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CHEMINOR DRUGS LTD. vs. INCOME TAX OFFICER ITAT, HYDERABAD A BENCH O.K. Narayanan, A.M. & H.S. Sidhu, J.M. ITA Nos. 10 & 11/Hyd/1996; Asst. yrs. 1993-94 & 1994-95 22nd December, 1999 (2001) 70 TTJ (Hyd) 936 : (2001) 76 ITD 37 (Hyd) Counsel appeared R. Ganesan, for the Appellant : C.P. Rama Swami, for the Respondent Order O.K. NARAYANAN, A.M. : These two appeals are filed by the assessee-company. These two appeals arise out of the orders passed by the ITO, Ward 5(6)(TDS), Hyderabad, under s. 201 r/w s. 195 of the IT Act, 1961, dt. 16th March, 1995. The ITO treated the assessee-company as an assessee in default for its failure to deduct tax from the payments made to nonresidents during the financial years 1992-93 and 1993-94. 2. The assessee is a public limited company having its registered office at Hyderabad. The assessee-company has been carrying on export sales to different countries including USA. In the course of its carrying on of the business, the assessee-company had made certain remittances by way of legal charges to its Attorneys in USA and also to various non-residents towards commission against export sales. On perusal of the Annual Report and accounts of the assessee-company for the financial years 1992-93 and 1993-94, the ITO found that the above foreign remittances were made by the assessee-company without deducting income-tax at source. On confrontation from the ITO for non-deduction of income-tax, the assessee contended that the remittances made by the assessee were not chargeable under the IT Act and, therefore, the company was not under any legal obligation to deduct incometax as provided in s. 195 of the IT Act. The ITO held that the remittances made by the assessee-company under both the heads were chargeable to income-tax in India and, therefore, the assessee was duty-bound to deduct income-tax from the remittances made by it. Regarding the payments of commission made to various nonresidents, the ITO held that the payments are covered by s. 5(2)(a). He found that the remittances towards sales commission were made to the non-residents by way of DDs and TTs. The assessee-company purchased the DDs from State Bank of India in Hyderabad and sent the DDs to the non-residents outside India through the medium of couriers. In other cases, the assessee-company remitted the money into their bank accounts in Hyderabad and telegraphic transfers were made to the branches of the bank abroad. The ITO held that in all these cases it has to be held that the remittances were received by the non-residents in India by virtue of the deeming provisions contained in s. 5(2)(a). According to the ITO, the bank and the couriers acted as agents of the non-residents and received the remittances regarding commission within India on behalf of those non-residents and, therefore, these remittances are deemed to be received in India on behalf of these non-residents. In respect of the legal fees remitted to Attorneys in USA, the ITO held that the remittances shall be deemed to be income accruing or arising in India by virtue of s. 9(1)(vii)(b). According to the ITO, the assessee has made the remittances to the Attorneys in USA towards fees payable for technical services and Expln. 2 provided under that section states that "technical services" include "consultancy services" also. According to the ITO, the services rendered by the attorneys is USA were in the nature of consultancy services and, therefore, the fees paid for those services will be deemed as income accruing or arising in India.

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Apart from the findings on merits as discussed above, the ITO also relied on the decision of the Calcutta High Court in the case of CIT vs. Blackwood Hodge Ltd. (1971) 81 ITR 807 (Cal) where the Court has held that the order passed under s. 201 of the IT Act, is not an assessment order and, therefore, if the ITO establishes prima facie that the assessee was liable to deduct tax at source and if the assessee does not deduct the tax so, he becomes an assessee in default and accordingly the ITO would be justified in initiating proceedings under s. 201 of the IT Act. On the basis of a detailed order passed by the ITO, he held that the remittances made by the assesseecompany were covered by s. 195 and, therefore, the company was liable to deduct tax and as tax was not deducted, the assessee was held to be an assessee in default. On the basis of the above finding, the ITO passed orders under s. 201 directing the assessee-company to pay the tax as per his orders. The orders passed by the ITO were taken in first appeal before the CIT(A)-II, Hyderabad. The learned CIT(A) discussed the issue at length in his order running to 12 pages and found that the ITO was justified in passing the impugned orders under s. 201 of the IT Act. On going through the various case laws on the subject, the learned CIT(A) held that the income derived by the Attorneys in USA by way of legal fees from the assessee was liable to be considered as an income accrued or arisen in India under the provisions of s. 9(1)(vii)(b) and the assesseecompany was liable to deduct tax at source therefrom under s. 195 of the IT Act at the time of remittance. Likewise, in the case of commission payments, the learned CIT(A) held that the commission payments were received or deemed to have been received in India by virtue of the provisions of s. 5(2)(a) and they were liable to tax in India and consequently the liability to deduct tax at source was equally existing by way of a statutory obligation. Therefore, he held that the ITO was justified in treating the assessee-company as an assessee in default and thereby raising the demand as provided in s. 201 of the IT Act. It is against the above order of the CIT(A) that the assessee-company has filed these two appeals before the Tribunal. The issues involved in both the appeals are common and the grounds are also common. Therefore, these appeals are heard together and disposed of together in this consolidated order. The assessee-company has raised the following grounds in the appeals before us : "1. On the facts and in the circumstances of the case, the learned CIT(A) erred in dismissing the appeal of the appellant and in upholding the order under the provisions of s. 201 r/w s. 195 of the IT Act, 1961, passed by the ITO, Hyderabad. The learned CIT(A) erred in not appreciating the contentions urged before him and in rejecting the contentions urged before him in regard to the liability of the appellant to deduction tax; (a) with respect to the fees paid to the attorneys, admittedly for services rendered by them wholly outside India, and (b) with respect of the commission paid to the sales agents for the services rendered by them in respective countries in which they were situated. The learned CIT(A) erred in holding that insofar as the fees paid to the attorneys is concerned, the provision of s. 9(1)(vii)(b) of the IT Act, 1961, having regard to the nature of services rendered by the attorneys, the learned CIT(A) ought to have held that the provisions of the said section have no application and ought to have held that no part of the fees paid to the attorneys accrued in India or can be deemed to have accrued in India, and consequently, the CIT(A) ought to have held that there was no liability to deduct tax with respect of the said amount under the provisions of s. 195 of the Act. The learned CIT(A) erred in holding that the provisions of double taxation avoidance agreement between India and United States of America did not apply to the facts of the case. In particular, the learned CIT(A) grossly erred in holding that provisions of Art. 15 of the Double Taxation Avoidance Agreement was not applicable on the ground that the attorneys admittedly did not perform any services in India. The CIT(A) ought to have appreciated that the case of rendering of technical services outside India would have been worse than the case where technical services were rendered in India, and if the latter itself was exempt, then there was no ground to tax the former. The learned CIT(A) erred in holding that commission payments made to foreign concerns were to be subject to deduction of tax at source under s. 195 of the Act. The learned CIT(A) erred in not following Circular No. 17 dt. 17th July, 1953, cited before.

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The learned CIT(A) erred in not applying ratio of judgment of the Supreme Court in the case of CIT vs. Toshoku Ltd. (1980) 19 CTR (SC) 192 : (1981) 125 ITR 525 (SC). On a proper reading of the circular in the judgment of the Supreme Court, the agreement entered into between the appellant and its foreign agents, the CIT(A) ought to have held that no part of the commission either accrued in India or deemed to have accrued in India, the agents are not liable to be taxed in India and therefore, there is no liability to tax thereon under the provisions of the Act." We heard both sides in detail. At the time of hearing, the learned chartered accountant appearing for the appellant requested for admission of additional evidence as submitted by him in paper book No. 1 filed before us. When the admissibility of additional evidence was considered, the learned Departmental Representative strongly objected to the admission of the additional evidence and submitted that many of the papers now sought to be adduced as additional evidence were not filed before the ITO in spite of effective opportunity given to the assessee. After hearing extensive arguments from both sides on this point, we found that the entire material now produced by the appellant as additional evidence cannot be considered at the second appeal stage. On a consensus arrived at in the Court, we were of the view that copies of three agreements out of ten filed by the assessee could be brought on record before the Tribunal as evidence. Those agreements relate to (i) Shri P.V. Rama Rao, (ii) M/s ReddyCheminor Inc., USA, and (iii) M/s Carlos Vallecilla, B & CIA, Columbia. The appellant has accordingly submitted a revised paper book which is placed on record. Shri Ganesan, learned chartered accountant appearing for the appellant, argued on the two issues involved in these appeals at length. He argued that the legal services rendered by the attorneys in USA was in the context of a specific hurdle faced by the assessee in the course of its export business and does not amount to any consultancy so as to attract the provisions of Expln. 2 under s. 9(1)(vii)(b). If at all, for arguments sake, it is deemed as consultancy services, still the fee was paid for the services utilised by the assessee for the business carried on by the assessee outside India and, therefore, it could not be treated as income deemed to accrue or arise in India. In the case of other remittances towards commission, the learned chartered accountant argued that as per the terms of the agreement, the commission had to be paid in US dollars in USA and, therefore, the remittances of those amounts by way of TT or DD shall be deemed to have been paid in USA itself, especially in view of the decision of the Supreme Court in the case of CIT vs. Patney & Co. (1959) 36 ITR 488 (SC). He touched upon all the aspects of the issues extensively relying on a number of case laws. He relied on the decision of the Hon'ble Supreme Court in the cases CIT vs. Ahmed Bhai Umarbhai & Co. (1950) 18 ITR 472 (SC), Bhogilal Laher Chand vs. CIT (1954) 25 ITR 523 (Bom), Emil Webber vs. CIT 1978 CTR (Bom) 296 : (1978) 114 ITR 515 (Bom), Punjab Steel Stockholders Syndicate Ltd. vs. CIT (1980) 16 CTR (P&H) 45 : (1980) 125 ITR 519 (P&H), Electronics Corpn. of India Ltd. vs. CIT & Anr. (1990) 77 CTR (SC) 16 : (1990) 183 ITR 43 (SC), Barendra Prasad Ray & Ors. vs. ITO & Ors. (1981) 22 CTR (SC) 157 : (1981) 129 ITR 295 (SC). He also relied on the decisions in G.V.K. Industries Ltd. & Anr. vs. ITO & Anr. (1997) 228 ITR 564 (AP), Shiva Narayana Sharma vs. CIT (1950) 18 ITR 844 (All) and Gurdas Singh vs. CIT (1964) 54 ITR 259 (P&H) and substantially on the decision of the Tribunal, Hyderabad Bench, in Dr. Reddys Laboratories vs. ITO (1996) 56 TTJ (Hyd) 38 : (1996) 58 ITD 104 (Hyd). Shri Rama Swami, learned Departmental Representative, on the other hand, argued that the issues have been rightly adjudicated by the lower authorities. He argued that only by virtue of some export sales it could not be held that the assessee was carrying on a business outside India so as to keep away from liability arising out of s. 9. He argued that the services rendered by the attorneys in USA, as discernable from the records of the case, were in the nature of consultancy services and, therefore, the fees paid by the assessee have been rightly held by the ITO as deemed to accrue or arise in India. The respect of payment of sales commission through bank DDs and TTs, the learned Departmental Representative heavily relied on the decision of the Hon'ble Supreme Court in CIT vs. Ogale Glass Works Ltd. (1954) 25 ITR 529 (SC). We have considered the rival submissions. The assessee-company had made foreign exchange remittances of fees to its attorneys in USA and to various other non-residents as export sales commission during the relevant financial years 1992-93 and 1993-94. Any person responsible for paying an amount to a non-resident shall, at the time of crediting of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. This is the general scheme of things provided in s. 195 of the IT Act, 1961. Sub-s. (1) of s. 195 makes it obligatory for every person in India to deduct tax at source at the rates specified in the relevant Finance Act. The provisions of s.

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195(1) apply where the payment is that of "any other sum chargeable under the provisions of this Act", not being salary income or interest on securities. The test for making deduction of income-tax is that the relevant payment should be chargeable under the provisions of the IT Act. Where the payer considers that the whole of the sums specified in s. 195(1) would not be chargeable in the hands of the recipient, he can make an application to the AO to determine the appropriate portion of the sum so chargeable. Once the AO determines such appropriate portion of the sums so chargeable, the deduction of income-tax at source under s. 195 (1) is only to be made on that portion of the sum which is to be so determined. This is provided in sub-s. (2) of s. 195. Likewise, sub-s. (3) of s. 195 enables any non-resident in receipt of such payments to make an application to the AO for a certificate entitling the non-resident to receive payments specified in s. 195(1) without deduction of tax at source. On satisfying on the facts and circumstances of the case, the AO may authorise payment without any deduction of tax at source. 12. The above provisions contained in sub-ss. (1), (2) and (3) of s. 195 are closely inter-connected and are complementary to each other and, therefore, have to be read together and as whole. The duty to deduct tax under s. 195(1) is an essential liability cast by statute on a person who is making payments to non-residents. A person responsible for making payments to a non-resident, other than interest on securities and income chargeable under the head "salaries" has necessarily to examine the liability to deduct tax at source. He has to satisfy himself that the payments made by him are not such sums which are chargeable under the provisions of the IT Act. The liability to deduct tax at source arises only in the case of such payments where those payments are in the nature of income chargeable under the IT Act. The provisions of s. 195(1) may create an avoidable inconvenience in such cases where the payments made by a person are not such amounts which are chargeable to income-tax. It is in order to avoid such inconvenience to a person that sub-s. (2) of s. 195 has been provided. Where the person making such payments to a non-resident thinks that the payments made by him to the non-resident would not be income chargeable in the case of the recipient, he can make an application to the AO to determine the issue and decide whether tax is to be deducted at source or not and if it is to be deducted, to what extent. The facility of consulting the AO is available not only to the payer but also to the recipient non-resident who can request for the issue of a certificate under the provisions of s. 195(3). Deduction of tax at source is excluded from such payments to a non-resident, in the statute itself, like interest on securities or salary income. In all other cases, the person making the payment has a duty to deduct tax at source. For the purpose of deciding whether any payment is in the nature of income chargeable or not, law provides an opportunity to the payer to approach the AO under sub-s. (2) of s. 195. The consultation provided under sub-s. (2) of s. 195 is, therefore, to be mandatorily followed by the person making the payment to the non-resident; he is otherwise liable to deduct tax at source under the provisions of sub-s. (1). It is thus clear that the person making the payments to a nonresident cannot take a unilateral decision that the payments made by him are not sums chargeable to income-tax and, therefore, he could make the payments without deduction of tax at source, without the concurrence of the AO as provided in sub-s. (2) of s. 195. We find that the provisions of s. 195(2) are not provisions of convenience which the assessee may use or may not use. If a person wants to make payments to a non-resident and those payments are not explicitly declared exempt by the provisions of the IT Act, the person making the payments has to deduct tax at source and he can free himself of the liability to deduct tax at source only if he gets the concurrence of the AO under sub-s. (2) of s. 195. If the person making the payments has not fulfilled his obligations under the provisions of sub-ss. (1), (2) or (3) of s. 195 as the case may be, he becomes an assessee in default and the consequences of the provisions of s. 201 will follow. In the present case, the assessee has not complied with any of the provisions contained in sub-ss. (1), (2) and (3) of s. 195 as stated above. The assessee denied its liability and argued its case only at the stage when the assessee was proceeded against under s. 201 of the IT Act. If that were the proper course envisaged in law, sub-s. (2) of s. 195 becomes redundant and any person can adhere to or avoid the compliance of s. 195(2) according to his convenience and belief. One of the cardinal principles of statutory construction is that no section or provision incorporated in a statute is redundant or irrelevant or ornamental. Every section or provision of a statute is active, relevant and essential in subserving the intention and objects of the legislation of that statute. The scheme of provisions arranged in s. 195 are to be construed as a whole. If recourse to sub-s. (2) is not made and that subsection is made redundant at the choice of the person liable to deduct tax at source, then sub-s. (1) of s. 195 also becomes redundant and an assessee can get away without deducting tax at source. The wholeness of various sub-

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sections of s. 195 is all the more important because the provisions relate to collection and recovery of tax arranged under Chapter VII-D of the IT Act. The scheme is to deduct the tax during the financial year itself. Particularly, the intention of s. 195 is to collect the tax before money is remitted to a non-resident. The collection of tax in advance is made subject to the adjustments to be made later on in the regular course of assessment. Therefore, the provisions contained in s. 195 are in the nature of urgent provisions. 15. Therefore, the liability cast upon a person to deduct tax at source under s. 195 is a strict liability. He has to discharge that liability by deducting tax at source under sub-s. (1) of s. 195. If any person wants to come out of the liability provided under s. 195(1) on the ground that the payments made to the non-residents are not in the nature of sums chargeable under the provisions of the Act, then he has to make an application to the AO under s. 195(2); or the non-resident recipient should obtain an exemption certificate issued by the AO under sub-s. (3) of s. 195. In other words, the liability cast under s. 195(1) can be discharged other than by way of deducting tax, only by taking recourse to sub-s. (2) or sub-s. (3) of that section. 16. In view of the legal position as discussed above, we are in agreement with the learned ITO that the order under s. 201 of the IT Act is not an assessment order and, therefore, the nature of enquiry and the nature of adjudication of the issue relating to deduction of tax at source under s. 195(1) shall necessarily be summary and generally peremptory in nature. This is mainly because the ITO is acting as a tax collector under the provisions relating to collecting tax in advance by way of TDS during the financial year itself. In the scheme of things, we have to find whether a person making payments to non-residents, other than those payments which are specifically exempted under s. 195(1), is under a statutory obligation to make an application under s. 195(2) if he is not proposing to deduct tax at source. On the question of deducting tax at source, the person making the payments can avoid the liability under s. 195(1) if and only if recourse has been made either under sub-s. (2) or under sub-s. (3) of s. 195. In such circumstances, the person making payments to a non-resident has to either deduct tax according to s. 195(1) or go by the provisions of sub-s. (2) unless the non-resident payee procures a clearance certificate from the AO under subs. (3) of s. 195. 17. In the present case before us, the assessee-company has not made any application to the ITO under s. 195(2) to determine whether the assessee was bound to deduct tax at source or not. The non-resident recipients also have not obtained a certificate of exemption from the AO under s. 195 (3). In these circumstances, the assessee should have deducted tax at source before making the remittances to the non-residents as provided in s. 195(1). The assesseecompany had not done so. Therefore, at the outset itself, it is clear that the assessee has violated the provisions of s. 195(1) and has become an assessee in default as provided in s. 201. When the assessee-company was heard by the ITO in the course of proceedings under s. 201, the assessee-company could have consolidated its position by providing appropriate evidence to the ITO. If it was the contention of the assessee-company that the remittances made by it to the non-residents were not income chargeable to Indian Income-tax as far as the recipients are concerned, the assessee-company should have produced before the ITO evidence to the effect that those nonresidents have already disclosed those receipts before the respective tax authorities or those amounts were assessed in their respective countries. If this were the case, the ITO would have been frustrated in proceeding further. In the course of proceedings under s. 201, the ITO has found that the assessee-company has not deducted tax at source as provided in s. 195(1), the assessee has not made an application to the ITO under s. 195(2) and the assessee has not produced a certificate under the provisions of s. 195(3). The assessee-company has not produced any evidence either, to prove that those payments were already subject-matter of tax in the respective countries of the non-residents, in order to enable the ITO to consider the case of the assessee afresh. Further, in the case of payments of sales commission, the assessee has not produced the agreements entered into with the concerned nonresidents even in the course of the proceedings under s. 201. 18. As a matter of fact, all the evidence which the assessee-company is said to have in its possession to prove that the remittances made by it were not in the nature of sums chargeable to tax under the provisions of the IT Act, 1961, should have been produced before the AO in the context of application to be put in before the AO under s. 195(2). Sec. 195(2) provides real opportunity to the assessee to convince the AO in the light of the evidence that may be available with the assessee that the payments made to the non-residents were not liable to be charged under the provisions of the IT Act. In the case before us, the assessee-company has not made any attempt in this direction. At the second stage when the proceedings were initiated under s. 201 also, the assessee has not

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produced the evidence before the AO so that it could establish that it was not an assessee in default. It is the AO who should necessarily be satisfied that the sums paid by the assessee-company were not liable to be taxed under the provisions of the IT Act and, therefore, the evidence should have been produced before him. It is not sufficient that the assessee makes an attempt to produce such evidence said to be in its possession at the first or second appellate stage. This is because, as we have already stated, the provisions contained in s. 195 are urgent provisions specifically meant for collecting tax during the financial year itself before the remittances are made to nonresidents. If the assessee does not choose to produce the evidence before the AO either under s. 195(2) or latest in the course of proceedings under s. 201, then the only way open for the assessee is to agitate the matter in a regular proceeding before the AO after filing the return of income as an agent of the non-residents as provided under s. 163 of the IT Act. Once the assessee-company is found to be an assessee in default, the consequences as provided in s. 201 shall invariably follow. Therefore, we find that the ITO is justified in treating the assessee-company as an assessee in default under the provisions of s. 201 and making the demand for appropriate tax from the assessee-company. On this short ground alone, we find that the ITO is justified in passing the order under s. 201, which is challenged in the appeals before us. As we have found that the ITO is justified in passing the order under s. 201 on the short ground of noncompliance by the assessee with the provisions of s. 195, we do not find it necessary to examine the various other contentions of the assessee relating to whether the payments made by the assessee were in the nature of income chargeable to tax under the IT Act, 1961, or not. Therefore, discussion on those grounds and consideration of the entire case laws relied on by the assessee and the evidence sought to be placed before us also are not found necessary. In the result, both the appeals are dismissed.

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