Beyond the Samsung judgment: An analysis by the Special Bench Tribunal Ruling in the case ITO v. Prasad Production Ltd.
In another recent judgment which put to rest the ambiguity in the interpretation of Section 195 of the Income Tax Act, 1961, a special bench constituted under section 255(3) of the Income Tax Act, 1961 ruled in favour of the assessee holding that section 195 of the said Act would apply only if the sum received was chargeable in India. Furthermore if the payer had a bona fide belief that he is not liable to tax he is under no obligation to follow the procedure in section 195 of the Act except comply with the RBI manual. The bench further held that section 195(2) was not mandatory in character as the CBDT circular had provided for an alternative procedure.
This case was similar to the recently decided Samsung case of the Karnataka High Court. The bench however after detailed analysis of the Samsung case diverted from the same stating that the Karnataka High Court had sub-silentio disregarded the CBDT Circular of July 2009 which prescribed an alternate procedure for remittance to a foreign entity without applying to the Assessing Officer for a No Objection Certificate. Further it was also per incurium as several precedents of the High courts and Supreme Court had been disregarded by the High Court.
In the present case the assessee company had been awarded a contract by the government of Andhra Pradesh to establish an IMAX theatre at Hyderabad. The assessee company entered into an agreement with IMAX ltd, Canada for the subsequent purchase, of equipment, maintenance and installation for which a certain consideration was remitted without withholding tax. The Assessing Officer concluded that the amount remitted was for the service provided by IMAX, Canada thereby qualifying it under section 9(vii) of the Act. The bench ruled that the sum remitted was auxiliary to the sale of the equipment and not independent services thereby not qualifying it under section 9. Further the Bench relied on a number of precedents and the decision in the Mahindra case whereby the pre-requisite of section 195(2) was held to be the chargeability of the sum remitted.
It is interesting to note that the Special bench debated in detail on the applicability of section 195 in consonance with the most cited Supreme Court judgments like the Transmission case; et al. It further made a detailed analysis of the binding nature of precedents for tribunals to follow keeping in mind the necessity for a thorough reasoning encompassed by different courts of law and their interpretation of the same. The bench systematically interpreted the different judgments in consonance with the principles governing tax law in India. In its considered decision it concluded that the tax payer had the first right to determine the chargeability of the sum of money being remitted, thereby enhancing the power of the tax payer.
hi avantika
ReplyDeleteIt seems the bombay high court has observed that the assessee has to make a bona fide determination and then decide whether to deduct tax at source u/s 195(1) of the IT Act. I see a problem in this. Consider a situation where an assessee does not withold tax and contents that the it was under a bona fide belief that the same was not chargeable to tax. Eventually, the revenue finds that the assesee should have deducted tax at source. Do u think under such circumstances the assessee would have the onerous task of proving that the belief of the assessee was indeed bona fide. Introducing another test of bona fide nature into 195(1) would only lead to confusion and increased litigation.