+Ita 357/2014Director Of Income Tax International Taxation v. Ita 352/2014 And Connected Matters

$~6 to 46*IN THE HIGH COURT OF DELHI AT NEW DELHI Decided on : 12.01.2015 +ITA 352/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE PACKAGED POWER INC...... Respondent+ITA 353/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusM/S GE PACKAGED POWER INC...... Respondent+ITA 354/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE PACKAGED POWER INC..... Respondent+ITA 355/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE PACKAGED POWER INC...... Respondent +ITA 356/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant..... Respondent versusGE PACKAGED POWER INC. +ITA 357/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versus +ITA 364/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE NUOVO PIGNONE S.P.A...... Respondent+ITA 365/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... AppellantversusGE ENGINE SERVICES DISTRIBUTION LLC..... Respondent+ITA 366/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE ENGINE SERVICES DISTRIBUTION LLC..... Respondent+ITA 367/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE ENGINE SERVICES DISTRIBUTION LLC..... Respondent+ITA 368/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... Appellant versusGE ENGINE SERVICES DISTRIBUTION LLC..... Respondent +ITA 369/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE ENGINE SERVICES DISTRIBUTION LLC..... Respondent +ITA 370/2014 DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... Appellant versusGE ENGINE SERVICES DISTRIBUTION LLC..... Respondent +ITA 371/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versusGE ENERGY PARTS INC ..... Respondent +ITA 372/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversus ..... Appellant..... Respondent..... Appellant..... Respondent..... Appellant GE ENERGY PARTS INC +ITA 373/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversusGE ENERGY PARTS INC..... Respondent +ITA 374/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION versusGE ENERGY PARTS INC ..... Respondent +ITA 375/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versusGE ENERGY PARTS INC ..... Respondent +ITA 376/2014 DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE AIRCRAFT ENGINE SERVICES LIMITED..... Respondent ..... Appellant +ITA 377/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versusGE AIRCRAFT ENGINE SERVICES LIMITED..... Respondent +ITA 378/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE AIRCRAFT ENGINE SERVICES LIMITED..... Respondent+ITA 379/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE AIRCRAFT ENGINE SERVICES LIMITED..... Respondent +ITA 380/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... AppellantversusGE AIRCRAFT ENGINE SERVICES LIMITED..... Respondent +ITA 381/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversusGE ENGINE SERVICES MALAYSIA SDN BHD..... Respondent ..... Appellant + ITA 382/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versusGE ENGINE SERVICES MALAYSIA SDN BHD..... Respondent +ITA 383/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... Appellant versusGE ENGINE SERVICES MALAYSIA SDN BHD ..... Appellant versus GE JAPAN LTD ..... Respondent +ITA 389/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versus GE JAPAN LTD ..... Respondent +ITA 390/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversus ..... Appellant GE NUOVO PIGNONE S.P.A ..... Respondent..... Appellant..... Respondent..... Appellant +ITA 391/2014 DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversus GE NUOVO PIGNONE S.P.A +ITA 402/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversusGE ENERGY PARTS INC ..... Respondent Through : Sh. Balbir Singh, Sr. Standing Counselwith Ms. Rubal Maini, Advocate, for CIT.Sh. Sachit Jolly and Ms. Gargi Bhatt, Advocates,for the respondent. +ITA 383/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION..... Appellant versusGE ENGINE SERVICES MALAYSIA SDN BHD ..... Appellant versus GE JAPAN LTD ..... Respondent +ITA 389/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION ..... Appellant versus GE JAPAN LTD ..... Respondent +ITA 390/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversus ..... Appellant GE NUOVO PIGNONE S.P.A ..... Respondent..... Appellant..... Respondent..... Appellant +ITA 391/2014 DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversus GE NUOVO PIGNONE S.P.A +ITA 402/2014DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIONversusGE ENERGY PARTS INC ..... Respondent Through : Sh. Balbir Singh, Sr. Standing Counselwith Ms. Rubal Maini, Advocate, for CIT.Sh. Sachit Jolly and Ms. Gargi Bhatt, Advocates,for the respondent. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % 1.In these appeals under Section 260A of the Income Tax Act, 1961(hereafter referred to as “the Act”), the Revenue questions the commonorder of the ITAT dated 16.7.2013 in ITA No.6034/Del-2010 and connectedappeals, by which the order of the Commissioner of Income Tax (Appeals)(“CIT(A)”) deleting the interest levied under Section 234B, was confirmed.The Revenue argues that the substantial question of law which arises forconsideration is whether the Income Tax Appellate Tribunal (ITAT) fell intoerror in holding that the assessee could not be saddled with interest liabilityunder Section 234B of the Act. 2.Briefly, the facts are that General Electric group was manufacturingequipment relating to oil and gas, energy, transportation and aviation, forsupply to customers in India. After a survey under Section 133A at thepremises of General Electric International Operations Company Inc.(“GEIOC”), the liaison office, reassessment proceedings were initiatedagainst several entities of the GE group for assessment years (AYs) 2000-2001 till AY 2006-07, on 31.3.2008. The respondents in these appeals are 8such entities (“assessees”) i.e. GE Packaged Power Inc., GE JenbacherGmbh, Nuovo Pignone Spa, GE Engine Services Inc., GE Energy Parts Inc.,GE Aircraft Engine Services Ltd., GE Engine Services Malaysia, and GEJapan Ltd., over various AYs. The assessees filed NIL returns of income andsought reasons for reopening assessment, which were duly provided.Objections to reassessment were disposed of, and notice under Section143(2) was issued, and final assessment order was issued. The Assessing Officer (AO) found that the assessees had a permanent establishment (“PE”)in India. The taxable income of the assessees was computed by attributingsome percentage of the sale price/consideration received as profits to the PE;interest under Sections 234A and 234B of the Act was also levied. 3.The assessees appealed against the order of the AO; the CIT(A)disposed of the appeals by its order of 30.9.2010, confirming the reopeningof the assessment, the finding on existence of PEs in India, and theattribution of profits to the PEs. However, on the question of interest underSection 234B for failure to pay advance tax in terms of Sections 208 and209, the CIT(A) applied the interpretation to Section 234B of the Act, givenin Director of Income Taxv. Jacabs Civil Inc. 330 ITR 578 (Del.) anddeleted the interest, therefore, holding in favour of the assessees. Before theITAT, the Revenue argued that the position of law, as held by the SupremeCourt in CIT v. Anjum M.H. Ghaswala and Ors. (2001) 252 ITR 01, wasthat interest under Section 234B is mandatory, and that the AO is not vestedwith any discretion in that regard. The appeals by the Revenue before theITATwere dismissed, by its order of 16.7.2013, on the ground that theposition of law in Jacabs (supra) was applicable squarely, and that thejudgment sought to be relied upon by the Revenue, in Anjum M.H.Ghaswala (supra) was also considered in Jacabs(supra). The Revenue is inappeal before this Court against the said order of the ITAT. 4.The Revenue argues that the ITAT's reliance on Jacab (supra) in theimpugned order was misplaced as the proposition that interest, under Section234B, is not chargeable cannot be unqualified, because regard must be hadto the role of the assessee/payee in the non-deduction or short-deduction oftax at source. Mr. Balbir Singh for the Revenue argues that the relevance of the assessee's role was made clear in DIT – International Taxation v. AlcatelLucent USA Inc, by a Division Bench of this Court in ITA No. 327 of 2012,dated 07.11.2013, in which it was held that interest could be imposed on anassessee foreign company which denies tax liability, for non-payment ofadvance tax, because there exists a presumption that the assessee hadrepresented to the Indian payer that tax should not be deducted from theremittances made to it. In Alcatel Lucent (supra), the foreign assessee firstcontested the PE status, but later, during the appellate stage, in a volte face,admitted that it was a PE and that its income was chargeable to tax in India.In such a situation, if the payer does not deduct tax, the assessee is assumedto have played some role in the non-deduction of tax at source by the payer,and interest under Section 234B is payable by the assessee. 5.Specific reliance was sought to be placed by the revenue, on theCourt’s emphasis that an assessee claiming its income not to be taxable inIndia, unlike one that admits its tax liability from the outset, cannot arguethat it is the responsibility of the payers to deduct tax, and at the same timebenefit from the tax credit under Section 209(1)(d). It was argued that thiscase was akin to Alcatel Lucent (supra), in that the assessees had deniedtheir tax liability initially (by filing NIL returns after the Section 148 notice),and, therefore, could not take shelter under Jacabs (supra),to now argue thatthe payer had an absolute liability to deduct tax from the remittance to thenon-resident payee. The Indian payer could not possibly have beenresponsible for deducting tax from the remittances made to the assessees,under such circumstances. 6.The case of the assessees is that they are non-resident companies andthe payment received by them should have suffered a tax deduction at source, by the payer, who was required so to do by Section 195 of the Act.Placing reliance on Jacabs (supra), it is argued that the obligation upon thepayer to deduct tax at source, before making remittances to the non-residentassessee, was absolute. This was evident from the terms of pre-amendedSection 209(1)(d), by which the assessee was not liable to pay advance tax,owing to the tax credit that it was entitled to for the tax that was“deductible” at source, in computing its advance tax. In other words, incomputing its own advance tax liability, it was entitled to reduce that taxdeductible or collectible at source by the payer. The amendment of provisoto Section 209(1) in the Finance Act, 2012, prescribing that the non-resident assessee can take credit only for the amount of tax actuallydeducted by the payer, was with effect from 1.4.2012, having been madeexpressly prospective. Consequently, during the AYs in question, no interestwas leviable under Section 234B. Alcatel Lucent (supra) was sought to bedistinguished, on the ground that that decision turned on the volte face of theassessee as to whether its income was taxable in India, at the appellate stage.There being no admission here of tax liability, it is argued that the obligationrests upon the payer to deduct tax at source. Reliance was also placed onCIT v. Madras Fertilizers Ltd. [1984] 149 ITR 703 (Mad.); DIT (Int.Taxation) v. NGC Network Asia LLC 313 ITR 187 (Bom.); Sedco ForexInternational Drilling Inc. v. DCIT 264 ITR 320 (Utt.); Motorola Inc. v. DIT95 ITR 269 (Delhi SB) and Qualcomm Inc. v. ADIT, 153 TTJ 513 (Del.), forthis proposition. 7.The question that arises for consideration is whether interest should belevied on the assessee under Section 234B, on the ground of non-payment ofadvance tax. The case of the Revenue, in short, is that the position of law in Alcatel Lucent (supra) is applicable, since the assessee, having denied taxliability during reassessment, caused the payer to erroneously refrain fromdeducting tax under Section 195; it must thus suffer an interest for non-payment of advance tax. The case of the assessees on the other hand is thatthe position of law in Jacabs (supra) must apply, and that the obligation wasupon the payer to deduct tax at source before making remittances to them;the payer’s failure to do so cannot invite an interest upon the payees. 8.Section 195(1) envisages deduction of tax at source by “any personresponsible for paying” to a foreign company, “any other sum chargeable”under the provisions of the Act, at the time of credit of such income to theaccount of the payee. The Court, in Jacabs (supra), interpreted thisobligation of the payer to deduct tax as absolute, in these terms: "8. …The scheme of the Act in respect of non residents is clear.Section 195 of the Act puts an obligation on the payer, i.e. anyperson responsible for paying to a non-resident, to deduct incometax at source at the rates in force from such payments excludingthose incomes which are chargeable under the head “Salaries‟. Therefore, the entire tax is to be deducted at source which ispayable on such payments made by the payee to the non-resident.Section 201 of the Act lays down the consequences of failure todeduct or pay. These consequences include not only the liability topay the amount which such a person was required to deduct atsource from the payments made to a non-resident but alsopenalties etc. Once it is found that the liability was that of thepayer and the said payer has defaulted in deducting the tax atsource, the Department is not remedy-less and therefore can takeaction against the payer under the provisions of Section 201 of theIncome Tax Act and compute the amount accordingly. No doubt, ifthe person (payer) who had to make payments to the non-residenthad defaulted in deducting the tax at source from such payments,the non- resident is not absolved from payment of taxes thereupon.However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. Thiswould be clear from the reading of Section 191 of the Act alongwith Section 209 (1) (d) of the Act. For this reason, it would not bepermissible for the Revenue to charge any interest under Section234B of the Act." 9.To understand whether Section 234B may be had recourse to, forfailure to pay advance tax, one must understand the scheme of advance taxpayment. One obligation is imposed upon the payer of a sum to a foreigncompany, requiring a deduction of tax at source under Section 195. Asecond obligation is directly imposed upon the assessee, by requiring it tocompute its advance tax liability as stipulated under Section 209. However,a foreign company assessee that receives remittances that are attributable asbusiness profits to a PE in India, is permitted a tax credit while computingits advance tax liability under Section 209, since a tax is deductible at sourceunder Section 195.Section 209(1)(d), prior to the Finance Act, 2012, read: "Section 209. Computation of advance tax (1)The amount of advance tax payable by an assessee in thefinancial year shall, subject to the provisions of sub-sections (2)and (3), be computed as follows, namely:- a.…b.…c.… d.the income-tax calculated under clause (a) or clause (b) orclause (c) shall, in each case, be reduced by the amount ofincome-tax, which would be deductible [or collectible] at sourceduring the said financial year under any provision of this Act fromany income (as computed before allowing any deductionsadmissible under this Act) which has been taken into account incomputing the current income or, as the case may be, the total "Section 209. Computation of advance tax (1)The amount of advance tax payable by an assessee in thefinancial year shall, subject to the provisions of sub-sections (2)and (3), be computed as follows, namely:- a.…b.…c.… d.the income-tax calculated under clause (a) or clause (b) orclause (c) shall, in each case, be reduced by the amount ofincome-tax, which would be deductible [or collectible] at sourceduring the said financial year under any provision of this Act fromany income (as computed before allowing any deductionsadmissible under this Act) which has been taken into account incomputing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reducedshall be the advance tax payable:" 10.The position in law, therefore, was that the assessee was entitled to, inits computation of its advance tax liability, take a tax credit of that amountwhich was deductible or collectible, regardless of whether the amount wasactually deducted or collected. As Jacabs (supra) noted, the reason for thiswas because, advance tax is to be computed either based on the previousyear’s assessment, or on an estimate of the income to be earned that year-which is to be made much before the final assessment. There is no possibleway in which the provision could allow a tax credit of the amount deductedor collected, because the actual deduction takes place at a later point in timei.e. at the point at which the payment is actually made to the assessee. 11.This provision unsurprisingly opened the window for the assessee totake tax credit of an amount that was deductible, even if it was not actuallydeducted. There were several reasons why the amount actually deductedcould be less than the amount deductible by the payer. Despite not sufferingdeduction, the position of law permitted the assessee to take credit of theamount deductible. Of course, such amount which was not actually deductedcould later be brought to tax under Section 191. Nonetheless, in recognitionof this anomalous situation, Parliament inserted a proviso in the FinanceAct, 2012, - with prospective effect from 1.4.2012, to Section 209 (1) in thefollowing terms: 1[Provided that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shallnot, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from anyincome, if the person responsible for deducting tax has paid orcredited such income without deduction of taxor it has beenreceived or debited by the person responsible for collecting taxwithout collection of such tax.] 1[Provided that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shallnot, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from anyincome, if the person responsible for deducting tax has paid orcredited such income without deduction of taxor it has beenreceived or debited by the person responsible for collecting taxwithout collection of such tax.] 12.This Court is of the opinion that the law prior to the 2012 amendmentmust be read to prevent such anomalies from arising. With this background,this Court has to examine the applicability of the position of law in AlcatelLucent (supra). The facts in Alcatel Lucent (supra) were that the assesseewas a non-resident company which supplied some equipment to Indianconsumers, and received payment for it in the AY 2007-08. Based on thematerials found in the survey at the premises of Alcatel Lucent India Ltd.,the Indian subsidiary, the AO for Alcatel Lucent France concluded that theassessee had a PE in India. Reassessment proceedings were initiated againstthe assessee for AYs 2004-05 to 2007-08. The assessee maintained theposition that it was not liable to tax in India, as it did not have a PE in India.Consequently, it filed NIL returns. However, the AO found that a percentageof its income was taxable in India, attributable to its PE, and levied interestunder Section 234A, 234B and 234C. In the appeal to the CIT(A), theassessee claiming inter alia, first, that the computation of income, byattributing business profits to a PE, was incorrect, and second, that theinterest levied under Section 234B was incorrect, since the wholeconsideration received by it was liable to tax deduction at source underSection 195, thus precluding any advance tax liability on its part. However,it did not press the first ground in the proceedings. The CIT(A) ultimatelydeleted the interest under Section 234B, on the ground that while the non-resident assessee was liable to tax, it could not be held to be liable to advance tax, as first, the obligation was absolute upon the payer to deducttax at source, under Section 195, read with Section 201 (which permittedrecovery from the payer, as assessee-in-default, of both the tax as well asinterest, for not deducting tax) and second, whether or not any tax wasactually deducted, the assessee was allowed a tax credit of that amount oftax that was deductible or collectible at source, by the pre-amended Section209(1)(d), thus negating the assessee’s liability to pay advance tax. TheITAT, on appeal by the Revenue, confirmed the view of the CIT(A). 13.The Division Bench of this Court however, held in favour of theRevenue, reasoning: advance tax, as first, the obligation was absolute upon the payer to deducttax at source, under Section 195, read with Section 201 (which permittedrecovery from the payer, as assessee-in-default, of both the tax as well asinterest, for not deducting tax) and second, whether or not any tax wasactually deducted, the assessee was allowed a tax credit of that amount oftax that was deductible or collectible at source, by the pre-amended Section209(1)(d), thus negating the assessee’s liability to pay advance tax. TheITAT, on appeal by the Revenue, confirmed the view of the CIT(A). 13.The Division Bench of this Court however, held in favour of theRevenue, reasoning: "20. The other argument on behalf of the assessee that the liabilityof the payer under Section 201 is absolutely different from theliability of the non-resident assessee under Section 234B need notbe examined and for the purpose of the present case it would notmake any difference, on account of the peculiar facts of thepresent case. It may be recalled that the argument put forth by therevenue before the Income Tax Appellate Tribunal was that at thetime of the receipt of monies from India, the assessee took the pleathat it did not have any PE in India and, therefore, the paymentwas not chargeable to tax in India, with the consequence thatSection 195(1) was not applicable, whereas in the appeals beforethe CIT (Appeals), a contradictory stand was adopted by theassessee, by accepting the fact that it had a PE in India and byadmitting that the income earned in India was chargeable to tax. Itwas further argued by the revenue that such a contradictory pleacannot be permitted to be taken by the assessee. It was pointed outthat consistent with the stand taken in the return, the assesseewould have told the Indian payer that no tax should be deductedfrom the remittance and it was, therefore, not open to the assessee,merely because at the first appeal stage it chose not to contest theassessment of the income attributable to the Indian PE, to turnaround and say that since it has now accepted its liability to paytax on the Indian income, it was for the Indian payers to have deducted the tax and if they had not done so the assessee cannotbe held liable for the interest.This argument of the revenue wasrejected by the Tribunalon the ground that there was no materialin support of the plea that the assessee represented to the Indianpayers not to deduct tax, nor did any such facts or circumstancesemerged from the impugned orders. deducted the tax and if they had not done so the assessee cannotbe held liable for the interest.This argument of the revenue wasrejected by the Tribunalon the ground that there was no materialin support of the plea that the assessee represented to the Indianpayers not to deduct tax, nor did any such facts or circumstancesemerged from the impugned orders. 21. We are unable to uphold this part of the decision of theTribunal. It must be remembered that in the note appended to thereturn the assessee was quite categorical in denying its liability tobe assessed in India. It relied on the double taxation avoidanceagreement between India and USA and pointed out that there wasno permanent establishment in India. It further stated that thetelecom equipments were sold outside India and the paymentswere also received outside India and thus the assessee did nothave any taxable presence in India so as to be liable for tax on itsIndian income. If this was the stand of the assessee, it is notimpermissible or unreasonable to visualise a situation where, theassessee would have represented to its Indian telecom dealers notto deduct tax from the remittances made to it. On the contrary itwould be surprising if the assessee did not make any suchrepresentation; such a representation would only be consistentwith the assessee's stand regarding its tax liability in India.Moreover, no purpose would have been served by the assesseetaking such a categorical stand regarding its tax liability in Indiaand at the same time suffering tax deduction under Section 195(1).Therefore, in our opinion, even though there may not be anypositive or direct evidence to show that the assessee did make arepresentation to its Indian telecom dealers not to deduct tax fromthe remittances, such a representation or informal communicationof the request can be reasonably inferred or presumed. TheTribunal ought to have accorded due weightage to the strongpossibility or probability of such a request having been made bythe assessee to the Indian payers since otherwise the denial of itstax liability on its Indian income would have served little purposefor the assessee. … 23. The Tribunal, keeping in mind the above observations,underlined by us, ought to have drawn the inference that theIndian payers did not deduct the tax under Section 195(1) becauseof the request made by the assessee, consistent with its stand thatit was not liable to be taxed in India." [emphasis added] 14.The Court went on to state in para 25: "25. …It is open to the assessee to deny its liability to tax in Indiaon whatever grounds it thinks fit and proper. Having denied its taxliability, it seems unfair on the part of the assessee to expect theIndian payers to deduct tax from the remittances. It is also open tothe assessee to change its stand at the first appellate stage andsubmit to the assessment of the income. When it does so, allconsequences under the Act follow, including its liability to payinterest under Section 234B since it would not have paid anyadvance tax.Such liabilities would arise right from the time whenthe income was earned. Advance tax was introduced as a PAYEScheme - "pay as you earn". It is not open to the assessee, afteraccepting the assessment at the first appellate stage to claim thatthe Indian payers ought to have deducted the tax irrespective ofthe fact that the assessee itself claimed the Indian income to be nottaxable. We can understand an assessee who admits its taxliability right from the beginning to contend that it was theresponsibility of the payers to deduct the tax and if they did not,even then the tax which ought to have been deducted by themshould be set off against the assessee's advance tax liabilities." [emphasis added] [emphasis added] 15.Apparently, it is this part of the decision that the Revenue seeks torely upon, in arguing that the view in Alcatel Lucent (supra) did not turn onthe volte face by the assessee as to its PE status, but instead on the fact that,at the time of assessment, the assessee denied its tax liability altogether. ThisCourt, upon consideration, is of the view that the fact that was central to thedecision of this Court in Alcatel Lucent (supra) is the assessee’s initial denialof PE status, and consequently of its tax liability, that was aggravatedby its subsequent volte face by way of its admission that it was a PE liable to tax inIndia. This resulted in the Court’s view that the assessee had played a role ininfluencing the payer’s non-deduction of tax at source, and was thusrequired to compensate for such a volte face, by paying interest underSection 234B. 16.This Court respectfully cannot apply the view taken in Alcatel Lucent(supra) to this case. This is because if the payer deducts tax at source onlywhen the assessee admits tax liability, then deductions would not be made incases where the assessee either falsely or under a bona fide mistake deniestax liability. Tax obligations cannot be founded on assertions of interestedparties. In such cases, the payer’s obligation to deduct tax would depend onthe payee’s opinion of whether it is liable to tax, which may differ from itsactual liability to tax as determined by the A.O’s final order. This effectivelyauthorizes the assessee and the payer to contract out of the statutoryobligation to deduct tax at source, which in this case, is located in Section195(1). Surely this could not be the Parliamentary intent. If such were thecase, there would have been no need to treat the payer as an assessee-in-default for failure to deduct tax at source, under Section 201.This Court isthus in agreement with the position of law in Jacabs (supra), that theobligation of the payer to deduct tax is absolute. 17.The implication of an absolute obligation upon the payer to deduct taxat source under Section 195(1) is that it becomes the responsibility of thepayer to determine the amount it ought to deduct from the remittance to bepaid to the assessee, towards tax. This determination would depend directlyon the income of the assessee that is taxable in India on account of being attributable to its PE in India. That this determination is the responsibility ofthe payer is provided for, in the statute, in Section 195(2), which reads: (2)Where the person responsible for paying any such sumchargeable under this Act other than salary to a non-residentconsiders that the whole of such sum would not be incomechargeable in the case of the recipient, he may make anapplication to the Assessing Officer to determine, by general orspecial order, the appropriate proportion of such sum sochargeable, and upon such determination, tax shall be deductedunder sub-section (1) only on that proportion of the sum which isso chargeable.chargeable under this Act other than salary to a non-residentconsiders that the whole of such sum would not be incomechargeable in the case of the recipient, he may make anapplication to the Assessing Officer to determine, by general orspecial order, the appropriate proportion of such sum sochargeable, and upon such determination, tax shall be deductedunder sub-section (1) only on that proportion of the sum which isso chargeable. Thus, the assessee’s liability to tax does not depend on its own view of itsPE status, or its admission or denial of tax liability. If an assessee files NILreturns at the stage of assessment, and maintains that it is not liable to tax inIndia, the payer is obliged to apply to the AO to determine what portion, ifany, of its remittance to the assessee, is liable to be deducted at sourcetowards tax. Thus, the assessee’s liability to tax does not depend on its own view of itsPE status, or its admission or denial of tax liability. If an assessee files NILreturns at the stage of assessment, and maintains that it is not liable to tax inIndia, the payer is obliged to apply to the AO to determine what portion, ifany, of its remittance to the assessee, is liable to be deducted at sourcetowards tax. 18.The view of this Court finds confirmation in the position of law as itstands at present, after the Finance Act, 2012; should a situation akin to thatin Alcatel Lucent (supra) arise, the payer would be treated as the assessee-in-default according to Section 201, and the payee/assessee would not bepermitted a tax credit under the proviso in Section 209(1)(d). Clearly, theanomaly of an assessee denying tax liability (whether under a bona fidemistake or by deceit), thereby not suffering a tax deduction at source, andstill being permitted a tax credit for the tax deductible, is remedied after theFinance Act, 2012. 19.Alcatel Lucent (supra), in any event, can be distinguished on theground that the Court was persuaded to confirm the levy of interest under Section 234B, only on account of the equities that needed to be balanced inthose peculiar facts, in favour of taxability. This is evident from thefollowing words of the Court: "26. It further seems to us inequitable that the assessee, whoaccepted the tax liability after initially denying it, should bepermitted to shift the responsibility to the Indian payers for notdeducting the tax at source from the remittances, after leadingthem to believe that no tax was deductible. The assessee must takeresponsibility for its volte face. Once liability to tax is accepted,all consequences follow; they cannot be avoided. After havingaccepted the liability to tax at the first appellate stage, it is unfairon the part of the assessee to invoke section 201 and point fingersat the Indian payers. The argument advanced by the learnedcounsel for the assessee that the Indian payers failed to deduct taxat their own risk seems to us to be only an argument ofconvenience or despair. As we have pointed out earlier, it isdifficult to imagine that the Indian telecom equipment dealers ofthe assessee would have failed to deduct tax at source except onbeing prompted by the assessee. It may be true that the generalrule is that equity has no place in the interpretation of tax laws.But we are of the view that when the facts of a particular casejustify it, it is open to the court to invoke the principles of equityeven in the interpretation of tax laws. Tax laws and equity neednot be sworn enemies at all times. The rule of strict interpretationmay be relaxed where mischief can result because of theinconsistent or contradictory stands taken by the assessee or eventhe revenue. Moreover, interest is, inter alia, compensation for theuse of the money. The assessee has had the use of the money,which would otherwise have been paid as advance tax, until itaccepted the assessments at the first appellate stage. Where therevenue has been deprived of the use of the monies and therebyput to loss for no fault on its part and where the loss arose as aresult of vacillating stands taken by the assessee, it is not expectedof the assessee to shift the responsibility to the Indian payers. Weare not to be understood as passing a value-judgment on theassessee's conduct. We are only saying that the assessee shouldtake responsibility for its actions." [emphasis added] This Court finds that no need is made out in these facts to balance anyequities in these facts, as the assessee has not vacillated in its stand as to theexistence of a PE in India or otherwise. In any event, as observed earlier, theposition of law itself requires that the tax be deducted at source, whatevermay be the assessee’s stance, failing which the payer is treated as anassessee-in-default under Section 201, and the payee is required to dischargeits liability to pay the tax that was not deducted under Section 191. [emphasis added] This Court finds that no need is made out in these facts to balance anyequities in these facts, as the assessee has not vacillated in its stand as to theexistence of a PE in India or otherwise. In any event, as observed earlier, theposition of law itself requires that the tax be deducted at source, whatevermay be the assessee’s stance, failing which the payer is treated as anassessee-in-default under Section 201, and the payee is required to dischargeits liability to pay the tax that was not deducted under Section 191. 20.This court also notices that the Madras High Court decision inMadras Fertilizers Ltd. (supra) and that of the Uttarakhand High Court inSedco (supra) was considered and affirmed by the Bombay High Court inDirector International Taxation v NGC Network Asia LLC [2009] 313 ITR187(Bom) that "We are clearly of the opinion that when a duty is cast on thepayer to pay the tax at source, on failure, no interest can be imposed on thepayee-assessee." An important decision is that of the Karnataka High Courtin Commissioner of Income Tax v Samsung Electronics Co Ltd. 2012 (345)ITR 494 (Kar), which also considered the same issue, i.e. the obligationunder Section 195 (1). The High Court in the first instance had rejected theRevenue'sappeal;theSupremeCourtremittedthematter-fordetermination as to whether income by way of royalty had been made out inthe facts of the case. The High Court decision first set out the order of theSupreme Court inter alia, as to the nature of obligation cast upon the payerunder Section 195: "While remanding the matter, Hon'ble Supreme Court has madecertainobservationswhileanalysingtheprovisionsof Section 195 of the Act as follows: "While remanding the matter, Hon'ble Supreme Court has madecertainobservationswhileanalysingtheprovisionsof Section 195 of the Act as follows: "7. Under Section 195(1), the tax has to be deducted at sourcefrom interest (other than interest on securities) or any other sum(not being salaries) chargeable under the I.T. Act in the case ofnon-residents only and not in the case of residents. Failure todeduct the tax under this Section may disentitle the payer to anyallowanceapartfromprosecutionunder Section276B.Thus, Section195imposes a statutory obligation on any personresponsible for paying to a non-resident, any interest (not beinginterest on securities) or any other sum (not being dividend)chargeable under the provisions of the I.T. Act, to deduct incometax at the rates in force unless he is liable to pay income taxthereon as an agent. Payment to non-residents by way of royaltyand payment for technical services rendered in India are commonexamples of sums chargeable under the provisions of the I.T. Actto which the aforestated requirement of tax deduction at sourceapplies. The tax so collected and deducted is required to be paidto the credit of Central Government in terms of Section200of theI.T. Act read with Rule 30 of the I.T. Rules, 1962. Failure todeduct tax or failure to pay tax would also render a person liableto penalty under Section201read with Section221of the I.T. Act.In addition, he would also be liable under Section201(1A) to paysimple interest at 12 per cent per annum on the amount of such taxfrom the date on which such tax was deductible to the date onwhich such tax is actually paid. The most important expressionin Section 195(1) consists of the words "Chargeable under theprovisions of the Act". A person paying interest or any other sumto a non-resident is not liable to deduct tax if such is notchargeable to tax under the I.T. Act. For instance, where there isno obligation on the part of the payer and no right to receive thesum by the recipient and that the payment does not arise out ofany contract or obligation between the payer and the recipient butis made voluntarily, such payments cannot be regarded as incomeunder the I.T. Act. It may be noted that Section 195 contemplatenot merely amounts, the whole of which are pure incomepayments, it also covers composite payments which has an elementof income embedded or incorporated in them. Thus, where anamount is payable to a non-resident, the payer is under anobligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to theappropriate proportion of income chargeable under the Actforming part of the gross sum of money payable to the non-resident.Thisobligationbeinglimitedtotheappropriateproportion of income flows from the words used in Section 195(1),namely, "chargeable under the provisions of the Act". It is for thisreason that vide Circular No. 728 dated October 30, 1995 theCBDThasclarifiedthatthetaxdeductorcantakeintoconsideration the effect of while deducting TAS. It may also benotedthat Section 195(1) isinidenticaltermswith Section 18(3B) of the 1922 Act, In CIT v. Cooper Engineering(MANU/MH/0040/1967: 68 ITR 457) it was pointed out that ifthe payment made by the resident to the non-resident was anamount which was not chargeable to tax in India, then no tax isdeductible at source even though the assessee had not made anapplicationunder Section 18(3B) (now Section 195(2) oftheI.T.Act). The application of Section 195(2) pre-supposes that the personresponsible for making the payment to the non-resident is in nodoubt that tax is payable in respect of some part of the amount tobe remitted to a non-resident but is not sure as to what should bethe portion so taxable or is not sure as to the amount of tax to bededucted. In such a situation, he is required to make anapplication to the ITO (TDS) for determining the amount. It is onlywhen these conditions are satisfied and an application is made tothe ITO (TDS) that the question of making an order underSection 195(2) will arise. In fact, at one point of time, there was aprovision in the I.T. Act to obtain a NOC from the Department thatno tax was due. That certificate was required to be given to RBIfor making remittance. It was held in the case of CzechoslovakOceanShippinglnternationalJointStockCompany v.ITO MANU/WB/0143/1970:81ITR162(Calcutta)thatanapplication for NOC cannot be said to be an applicationunder Section 195(2) oftheAct.Whichdecidingthescopeof Section 195(2) it is important to note that the tax which isrequired to be deducted at source is deductible only out of thechargeable sum. This is the underlying principle of Section195.Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well asthe provisions of DTAA are also relevant, while applying tax deductionatsourceprovisions.ReferencetoITO(TDS)under Section 195(2) or 195(3) either by the non-resident or bythe resident payer is to avoid any future hassles for both residentaswellasnon-resident.Inourview, Sections 195(2) and 195(3) aresafeguards.Thesaidprovisions are of practical importance. This reasoning of ours isbased on the decision of this Court in Transmission Corporation(supra) in which this safeguard. From this it follows that where aperson responsible for deduction is fairly certain then he can makehis own determination as to whether the tax was deductible atsource and, if so, what should be the amount thereof." The Supreme Court after considering the submissions of learned counselappearing for the parties regarding the validity of the order passed by thisCourt dated 24-9-2009 has observed as follows: The Supreme Court after considering the submissions of learned counselappearing for the parties regarding the validity of the order passed by thisCourt dated 24-9-2009 has observed as follows: "9. One more aspect needs to be highlighted. Section 195 falls inChapter XVII which deals with collection and recovery. ChapterXVII-B deals with deduction at source by the payer. On analysisof various provisions of Chapter XVII one finds use of differentexpressions however, the expression "sum chargeable under theprovisionsoftheAct"isusedonlyin Section 195.Forexample, Section 194C casts an obligation to deduct TAS in respectof"anysumpaidtoanyresident".Similarly, Sections 194EE and194Finter alia provide for deductionof tax in respect of "any amount" referred to in the specifiedprovisions. In none of the provisions we find the expression "sumchargeable under the provisions of the Act", which as statedabove, is an expression used only in Section195(1). Therefore,this Court is required to give meaning and effect to the saidexpression. It follows, therefore, that the obligation to deduct TASarisesonlywhenthereisasumchargeableundertheAct. Section195(2)isnotmerelyaprovisiontoprovideinformation to the ITO(TDS). It is a provision requiring tax to bededucted as source to be paid to the Revenue by the payer whomakes payment to a non-resident. Therefore, Section 195 has to bereadinconformitywiththechargingprovisions,ie., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195(1). Thefact that the Revenue has not obtained any information per secannot be a ground to construe Section 195 widely so as to requirededuction of TAS even in a case where an amount paid is notchargeable to tax in India at all. We cannot read Section 195, assuggested by the Department, namely, that the moment there isremittance the obligation to deduct TAS arises. If we were toaccept such a contention it would mean that on mere paymentincome would be said to arise or accrue in India. Therefore, asstated earlier, if the contention of the Department was accepted itwould mean obliteration of the expression "sum chargeable underthe provisions of the Act" from Section 195(1). While interpretinga Section one has to give weightage to every word used inthat section. While interpreting the provisions of the Income TaxAct one cannot read the charging Sections of that Act de hors themachinery Sections. The Act is to be read as an integratedcode. Section 195 appears in Chapter XVII which deals withcollection and recovery. As held in the case of C.I.T. v. Eli Lilly &Co. (India) (P.) Ltd. [MANU/SC/0487/2009: 312 ITR 225) theprevisions for deduction of TAS which is in Chapter XVII dealingwith collection of taxes and the charging provisions of the I.T. Actform one single integral, inseparable Code and, therefore, theprovisions