatel Lucent I • I Before the Tribunal thS^ccmt^i&i® t^efflj^i^b^alf of the Revenue was thatatthe time ofthereceipt ofmonies from India, the assessee had taken the plea that it did not have a PE in India and therefore the payment was not chargeable to tax in India and consequently the provisions ofSection 195 were not apphcable, whereas in the appeals before the CIT (Appeals) acontradictory stand was taken by the assessee, by accepting the fact that it had a PE in India and admitting that the income earned in India was • ITANOS.327-330 &336-340/2012 Page 9of33 =4= 2013:DHC:7845-DB

chargeable to tax. Nevertheless, it was pointed out by the revenue, the assessee still (iontended that no interest under Section 234 B can be levied because if the entire income was subject to tax in India the consequence would be that it was the responsibility ofthe payer to deduct tax and if he has not done so, the remedy of the Income Tax Department lies against him in terms of Section 201 and not against the assessee under Section 234B. The Revenue seriously'contested4his,.contradictory stand taken by C1 ^ ^ , •%. the assessee beforeithe?; "" ✓ that the assess.efe pointed out md taken by tlie assessee originally in tie return filed in i;b^J)4nSi4.the notice under Section 148, •it would have told the MiariMa^t-Afe not have ai^ PE in India and therefore no t&liiMdle^deducted Jfeom therf^iMnce; and having said so and-led the payefedBgndia to-mag^^e 'entire payment ofthe purchase price ofthe equipments without any deduction oftax in terms of Section 195, it is nov^ not open to the assessee, merely because atthe first appellate stage it did not choose to contest the assessment ofthe income attributable to the Indian PE, to turn around and say that now that it has accepted the liability to pay tax on its Indian income, it wa§ lTANos.327-330 &336-340/2012 , >'. Page 10 of33 2013:DHC:7845-DB

for the Indian payers to have deducted the tax and if they had not done so, the assessee cannot be held liable for the interest. It was further pointed out by the Revenue that consequent to the amendment made to Section 201 by the Finance Act, 2012 with effect from 01.04.2012, time limit of four years was set for taking action under' Section 201 and therefore iio action can be taken against the payers for the years under consideration since the afof^sajd^tim^tmi^.'fi^^lready expired. Itwas submitted that wheno^diiis'' courtssd^caded the-<p|sf \f Jacabs Civil fW .-ir. V ^ % „n t;n,« tsllf no time limit for takiilg action agains®e|E^ijfNow that the acfion against I •« is 'PiU ji f: ' I J of the interest under. Ser.tion'23,4B. -ryfh-^i T|( A-' .,-W" '10. These.submissions ofigie Repniie^JJs^OffBt find favour with the •ft S «" fl «• • "I i| II 1[| If. |i j. the payer has|become time baq^S^lf^ljIasis of the judgmJit has been i| - |f removed, with'^e resuIt..ihatikS|s^s||^w^l^ payment Tribunal. If held that undisputedly the tax on the income received by the assessee was required to be deducted at source at the applicable rates by the respective payers under Section 195 of the Act. In terms of Section 209(l)(d), the income tax calculated on the estimated income ofthe assessee 'is to be reduced by the amount oftax which would ITA NOS.327-S30 & 336-340/2012 Page 11 of33 2013:DHC:7845-DB

be deductible at source. No tax was deducted by the payers, for which the assessees cannot be faulted. However, the assessee can take credit for the tax which ought to have been deducted by the payers because the requirement of Section 209(l)(d) was that the tax "deductible" could be talbn credit for and it was not necessary that the tax should have been actually deducted; In addition to this reasoning based on the language of Section 209(l)(d), the Trp3uiM,^phe|d, ;^th1^ei^ence to the argument of the Revenue thafthe ks&ssee jjatepresenteC^pA payers that the 'V \ • income was nOtMiabJeno deduclion of M: at source (EtMhefewas no PE), §i tsifcC"'' \ \ |\ 1' ^ I that "no such Material in suppoit ofthis plea has been placM before us ft' Ik %S:5\ '4, I ' t! If 'L IVl' nor any sucJ^facts and circuyi$t&JicM,erii.erged from tJ^ impugjied orders ". .4 7';r S' •r yfl'' • 11. The ariswer^f the,.T:.iibunal to the^igmnpnt^,pf the Revenue based oil the time limit set by the. amendment-made to Section 201 with effect from 01.04.2010 was that in terms ofSection 40(a)(i), inserted with effect from 01.04.1989, certain types of payments which are claimed as a deduction by the payer would not get the benefit of deduction ifthe tax was not deducted at source, if such payments were made outside- India. According to the Tribunal this provision ensured effective compliance of ITA Nos.327-330 & 336-340/2012 Page 12 of33 2013:DHC:7845-DB

Section 195 of the Act relating to tax deduction at source. The Tribunal eventually fO'Und that the controversy was covered by the judgment of this court in Jacabs Civil Incorporated- (supra) and accordingly confirmed the decision of the CIT (Appeals) that the assessee was not liable to pay any interest under Section 234B ofthe Act. 12. According to the learned standing counsel for the income tax department, the approach,ofIhe,Tiib^^ is,,sOTously flawed. According to him the legal position that the non-rfesidetit asCe'lsee^ls entitled to take O r^j. ^ t r ^ •% credit, while colng^ing its advance t|x liability, for^\th| t|x which was "deductible" tiough not actually deducted/iivithin the meaniii^ of Section i ' 1 li \ i • the present 209(l)(d) I • 1 is ntt applicable to lhi ia#M%e present case. M ''w: /.y •iv, . ,•••4 ooooo^o taxsrii case, the assessfee initially''dispute^ils'^ft^il^^ India and ^ f' ••^^rnismkrnt^ . ailiculated its staiil mthe noLe,a|)pende4^t0^'€ie€etuins^^ in response to notices issued under Section^ 148:;;;.and eveu filed appeals against the reassessments; but before the CIT (Appeals) it gave up the claim that it was notliable totaxinIndia and pressed its claim only to the extent ofits liability to pay intkest under Section 234B; It is submitted that this factual position is in complete contrast to the facts before this Court in Jacabs (supra) where the assessee admitted its liability to pay tax on the ITANOS.327-330& 336-340/20J2 ' Page 13 of33 2013:DHC:7845-DB

Indian income in the return filed by it and the payer was, therefore, found clearly liable to deduct tax. It was in those circumstances that this Court . held that the tax was "deductible" and the non-resident assessee can rightly take credit for the same, even though the tax was not actually deducted, while computing its advance tax liability, According to the learned standing counsel, it is notopen to the'non-resident assessee inthe •present case to say that thdti|h it, was inot liahfeto pay tax on its Indian I) fjM?- :• .A income, but still the Indian telecom equipmeritide,ai%. ought to have •t, ^ deducted the tax uifd'CT Section;:195;,of'the^Act. Acc&rdiri|, to him, this would be acontradictory stand \tSich\caiinot be accepted at all. I HlKiUu f Iff VV'h ('I . 13. The learned counsel for tlie','asse^sdfe inter alia made the following (a) The h^pif^'ofthe^^er oft^^^ deduct tax from tlie'payiHenfcunder-''^^^^ 195(1) is absolute and does not depend on the stand taken by the non-resident assessee with regard to the question whether or not the amount remitted gives rise to tax liability under the Act in India. In case the payer has any doubt about the taxability of the sum remitted by him in r the hands ofthe non-resident assessee, it is open to him to make an % submissions:\ « fjh.; M :,t5 the non-resident to ITANos.327-330 & 336-340/2012 Page 14 of33 'v • , 2013:DHC:7845-DB

applicEition under Section 195(2) to the appropriate authority to have 'the income portion of the sum determined for the pm-pose of deduction oftax; i (b) If the payer fails to deduct the tax, his liability to make good, the pa^^ment along with interest is governed by Section 201(1) and (lA). This liability is absolute and exhaustive of the remedy " ^ oses the4illail .#• . "V % available to the revenuief (c) Sectioif201(1ti^) whichsiffiposes the€i^i]% upon the payer 0 \ ' I % to pay int&est''6n the amount which'Ought to Bafe d;educted from the sunlpaid to the rion-iesident and Section 234B i?5 ^ interestlDn the non-resideii)i|al^fessfee for non-paymen tax are mkually exclusive anljpperafl ^iSlfeent ftct-situations. They axe nd' alternative courses in,,ttt"e^senMlh^ the department •'..-Jill'' i '-1 «:| %;ri can choose to pioreed underAhe^one-'or^he'other; f. . ^ (d) There is no concession given by Section 201 in the sense that no plea ofreasonable cause for the failure to deduct the tax can be entertained under that Section; (e) The proviso to Section 209(1) inserted by the Finance Act, 2012 amending the sub-section to provide that the non-resident 'hich levies fof advance •-.^1 ITANOS.327-330 &336-340/2012 ^ Page 15 of33 . 2013:DHC:7845-DB

assessee can take credit only for the amount of tax actually deducted by the payer while computing his advance tax liability was inserted only w. e. f. 01.04.2012 and would apply only from the assessment year 2012-13. The amendment is not clarificatory or explanatory and has been made expressly prospective. 14, In his rejoinder, the learned standing counsel for the income tax departmerit siibmittedJiSt tlie%ci|fiiMQn of'l|ig;»expression "assessed tax" appearing in Sectfon ®2jM(5) is diffcient frpm thedefjriition of the said • ' ~ 'h I. "*•€'. '% . expression apDtearing in Explanation, 1 ^below SectiQil;^^2MB and this • I*• • "'"I makes a cruqikl difference in the assessee's case. He pointed out that I •• ,|| under the aforesaid Explanation, as it stob.d both before being amended I , . I by the Finance B.ct, 2Q06"#;,.e:.^f;' D,l;;.04.2007 and thereaftef, only the tax actually deducted at^^lbMce il'''p.ermitted^^ deducted' from the tax on the total income determined;iMer«the^=Te|m^i€ssessment and if no tax is deducted at source, no such adjustment from the tax on the total income assessed is permissible. In other words, his contention was that 9 • the Explanation below Section 234B overrides the provisions ofSection \ 209(l)(d) and, therefore, the benefit ofreducing the tax onthe estimated income by the tax which was "deductible", but not actually deducted, was not available to the non-resident assessee. , He further pointed out . . ITANOS.327-330& 336-340/2012 Page16of33 2013:DHC:7845-DB

.a- "h that mthe present case the payer Imew that no income was chargeable to tax in the hands of the non-resident assessee as the sum remitted represented the purchase price ofthe telecom equipments and, therefore, advisedly did not deduct any tax from the remittance..When the assessee accepted its tax liability in India, itfollows that it would also be liable to pay interest under Section 234B for failure to pay the advance tax and such aconsequence camjof ^•^tE^liability is admitted. He further submitt^ffte^e dedsWBfthis (supra) did not deal with all th$factual ^sit|Si;i#s posspe, becaug|,.m|that case the "assessee admiled the taxable'idc^Mfeven ill the return and tllb payer was f 'f' i ,ir I y 1,4 w!>f j;'i. (/ j.f also found nal|e to deduct tax. Aliprdialito him, the presen|case stands % f a on a completel^idifferent footing % .,4 . . ' ' ^ 15. Both the sH#^ filed wiitten submissions ^^^te'have also been '" . ' ,, , .1 ,4 r " Z'"' taken into consideration v^'hile disposing ofthe appeals. 16. • In the light of the judgment of this Couit in Jacabs (supia)^ tlie inteipretation to be placed on Section 209(l)(d) in juxtaposition witl, Section 195(1) is that which is canvassed before us on behalf of the assessee. However, we find merit in the submission of tlie, learned standing counsel for the mcoine tax department tliat on the facts of the present case, the aforesaid legal position cajmot be applied. As pointed ITA Nos.327-^330 &336-340/2012 Page 17 of 33 2013:DHC:7845-DB

li r,-. GUt by him, in the case of Jacabs (supra) the assessee filed its return of income admitting tax hability on income of ?296,83,278/-. On this income it did not pay advance tax on the due dates. The assessing officer proceeded to charge interest under Section 234B, oVeiTuling the assessees objection that'tax was "deductible" by the National Highway Authority of India for whom the assessee was executing tile projects. The plea was, however, accepted by |Aj|f||a|s) .p{1.8!B^come Tax Appellate Tribunal. It was int^ftiQse facts 'that^ffl^jCourt hSld^tha^ince it was the # ' •> V t'"- ^lv ' XV •'% #'.17 £ V ^ J ^ % duty of NH/J[ to deduct tax itSf"195(1) fr&i'the payments I J V made to the assessee, and even though no 'lax was actually deducted and 1 ' I ie NHAL the assessee (^aslrelidtled to take creditf for the tax \ • ^ which was '"deluctible'ifbysthe MTAJt 'advance tax liability. In the ffl;|l|^ic^q^^J;he factual^posgi|<^^ different. %!- "j;. >(#" .rf#' Herein the assessee didtnot admit any.,me%ipi«m the returns. In the note appended to the return (which we have extracted earlier) the assessee denied its liability to be taxed in India on the ground that it had no PE in India. The assessee also pointed out that no income from the supply of telecom equipment to the Indian dealers arose in India since all sales were made from outside India (in the USA). The assessing officer did not accept the claim made in the note and ITANOS.327-330 &336-340/2012 • Page 18 of33 2013:DHC:7845-DB

• proceeded to assess the assessee in respect ofthe income arising in India from the supply of the telecom equipment on estimate basis. The assessment was not accepted and appeals were filed but in the appeals the assessee did not press the ground of appeal against the computation of the income, but pressed the appeals only against the levy of interest under Section 234B. Thus it was at the stage of the CIT (Appeals) that the assessee accepted its.^0iabiIipihTndia..'1fe^ be incongruous, f l %J 1=^,15? ""'V as pointed out oi^^qh^lf'St the leyenue, to' hold/Jih^l^en though the •fe. • •^1.&- •Si' /p. ,#'• "^'1' '1 ' •'I- '/ assessee didnoi^dmifany taxliability m\Iiicffa while llifigthe return and f ^ a- • rici ' "••i,.!'.'.- •even up to thefstage of first appeal, and con'espondingly thesj r, (V I U I. M. I ayers were also not liableslto deduct tax und^1S,e|ti:d;|i 195(1), still it ca| t for the tax "deductible"^'though,not dedudte^, by the India take credit I' Indiaa payers from the remittance made. makes a crucial difference .|c bfenefit ofthe decision ofthis Court m Jacabs (supra) cannot be extended to the assessee. ' 17. The learned counsel for the assessee, however, put forth two •arguments in rebuttal. The first is thatthis Court also decided the case of Mitsubishi Corporation in the same judgment dated 30^'' August, 2010 by which Jacabs'(supra) was decided. In this behalf, he drew our attention ITA Nos.327-330 & 336-340/2012 Page 19 of33 • 2013:DHC:7845-DB

A to the first paragraph of the judgment in which this Court observed that except in ITA No.491/2008, in all other appeals, M/s. Mitsubishi Corporation was the assessee-respondent. However, the issue in all the cases was the same i.e. chargeability of interest under Section 234B. AA^ile naiTating the facts, this Court took note of the facts appearing in ITA No.491/2008 which related to Jacabs (supra). The Court proceeded orders Mitsubishi •# ry c f V- - V" % Corporation, ir^er^fcharged ufider Section 234B ^§^%ct has been i 1. deleted by th^IribunoF. Oh the basis'of^ithese observations|the learned i • • • i • counsel for th| assessee submitted-tnatlthe facts of Jacabs ana Mitsubishi I It' i •K'S; ••i-'t; t > I Corporation weSe the sam;e;;K 'l|. i '• suhunoned the file of 18. In order to ascertain.the^,correct position, w©»surnj V ' 'is, ITA No.229/2010 vs Coruoration. The order of the Tribunal is dated 23.06.2009. Paragraph 2 ofthe said order reads as under: - "2. The appellant Mitsubishi Corporation is a Japanese non-resident company and it had been carrying on its activities through its liaison office in New Delhi and offices in other cities called "divisions". It claimed that it has no income taxable in India. The department, however, carried survey and recorded statement of General Managers in India and, on the basis of documents recovered in survey, ITA Nos.327-330 & 336-340/2012 Page 20 of33 2013:DHC:7845-DB

held that a portion ofincome ofthe assessee attributable to Indian activities was liable, to be taxed in India under. Article 4, 5 and 6 ofDTAA between India and Japan and underprovisions ofthe Indian Income Tax Act. Initially, the assessee resisted such assessment but ultimately accepted that income taken by the AO was rightly taxed. The quantum of assessments was not challensed before the Id CITfA). The challenge was restj-icted to the levy of interest u/s 234B ofthe Act. Before the Id. CITfA), assessee placed reliance on decision oflTAT in assessee's own case for AY 2005-06 wherein similar interest u/s 234B imposed on the assessee was deleted vide,MrdmsimfIA No.848/D/08 dated 08.08.2008 after a/d^ailedfdisfus^gri: matter of judicial disciplMe, fhe^j^JClT (A) %]iguid ^nav^^. followed order ofITAVpiveh-ih identicMssircim^stamesjgjMi.deleted themterestmeyi0d, moi^ewaxptP^t^fy:^ whemaecis'ion of Hon'ble -Supj^te UnidW^f Ii^dia and oth^rs^i^. Kamalc^^^^p^ie Corporai'ioh ^fd.,' [1992 Ar 711 (SC)J Jurisdictional Agh Court (pel) in case ofNdkia ^Cpfppration v. Directors of irri /r J. ^ • Ti) _ _ were oro.usni to ms nuLLcein-anusipiace^u on riicoru.mne. r -•:••• Si; also noted th0^^^fu^idl^mis(^^ subordmSk,,a(^:i^Hiveslf^^ iiec\&^&^;00iigher authorities. ^Ei^onevMi^actedjust^e o^poA^" 4,1'' r '"j 19. It is thus noticed that the facts of Mitsubishi Corporation are different from the facts of Jacabs and are akin to the facts of the present case. Therefore, the observation of this Court in Jacabs case (supra) that in the case of Mitsubishi Corporation, interest was charged under .Section 234B. under circumstances similar to those obtaining in Jacabs case appears, with respect, to be inaccurate. The facts of the present ITA NosJ27-330 & 336-340/2012 2013:DHC:7845-DB

case being. similar to those of Mitsubishi Corporation^ have'to be, therefore, dealt with separately. This Court would appear to have proceeded on the assumption that the facts of Mitsubishi Corporaiion were similar to those of Jacabs (supra). Since it is not so, different ,considerations will have to be applied and the legal position laid down in Jacabs case cannot automatically be invoked and applied to the present case. • '% %14 fi } 20. . The other .SrgviMeht on behSlf6ftlft asiess^'thalvthe liability of : . • # '€,'%/ the payer under S'^dion 201 is^®sSml|^ froM«t^ liability of f 1 the non-resident assessee under 234B need not be ej^amined and •I • f ;fji f I for the purposi ofthe present c^sfei not make any difference, on % I' M ^ / account of the p,eculiafMfei;s>6f the presehfWse!llltHn.ay b'e recalled that • the argument put foitfivbythe revenue.hef6fe..tH'e"Mc0me Tax Appellate • • 1-:^ ^355^5=^""' ^ Tribimal was that at the timea5£the"fgceipts^^^ firohi India, the assessee took the plea that it did not have any PE in India and, therefore, the payment was not chargeable to tax in India, with the consequence that Section 195(1) was not applicable, whereas in the appeals before the CIT (Appeals), a contradictory stand was adopted by the assessee, by accepting the fact that it had a PE in India and by 1TANOS.327-330& 336-340/2012 Page 22 of33 2013:DHC:7845-DB

admitting tliat the income earned in India was chargeable to tax. It was further argued by.the revenue that such a contradictory plea cannot be permitted to be taken by the assessee. It was'pointed out that consistent with the stand taken in the return, the assessee would have told the Indian payer that no tax should be deducted from the remittance and it was, therefore, not open to the assessee, merely because at the first appeal stage it chose .not to SiCOiltegFthe^j assessment of the income • I VI "• 'X attributable to the;iIndianTE, to tuin aiound ahd/say''that since it has now accepted il(s'Ifafellity to payHaX on theIndian inc0i!le,% was for the •' '-S • Indian payers|to have deducted^the |ax and if they had notipone so the assessee canAt be held liable|f|]||tfciiinterest. This argument of the I " I revenue was r^ected byitbc 'tribunal oh tlie ground that,|ihere was no material in''suppoft^ffle:;pieaKthat the assessee represented to the-Indian payers not to deduct taxfiioitdicJ^)^^ emerged from the irnpugned orders. 21. We are unable to uphold this part of the decision of the Tribunal. It must be remembered that in the note appended to the return the assessee was quite categorical in denying its liability to be assessed in India. It relied on the double taxation avoidance agreement between 1TANOS.327-330& 336-340/2012 Page 23 of33 2013:DHC:7845-DB

India- and USA and pointed out •that there was no permanent •establishment in India. It further stated that the telecom equipments were sold outside India and the payments were alsb received outside India and thus the assessee did not have any taxable presence in India so as to be liable for tax on its Indian income. If this was the stand ofthe assessee, it is not impermissible or mireasonable to visualise a situation where, the assessee would have represented itp. Its Indiaii'^elecom dealers not to • • • f I /I-' fr /f%. deduct tax from tl^-ipmift^ces. nia» it. On llid#pi!kary it would be .. . , surprismg if the-ass-gssee didtoafcmake anyFsuch representation; such a . } representatioi| would only bipyc;M|istent v/ith the asse|see's stand 1 I I • regarding its lax liability in In&ia..|]|[%^over, no purpose ivould have % I been served by^e assess'ee t^in^^jii^'fel^egorical standf'regarding its tax liability in India 'and at the same time suffering tff:|^ldeduction under Section 195(1). Therefore',;,||i oui opinion', even though there may not be i-i any positive or direct evidence to show that the assessee did make a representation to its Indian telecom dealers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed. The Tribunal ought to have accorded due weightage to the strong possibility or probability of such a request having been made by the assessee to the Indian payers ITA Nos.327-330 & 336-340/2012 Page 24 of33 2013:DHC:7845-DB

since otherwise the denial of its tax liability on its Indian income would have served little purpose for the assessee. 22. .In Esthuri Aswathiah vs. CIT, Mysore i (1967) 66 ITR 478, a three Judge bench of the Supreme Court, while expounding on the functions of the Tribunal and its duties while disposing of the appeals, had this.to say: . s,T proof oj act uvin probabilities, fuM&rf&mvtions may sunUv gaps iriMie evidence whidHih^^iU, on account ofdMav . or the Mature ofthe tramiict&^MMbr other reasoni! be suDpliechfrom B^kj^he. Tri^hnal Between the''Uai^J-of^pt^^ of the taxpayers, the a judicial ' balance.' (underlining ours). 23. The Tribunal, keeping in mind the above observations, underlined by us, ought to have drawn the inference that the Indian payers did not deduct the tax under Section 195(1) because ofthe request made by the ITA Nos.327-330 &336-340/2012 25 of33 2013:DHC:7845-DB

;; 1 assessee, consistent with its stand that it was not hable to be taxed in India. 24. The learned counsel for the assessee submitted in the course of his arguments that the assessee and the Indian telecom equipment dealers cannot contract out of the statute and, therefore, even if such an arrangement had been made between-theffl. it cannot be given effect to and the liability ofthe^ifiSiEmfpH^yriu^^ %pt^n'has to be strictly ✓ 4/,n, enforced. In othef wf)r3s, it was his contention tlat,.th%Indian payers #' . k ^ -C" .'<1, 0 ' j I I ^ ought not to ifaVeSpaid any heed, and should haveftacteU strictly in I . f I accordance v/fh Sections 195(l|.^even^a4^ but not admitting that view of the there I ^ . • j was suclla request from th|ffese!^|^||raking apracticd ... J, matter, it is difficult to/se,e'.hQ\^^,,$h6an^iam^Jpayprs> have resisted the vV^./ request which, acc6rdilig'tb,6ttr inferenoefwas made^by the assessee to ""•W i rr ill'* them not to deduct tax fiom the remittances ?Plie Indian payers have to keep in mind the foture business prospects and itwas necessary for them to keep the assessee in good humour so that the business relationship remains profitable for them.' They would have been in no position to resist the request. Moreover, since the sales were claimed to have been •concluded outside India, again itwould be a fair, and reasonable inference •to be drawn that the Indian dealers would have had an interface with the ITANOS.327-330 &336-340/2012 Page 26 of33 2013:DHC:7845-DB

i• assessee in USA v/hile concluding the sale contracts and on such an occasion it is normal for the parties to finalise all aspects touching on their relationship including the tax compliances. It should also be remembered that no reason whatsoever has been given by the assessee as to why. it did not press its appeals before the CIT (Appeals) on the question of liability to tax on its Indian income. 25. In the light ofth^^evft^ehfe^ ixs dnfthe^fatftsvofthe present case, af iff % we do not consider, cited by both flie^siEes. It is/fioly^^^^essary to juSt highHght one' , I • HiPSf I aspect of thelmatter. This wa|'"'inff||S|)omted out on b&alf of the , I 1 revenue also. It is open to the a^slsfeSm-keny its liability t^tax inIndia on whatever gr|unds,4|ffiin%A Ila^gJenied its tax ^ % % .fsP'- .# liability, it seems lihfaif'on tH&-part,4^£Jae^ssess|^yexpect the Indian , < ,. n „iA pavers to deduct tax fiom thcjemittanceOfaiS-'^also open to the assessee to change its stand at the first appellate stage and submit to the assessment of the income. When it does so, all consequences under the Act follow, including its liability to pay interest under Section 234B since it would not have paid any advance t£LX. Such liabilities would arise rightfrom the time when the income was earned. Advance tax was introduced as a PAYE Scheme - "pay as you earn". It is not open to ITA Nos.327-330 & 336-340/2012 2013:DHC:7845-DB

5 • P' the assessee, after acceptmg the assessment- at the first appellate stage to claim that the Indian payers ought to have dedudted the tax irrespective of the fact that the assessee itself claimed the Indian income to be not taxable. We can understand an assessee who admits its tax liability right from the beginning to contend that it was the responsibility of the payers to deduct the tax and if they did not, even then-the tax which oughtyto'have teeff'^de^uciiedsi^by them'should be set off against the assgssee's MvanceitaMiabilities.^CDhat i%the type of case dealt with in thS decision of®l'''Cbui^%i'Jacabs %We were not with in thS depision of this Cpurtin'J • •• ,f fw f jk .ill "referred to alsingle case whjercmn, facts similar to the vfcase of the I ^ I 1 . .1 assessee before us, the Court tp^ok ,the, view that no interest under Section 234B was chargeabj|,-ihliSa^f^j^mbiskUCc decided along wfthMie^^^^ of Jacabs, "syiai on factl" similar to the assessee's case." Howe^er;%^Aoinle'd olitliy-^i^s^earlier, this Court' in I i'l"* '5 Jacabs case proceeded on the assumption that the facts in Mitsubishi CorporatiojL were similar to those in Jacabs. That assumption, as we have earlier demonstrated, with respect, is not borne out by the facts. '26. It further seems to, us inequitable that the assessee, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source .ITANOS.327-330 &336-340/2012 Page 28 of33 . 'V 2013:DHC:7845-DB

d from the remittances, after leading them to believe that no tax was . deductible. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they camiot be avoided. After having accepted the liability to tax at the first appellate stage, it .is unfair on the. part of the assessee to invoke section 201 and point fingers at the Indian payers. The argument advanced by the learned counsel for the assessee thafthe^ndiahfpayers failed to .#r is ,-,W' "s •" "'ii deduct tax at their of^dnyeinience or despair. own risk seems to-4s to. fe-only an^ppgument of^qnv^eni As we have poiitedfout eailiei, itus difficult to ima|-iile. that the Indian telecom equipfaent dealers ^ Via^^P' fmlfsvi tr» rlpTlnr.t I tax.at source Ixcept on bei that the generalkule is th^'i:equ|g\lM mthe interfrffetation oftax laws But we .are1oMie.^#iew that when the facts particular case justify it, it is opento'^isjb^ pnnoiples of equity even in the interpretEition of tax laws. Tax laws and equity need not be sworn enemies at all times. The rule of strict interpretation may be relaxed Where mischief can result because of the inconsistent or contradictory stands taken by the assessee or even the revenue. Moreover, interest is, inter alia, compensation for the use of the money. The assessee has had- the use ofthe money, which would otherwise have been paid as advance would have fail^jd to deduct filfll • • ITA Nos.327-330 d 336-340/2012 Page 29 of33 2013:DHC:7845-DB

r tax, iintil it accepted the assessments at the first appellate stage. Wliere the revenue has been deprived of the use ofthe monies and thereby put to loss for no fault on its part and where the loss arose as a result of vacillating stands taken by the assessee, it is not expected of the assessee to shift the responsibility to the Indian payers. We are not to be understood as passing a value-judgment on the assessee's conduct. We are only saying that the assessee, shouldvtake<rresp%nsibility for its actions. i*!. I'i ••U'-v' ' '-ty,. 27. It even while 0. ^ ^'7 Hegde, J:^]dl||aSuiis; "It is true thht equitable f ]!'fesyi'- i W W .irn'M retim considerations consideration^are irrelevant inliJ^if^jp^^ing tax laws. But,^those laws, like all other lAvs, have to be intSme:tM'i easonably and i$ consonance with justice". InWv: JM. Gotla i (19p 156'ITR/'23 (SC), it was held by the Supreme Court tKa!'''tHoug@i;'el^^^ i;ah^ taxation are often 'TV. ' 5 a strangers,, attempts should be made (to ensure) that they do not always .remain so and if a construction results in equity rather than injustice, that should be preferred to the literal or strict construction. In Calcutta Jute Manufacturins Co. v. Commercial Tax Officer i- (AIR 1997 SC 2920) the Supreme Court held that ifthere is aprovision in ataxing statute'to • compensate the state by charging interest, that provision need not be ITA Nos.327-330 cJ: 336-340/2012 30 of33 2013:DHC:7845-DB

strictly construed but may be so construed as to effectuMe its pmpose. The Court held: ''10. The State is empowered by the legislature to raise revenue through the mode prescribed in the Act so the State should not be the sufferer on account ofthe delay caused by the taxpayer in payment of the tax due. The provision for charging interest .would have been inti-oduced in order, to compensate the State (or the Revenue) for the loss occasioned due to delay in pa^ing^ihe^tax, (^ide Cdmmr. ofIncome-tax AP. V. M. Ckanim^SSicM rf9l5 ; (AIR 1985 ~ — ^ ^ ^ Commr. of 461 iSilMi ' 438). WMn^i}iterpretin^MS^i00^0f^ in ataxing. ...f \ taxjirig.statute a construction"'which 'the- purpose 'of the ,.,^77 provision must be '!! It T ?«• 'S3 « / f&k U is well-settled that in 1 interpre^ng ataxing stati^^c^^lly, there is no scSpefor 'considei%tion of li/wcis so ^tid by Rowlatt in C&is?0MMd:^^viSMGMeA^ Revenue I KB 04 at pase'TJks^^- ^ "/« a taxing Adtfm^^nd^ ioflpdk merely at what is clearly said. "''There^'Hs^no room for any intendment. There is no equity about a tax. There is, no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only lookfairly at the language used." The above obsei^ation has been quoted with approval by a Bench ofthree Judges ofthis Court in Commissioner of Income-tax Madras k Amx Products Ltd. i 55 (AIR'1965 SC 1358). In another decision rendered by a ITA Nos.327-330 & 336-340/2012 •Page 31 of33 2013:DHC:7845-DB

Bench ofthree Judges ofthis Court in State ofTamil Nadu K M..K Kandaswami i 36STC 191 : '-(AIR 1975 SC1871) It has been observed thus: •| '7?2 interpi^^ting such a provision, a construction which would defeat its purpose and, in effect, obliterate jt from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to f,he one which would render it.oti&Se Wfteni§^i:i^, --- • 11. %IH if ^ ^ aSom0d^on which would Up^'^t fto^t^ SVen/^^J^pdir-i'iSl:h'i^ii-hf/vr)n'!c> 'iTn' ivifv/^rli Section IpAs^ the Act. thefull ^nd"Sbrrectretur§^^^^,.^^ .^ failure kp furnish such liability to pay interest '• )i i' ifj'• }/ jlll from the prescribed datd '^^M^^ise when assessment is m. .'f*'"vS 28. We think that-l|he' present case is one^';#liAMoH' considerations should prevail in the iiii erpretaticirf^fi it will not merely result in injustice but the purpose of the provision would not have been achieved. In any case, the facts of the present case are different, as we have earlier pointed out, from the facts obtaining in Jacabs (supra) and therefore the said decision cannot be applied. ITA Nos.327-330 & 336-340/2012 Page 32 of33 2013:DHC:7845-DB