M/S TE CONNECTIVITY INDIA PRIVATE LIMITED,BANGALORE vs. CIT, BANGALORE

Per INTURI RAMA RAO, AM :

This is an appeal filed by the assessee-company directed against the order of the Commissioner of Income-tax (Appeals)- III, Bangalore [CIT(A)] dated 9/10/2014 for the assessment year 2006-07.

ITA No.3/Bang/2015 Page 2 of 13 The grounds mentioned herein are without prejudice to one another.

1) That the order passed by the Learned Commissioner of Income-Tax (Appeals), LTU ['CIT(A)'] under section 250 of the Income-tax Act, 1961 ('Act') is contrary to the facts, is bad in law and liable to be quashed. 2) That on the facts and in the circumstances of the case, the Learned CIT(A) erred in upholding the action of the Income-tax Officer (LTU) (TDS) ['Learned AO] by confirming that TE Connectivity India Private Limited ('TECIL') was an "Assessee in Default" for not deducting and remitting tax on provision for expenses created in the financial statement as on March 31 and reversed in subsequent month. 3) That the learned CIT(A) failed to understand that the provision for expenses were created in the financial statement for the purpose of complying with the mercantile system of accounting and taxes were withheld as and when the actual invoices were received from vendors. 4) That the Learned CIT(A) failed to appreciate that the provision for expenses were contingent in nature, and hence tax was not withheld on such provisions. 5) The Appellant prays for appropriate relief based on the above grounds of appeal and the facts and circumstances of the case and in deletion of the tax payable amounting to Rs 29,82,454. 6) That the Appellant craves leave to add to and/ or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this Appeal.

ITA No.3/Bang/2015 Page 3 of 13 wiring harness and fibre optic cable assemblies and accessories, presses and applicators. The Income-tax Officer (LTU)(TDS), Bangalore,[hereafter referred as ‘TDS Officer’] exercising his powers vested u/s 133(6) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short], directed the assessee-company to furnish details of payments made and tax deducted at source during the financial year 2011-12. During the course of such proceedings, the TDS officer had noticed that the assessee-company had not deducted TDS in respect of provision for various expenses made as on 31/3/2012 of Rs.10,62,92,447/- It was submitted that by the assessee before the TDS Officer that the company was following mercantile system of accounting and the company had policy of maintaining a Management Information System under which monthly provision is made for MIS purpose in respect of various expenses and this provision is reversed in the beginning of the next month. Accordingly, provision made at the end of the accounting year is reversed in the beginning of the next year and such provision is disallowed by adding to the total income as no TDS was made and the claim for deduction was made only in the year in which TDS was made. The TDS officer had not accepted the submissions made and held that the assessee-company is in default as it had not deducted TDS on such amount of provision. However, he allowed relief in respect of an amount of Rs.8,66,58,261/- in respect of which taxes have been deducted in the immediate succeeding year and

ITA No.3/Bang/2015 Page 4 of 13 demanded TDS on the balance amount of Rs.195,44,231/- and levied interest also under the provisions of sec.201(1A) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short].

5.1 Learned AR of the assessee-company submitted that the provisions are made on ad hoc basis, no payees are identifiable and liability had not crystallized in the hands of the assessee- company and therefore, the question of deducting TDS at source does not arise. In support of this, learned AR of the assessee- company has relied on the following decisions: i. Karnataka Power Transmission Corporation Ltd. vs. DCIT (Kar.) ii. E.D.Sassoon & Co.Ltd. vs. CIT (26 ITR 27)(SC) iii. Ramsh R.Saraiya vs. CIT (55 ITR 699)(SC) iv. Bharat Earth Movers vs. CIT (112 Taxman 61 (SC) v. Taparia Tools Ltd. vs. JCIT (126 Taxman 544)(Bom) vi. CIT vs. Life Insurance Corporation (25 Taxman 6)(MP) vii. CIT vs. Kannan Devan Hill Produce Co. Ltd. (30 Taxman 460(Ker.) viii. Director of Income-tax vs. Ericsson Communications Ltd.(ITA 106/2002)(Del.)

ITA No.3/Bang/2015 Page 5 of 13 ix. CIT vs. Rishikesh Apartments co-op. Housing Society Ltd. (119 Taxman 239)(Guj) x. Dishnet Wireless Ltd. vs. DCIT (ITA Nos.320 to 329/Mds/2014)(ITAT, Madras) xi. Director of Income-tax vs. Telco Construction Equipment Co. Ltd.(ITA No.478/Bang/2012 (ITAT,Bang) xii. M/s.Bosch Ltd. vs. ITO (ITA No.1583/Bang/2014)(ITAT, Bang) xiii. Pfizer Ltd. vs. ITO (TDS)(OSD) (28 Taxmann.com 17(ITAT, Mumbai) xiv. Industrial Development Bank of....vs. ITO (107 ITD 45)(ITAT, Mumbai) xv. xvi. Uttar Pradesh Financial Corporation vs. ITO (ITA Nos.642 l& 643/Lkw/2010)(ITAT,Lucknow)

5.2 On the other hand, learned DR relied on the orders of the lower authorities.

ITA No.3/Bang/2015 Page 6 of 13 01/03/2016, to which one of us i.e. the Accountant Member is the author of the order, held as follows: “9. The undisputed facts in this case are that he provisions were made at the end of the year and the same were reversed in the beginning of the next accounting year. The short point that arises for our consideration is whether the liability for deduction of tax at source has arisen the moment the amount is credited in the books of accounts. Having regard in the scheme of tax deducted at source, under Chapter-XVII- B of the IT Act, we are of the considered opinion that the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee. We are holding so, keeping in view the ratio laid down by the Hon’ble Apex Court in the case of M/s GE India Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) wherein the Hon’ble Supreme Court held that if payment is not assessable to tax there is no question of tax at source being deducted. The relevant portion of the judgment is reproduced as under :- “If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of “ any sum paid to any resident”. Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of “ any amount” referred to in the specified provisions. In none of the provisions we find the expression “ sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in section 195(1). Therefore this court is required to give meaning and effect to the said

ITA No.3/Bang/2015 Page 7 of 13 expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the Income tax Officer (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 has to be read in conformity with the charging provisions, i.e section 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 CIT vs. Eli Lilly and Co. (India) (P) Ltd. (2009) 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income Tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are “ chargeable to tax” under the Income- Tax Act. It is true that the judgment in Eli Lilly (2009) 312 ITR 225 was confined to section 192 of the Income Tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “ chargeable under the provisions of the Act”.

ITA No.3/Bang/2015 Page 8 of 13 Which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income Tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income tax Act. 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 Income-tax 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 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 Income tax Officer (TDS) of payments made to non- residents. In other words, according to the Department, section 195(2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the

ITA No.3/Bang/2015 Page 9 of 13 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 assessee-in-default. The above-mentioned 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 Income Tax 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, with effect from April 1, 1989, 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 Income-tax Act. This provision ensures effective compliance with section 195 of the Income tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income Tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the Income- tax Act then it would be open to the Assessing Officer to disallow such claim for deduction. Similarly, vide the Finance Act, 2008, with effect from April 1, 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 April 1, 2008. It will only 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. Applicability of the judgment in the case of

ITA No.3/Bang/2015 Page 10 of 13 Transmission Corporation (supra) In Transmission Corporation’s case (1999) 239 ITR 587(SC) a nonresident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (1999) 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount on the footing that only a portion of the payment made represented ‘ income chargeable to tax in India’ then it was necessary for him to make an application under section 195(2) of the Act to the Income Tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view , section 195(2) is based on the “principle of proportionality””. The said sub section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of ‘income’ chargeable to tax in India. It is in this context that the Supreme Court stated, ‘if no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ’sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words ‘ such sum’ clearly indicate that the observation refers to a case of composite payment where the payer has a

ITA No.3/Bang/2015 Page 11 of 13 doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this court in Transmission Corporation case (1999) 239 ITR 587 (SC) which are put in italics have been completely, with respect misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non- resident is not at all ’ chargeable to tax in India’., then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lay down that tax at source is deductable only from “ sums chargeable” under the provisions of the Income Tax Act, i.e. chargeable under sections 4,5 and 9 of the Income Tax Act.” 10. Now to determine where there was income accrued or not considering the fact that the provisions were made at the year end is reversed in the beginning of the next accounting year goes to show that there was no income accrued. Mere entries in the books of accounts does not establish the accrual of income in the hands of the payee as held by the Hon’ble Supreme Court in the case of CIT Vs M/s Shoorji Vallabhdas & Co. 46 ITR 144 wherein it was held as follows; “ That the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was nota case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lessor remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act, takes into accounts two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income;, which does not materialize. Where income has, in fact, been received and is subsequently, given up in such circumstances that it

ITA No.3/Bang/2015 Page 12 of 13 remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account”. Thus, having regard to the ratio laid down by the Hon’ble Apex Court, it cannot be said that income had accrued in the hands of the payee. We, therefore, hold that there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end. Hence, the assessee company cannot be treated as ‘assessee in default’ for not deducting tax at source and therefore, we allow the grounds of appeal filed by the assessee company in this regard.”

The Hon’ble High Court of Karnataka in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT (2016) 383 ITR 59(Karn) held that for the purpose of deducting tax at source, the income which finally par takes character of income alone is allowable for deduction of income-tax. If the amount is not considered to be income in the hands of the deductee, the provisions of tax deduction at source would not be made applicable. The relevant paragraph of the judgment is as under: “We have examined the applicability of section 194A of the Act to the present case. Section 194A of the Act mandates the tax deductor to deduct "income-tax" on "any income by way of interest other than income by way of interest on securities". The phrase “any income" and "income-tax thereon" if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of be income-tax on that income by wav of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, section 194A(1) of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. In view

ITA No.3/Bang/2015 Page 13 of 13 of the admitted fact that interest being not paid to the payees (suppliers) being reversed in the books of account, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the payees (suppliers). It is true that in the case of Ericsson Communication Limited (supra), the Delhi High Court was dealing with the case of section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the "income chargeable under the Act". Absence of such words "chargeable to tax" under the provisions of section 194A of the Act would not empower the authorities to invoke the provisions of section 201(1) and 201(1A) of the Act ignoring the words ‘any income by way of interest. ” Respectfully following the above order, we hold that the assessee- company is not liable to deduct tax at source as no income has accrued in the hands of the payee.