Background:
The assessee, a private limited company, carrying on the business of project and construction management entered into a management services agreement LLAH, Singapore. Under the agreement, LLAH was to provide services like administration, personnel, legal, finance and accounting information, marketing support, insurance matters, treasury management and information technology to the assessee.
LLAH filed applications under Section 197 of the Act. LLAH furnished copies of the invoices raised by them to the AO. It was contended that the consideration paid under the agreement is by way of reimbursement of actual expanses. The assessing authority issued certificates authorizing the payment without deduction of tax.
Later, the Authority issued a notice under Section 201 calling upon the assessee to show cause as to why he should not be treated, as an assessee in default under Section 201(1) and also why interest should not be levied under Section 201 (1A) as the assessee has not deducted tax as required under Section 195(1) of the Act at the time of making a credit entry.
The assessing authority held that the intention of the assessee was to get the benefit of LLAH’s expertise and experience in management services. The consideration was paid for such services.
Assessee’s contentions:
- The credit to the outstanding expanses account is not to be regarded as credit to the account of the non-resident as the income has not accrued or crystallized. No tax can be charged under Sections 4 and 5 and no tax can be deducted under Section 195 unless income accrues and that happen only when it becomes due and payable.
- When LLAH had approached the assessing authority for issue of a certificate under Section 197(1), they produced before the authorities, the invoices raised and it is their case also that what is received by them is reimbursement of the actual expenses incurred for the management services rendered. Accepting the said stand, the certificate is issued.
- Once there is a certificate under Sub-Section (2) of Section 197, no tax is liable to be deducted by the assessee.
- Though the consideration paid was for rendering managerial services and what is paid is the actual cost of such services and by way of reimbursement, the technical know how, expertise and skill is not made available under the terms of contract and therefore, primarily there is no liability to pay tax at all.
- The Tax authorities have not properly interpreted the concept of ‘make available’ in the light of the terms contained in the DTAA.
Revenue’s contentions
- The name which the parties give to the transaction which is the source of receipt and characterization of the receipt by them are of little moment, and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances.
- Services which were rendered by LLAH involved training which would clearly ‘make available technical knowledge expertise, skill, know haw’ for purposes of the assessee and hence, they fall into the category of FTS.
- Certificates issued by the assessing officer is not conclusive. In the regular assessment proceedings, it open to the assessing authority to hold that tax is liable to be paid, even though the certificate issued under Section 197 (1) is not cancelled.
HELD:
- If the assessing authority is of the view that no tax is chargeable, a certificate under section 195(2) to that effect could be issued to the person responsible for making payment. Once such a certificate is issued, there is no obligation on the part of the payer to pay tax.
- In view of the fact that the word used is “shall” in section 197, if the recipient were to obtain such a certificate and make it available to the payer, then, the payer shall not deduct tax at source.
- Even if tax is payable under the Act, the payer cannot be treated as an assessee in default.
- If in a regular assessment, an order is passed holding that the said income is liable to tax, the issue of such a certificate under the aforesaid provision would not come in the way of levying and collecting tax from the recipient. However, the payer cannot be treated as an assessee in default and he cannot be proceeded with
- However, the said certificate is tentative or provisional or interim in nature. It does not have any effect beyond providing immunity under Section 201 of the Act.
- Assessing Authority while passing an assessment order did not find fault with the assessee in not complying with the requirement of Section 195 and consequently, did not disallow the said expenditure. The jurisdictional Commissioner did not initiate any revisional proceedings to interfere with the said order.
- Therefore, the entire proceeding initiated on that basis is unsustainable, illegal and the Tribunal was justified in setting aside the same.