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DIT-I, INTERNATIONAL TAXATION Vs. ALCATEL LUCENT USA, INC.
January, 10th 2014
       THE HIGH COURT OF DELHI AT NEW DELHI
%                                Judgment delivered on: 7th November, 2013

+      ITA 327/2012, ITA 330/2012, ITA 338/2012 & ITA 339/2012

       DIT-I, INTERNATIONAL TAXATION                              .......Petitioner

                                       versus

       ALCATEL LUCENT USA, INC.                                   ......Respondent

+      ITA 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 &
       ITA 340/2012

       DIT-I, INTERNATIONAL TAXATION                              .......Petitioner

                                       versus

       ALCATEL LUCENT WORLD SERVICES INC ....Respondent

Advocates who appeared in this case:
For the Petitioner  :        Mr N. P. Sahni, Advocate.
For the Respondent  :        Mr M. S. Syali, Sr. Advocate with Mr Mayank Nagi, Ms
                             Husnal Syali, Advocates.

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR

                                    JUDGMENT

R.V.EASWAR, J


1.     These are nine appeals filed by the Revenue under Section 260A of

the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). They are

directed against the common order passed by the Income Tax Appellate




ITA Nos.327-330 & 336-340/2012                                       Page 1 of 33
  Tribunal on 21.10.2011 in ITA Nos. 3821 to 3824/de1/2011 and ITA

  Nos. 3825 to 3829/de1/2011. There are two respondents in these appeals

  (i) Alcatel Lucent USA, INC. and (ii) Alcatel Lucent World Services

  INC. In respect of the first assessee, the assessment years involved are

  2004-05 to 2007-08 and in respect of the second assessee, the assessment

  years involved are 2004-05 to 2008-09.

  2.     On 10th July, 2012 this court framed the following substantial

  question of law, common to all the appeals: -

         "Whether in the facts and circumstances of this case the
         Tribunal fell into error in holding that the assessee was not
         liable to pay interest in terms of Section 234B of the Income
         Tax Act?"
3. ITA No.327 of 2012 was taken as the lead matter by consent. The facts

  relating to this appeal may be noted in brief. The assessee-Alcatel Lucent

  USA, INC., is a tax-resident of USA and is part of the Alcatel Lucent

  Group. It supplied telecom equipments to customers in India in the year

  under consideration, which is the FYE 31.03.2006, relevant to the

  assessment year 2007-08. It would appear that the aforesaid group

  started its operations in India in 1982 in terms of an agreement with ITI

  Limited, a public sector undertaking which was engaged in the

  manufacture of telephones. Thereafter a joint venture was established




  ITA Nos.327-330 & 336-340/2012                               Page 2 of 33
with C-DOT at Chennai, besides establishing a research centre at

Bangalore. On 27.02.2009, a survey under Section 133 A of the Act was

conducted in the premises of Alcatel Lucent India Ltd., which is the

Indian subsidiary and which according to the income tax authorities

constituted the permanent establishment (PE) of the assessee in India.

The Indian subsidiary provided marketing support services to the

assessees. Based on the materials found during the survey, the assessing

officer in charge of the assessment of Alcatel - Lucent France, which

was another flagship company belonging to the same group, concluded

that the assessee had a PE in India in terms of the Double Taxation

Avoidance Agreement between India and US and was liable to tax in

India on the income earned therein. Based on these findings of the

assessing officer who was in charge of the assessment of Alcatel -

Lucent France, the assessing officer who was in charge of the

assessment of the present assessee issued notices under Section 148 of

the Act for the assessment years 2004-05 to 2007-08. It may be added

that similar reassessment notices under Section 148 were also issued to

the other assessee concerned in the present appeals, i.e. Alcatel Lucent

World Services INC. for the very same assessment years; in addition, for

the assessment year 2008-09, a notice under Section 142 (1) was also



ITA Nos.327-330 & 336-340/2012                             Page 3 of 33
issued to that company. Apparently, these notices were issued on the

ground that income chargeable to tax in India had escaped assessment.

4.     In response, both the assessees herein filed returns of income for all

the assessment years declaring "nil" income. In the returns, the following

note was appended, explaining why the assessee took the position that it

was not liable to tax in India:

       "a)     Alcatel-Lucent USA Inc. ("Alcatel Lucent Inc." or
               the Company") is a company incorporated in
               USA. It is a tax resident of USA and entitled to
               be governed by the provisions of the Double
               Taxation Avoidance Agreement between India
               and USA ("the DTAA').

       b)      Alcatel Lucent Inc. does not have any office,
               premises or other place of business in India.
               During the year under consideration, Alcatel
               Lucent Inc. supplied certain goods I equipment
               to Indian customers engaged in telecom.
               business. The sales of these goods were made
               from outside of India. The payments for the
               same were also received outside of India. In
               view of above, the Company does not have any
               taxable presence in India and hence no portion
               of its business profits is taxable in India.

       c)      The present return of income is being filed
               under protest and in pursuance to the notice
               issued under section 148 of the Indian Income-
               tax Act, 1961 ("the ;Act") by the Assistant
               Director     of  Income-tax,     Circle    -1(1),
               International Taxation, Drum Shape Building,
               I.P. Estate, New Delhi. The return is being filed



ITA Nos.327-330 & 336-340/2012                                 Page 4 of 33
               only with a view to comply with the said notice.
               The act of such compliance is not an admission
               of any sorts that Alcatel Lucent Inc. had any
               taxable income in India for the year under
               consideration. The return is being filed without
               prejudice to the Company's contention that the
               notice issued to it is without jurisdiction and
               bad in law. The return is being filed without
               prejudice to the legal rights the Company has
               under law to contest the above notice, including
               the right to challenge the extra territorial
               application of the Act in the present case. The
               act of filing the return in compliance to the
               above notice should not be construed as Alcatel
               Lucent Inc. acceding to the jurisdiction of the
               Indian Tax Authorities in any, manner
               whatsoever."




5.     The assessing officer however did not accept the assessee's stand

and in the assessment order passed on 23.03.2010 attributed 2.5% of the

sale proceeds of the hardware as profit attributable to the PE in India,

which came to `21,02,58,238/- for the assessment year 2007-08. Similar

re-assessments were made in all the years in respect of both the

assessees. In the re-assessment order, in addition to the aforesaid income,

the assessing officer also directed that interest under Sections 234A,

234B and 234C shall be charged. Demand notices were accordingly

issued.




ITA Nos.327-330 & 336-340/2012                               Page 5 of 33
6.     Appeals were taken by the assessee in respect of all the

assessment years before the CIT (Appeals). Three grounds were taken in

the appeals. The first ground was that the assessing officer erred in

computing the income of the assessee as was done in the re-assessment

orders; the second ground was that on the facts and in the circumstances

of the case and in law, the assessing officer erred in levying interest

under Section 234B "in view of the fact that the entire consideration in

the hands of appellant was subject to deduction of tax at source under

Section 195 of the Act"; the third ground was against the initiation of

penalty proceedings for alleged concealment of income.

7.     Before the CIT (Appeals), the assessee did not press the appeals in

respect of the first ground, i.e. the ground against the computation of the

income attributable to the PE in India. Only ground No.2 which was

directed against the levy of interest under Section 234B of the Act was

pressed, the contention being that it was the liability of the purchasers of

the telecom equipment in India to deduct income tax at the applicable

rates from the remittance made to the assessee under Section 195 of the

Act, that in view of the language employed in Section 209(1)(d) the

assessee was entitled to take credit for the tax which was "deductible" at




ITA Nos.327-330 & 336-340/2012                                Page 6 of 33
source while computing its liability for paying advance tax and if the

amount of tax so "deductible" by the payer in India is given credit, there

was no amount of advance tax payable by the assessee, and if that is so

there was no question of the assessee being liable to pay any interest

under Section 234B. Several authorities were cited before the CIT

(Appeals) in support of the above contention including the judgment of

a Division Bench of this court in Director of Income Tax vs. Jacabs

Civil Incorporated and Mitsubishi Corporation : (2010) 330 ITR 578.

It was submitted before the CIT (Appeals) that in this judgment, this

court held that Section 195 places an obligation on the payer to deduct

tax at source at the rates in force from the payments made and if the

payer has defaulted in deducting the tax, it was open to the Income Tax

Department to take action against the payer under Section 201 of the

Act, but no action can be taken for recovery of the interest under Section

234B from the non-resident assessee. It was further held in this decision

that the non-resident will, no doubt, be liable to pay the income tax on

the income assessed upon it, but it cannot be held liable for payment of

any advance tax thereon if the tax deductible by the payer in India

exceeds the amount of advance tax payable on the estimated income. It

was further held that the position would be so even if the income tax



ITA Nos.327-330 & 336-340/2012                              Page 7 of 33
was not in fact deducted from the remittance because Section 209

(1)(d) of the Act permitted the non-resident assessee to take credit,

while computing its advance tax liability, for the amount of income tax

that was "deductible" from the remittance, though not actually

deducted. It was furthermore held in the judgment that once it was

found that the liability was that of the payer under Section 201 of the

Income Tax Act, which permitted recovery of the tax from the payer by

treating him as an assessee in default and also recovery of interest

under Section 201 (1A) for the default in not deducting the tax, there

can be no liability fastened upon the non-resident assessee to pay

interest under Section 234B.

8.     The CIT (Appeals) accepted the contention of the assessee based

on the language employed in Section 209(1)(d) read with Section 195 of

the Act and on the basis of the judgment cited above and held as follows:

       "In this case, it is undisputed that the tax on the
       entire income received by the appellant was
       required to be deducted at appropriate rates by the
       respective payers u/s 195(2) of the Income-tax Act.
       Had the payer made the deduction of tax at the
       appropriate rate, the net tax payable by the appellant
       would have been Nil. Therefore, it is clear that there
       was no liability to pay advance tax by the appellant. I
       have carefully gone through the various judgments
       relied upon by the appellant in this regard. The



ITA Nos.327-330 & 336-340/2012                              Page 8 of 33
       jurisdictional High court i.e. Hon'ble Delhi High Court, in
       recent judgment dated 30 th August 2010 in the case of
       Director of Income-tax vs. Jacabs Civil Incorporated/
       Mitsubishi Corporation : (2010) 330 ITR 578 (Delhi),
       has held that section 195 puts an obligation on the
       payer, i.e., any person responsible for paying any tax
       resident, to deduct tax at source at the rates in force
       from such payments and if payer has defaulted in
       deducting tax at source, the department can, take
       action against the payer under the provisions of
       section 201. In such a case, the non-resident is liable
       to pay tax but there is no question of payment of
       advance-tax and, therefore, it cannot be held liable to
       pay interest u/s 234B on account of default of the
       payer in deducting tax source from the payments made
       to the appellant."

9.     The Revenue carried the matter in appeal before the Income Tax

Appellate Tribunal. All the nine appeals, four in the case of Alcatel Lucent

USA Inc. and five in the case of Alcatel Lucent World Services Inc. were

disposed of by the Tribunal by a common order passed on 21.10.2011.

Before the Tribunal the contention taken on behalf of the Revenue was

that at the time of the receipt of monies from India, the assessee had taken

the plea that it did not have a PE in India and therefore the payment was

not chargeable to tax in India and consequently the provisions of Section

195 were not applicable, whereas in the appeals before the CIT (Appeals)

a contradictory stand was taken by the assessee, by accepting the fact that

it had a PE in India and admitting that the income earned in India was



ITA Nos.327-330 & 336-340/2012                                Page 9 of 33
chargeable to tax. Nevertheless, it was pointed out by the revenue, the

assessee still contended that no interest under Section 234 B can be levied

because if the entire income was subject to tax in India the consequence

would be that it was the responsibility of the payer to deduct tax and if he

has not done so, the remedy of the Income Tax Department lies against

him in terms of Section 201 and not against the assessee under Section

234B. The Revenue seriously contested this contradictory stand taken by

the assessee before the CIT (Appeals) and submitted before the Tribunal

that the assessee should not be allowed to take such a plea. It was

pointed out that consistent with the stand taken by the assessee

originally in the return filed in response to the notice under Section 148,

it would have told the Indian payer that it did not have any PE in India

and therefore no tax should be deducted from the remittance; and having

said so and led the payers in India to make the entire payment of the

purchase price of the equipments without any deduction of tax in terms

of Section 195, it is now not open to the assessee, merely because at the

first appellate stage it did not choose to contest the assessment of the

income attributable to the Indian PE, to turn around and say that now

that it has accepted the liability to pay tax on its Indian income, it was




ITA Nos.327-330 & 336-340/2012                                Page 10 of 33
for the Indian payers to have deducted the tax and if they had not done

so, the assessee cannot be held liable for the interest. It was further

pointed out by the Revenue that consequent to the amendment made to

Section 201 by the Finance Act, 2012 with effect from 01.04.2012,

time limit of four years was set for taking action under Section 201 and

therefore no action can be taken against the payers for the years under

consideration since the aforesaid time limit had already expired. It was

submitted that when this court decided the case of Jacabs Civil

Incorporated and Mitsubishi Corporation (supra) there was no time

limit for taking action against the payer. Now that the action against

the payer has become time barred, the basis of the judgment has been

removed, with the result that the assessee would be liable for payment

of the interest under Section 234B.

10.    These submissions of the Revenue did not find favour with the

Tribunal. It held that undisputedly the tax on the income received by

the assessee was required to be deducted at source at the applicable

rates by the respective payers under Section 195 of the Act. In terms

of Section 209(1)(d), the income tax calculated on the estimated

income of the assessee is to be reduced by the amount of tax which would




ITA Nos.327-330 & 336-340/2012                             Page 11 of 33
be deductible at source. No tax was deducted by the payers, for which the

assessees cannot be faulted. However, the assessee can take credit for the

tax which ought to have been deducted by the payers because the

requirement of Section 209(1)(d) was that the tax "deductible" could be

taken credit for and it was not necessary that the tax should have been

actually deducted. In addition to this reasoning based on the language of

Section 209(1)(d), the Tribunal also held, with reference to the argument

of the Revenue that the assessee had represented to the payers that the

income was not liable to deduction of tax at source (as there was no PE),

that "no such material in support of this plea has been placed before us

nor any such facts and circumstances emerged from the impugned

orders".

11.    The answer of the Tribunal to the argument of the Revenue based

on the time limit set by the amendment made to Section 201 with effect

from 01.04.2010 was that in terms of Section 40(a)(i), inserted with effect

from 01.04.1989, certain types of payments which are claimed as a

deduction by the payer would not get the benefit of deduction if the tax

was not deducted at source, if such payments were made outside India.

According to the Tribunal this provision ensured effective compliance of




ITA Nos.327-330 & 336-340/2012                               Page 12 of 33
Section 195 of the Act relating to tax deduction at source. The Tribunal

eventually found that the controversy was covered by the judgment of

this court in Jacabs Civil Incorporated (supra) and accordingly

confirmed the decision of the CIT (Appeals) that the assessee was not

liable to pay any interest under Section 234B of the Act.

12.    According to the learned standing counsel for the income tax

department, the approach of the Tribunal is seriously flawed. According

to him the legal position that the non-resident assessee is entitled to take

credit, while computing its advance tax liability, for the tax which was

"deductible" though not actually deducted, within the meaning of Section

209(1)(d) is not applicable to the facts of the present case. In the present

case, the assessee initially disputed its liability to pay tax in India and

articulated its stand in the note appended to the returns filed in response

to notices issued under Section 148, and even filed appeals against the

reassessments; but before the CIT (Appeals) it gave up the claim that it

was not liable to tax in India and pressed its claim only to the extent of its

liability to pay interest under Section 234B. It is submitted that this

factual position is in complete contrast to the facts before this Court in

Jacabs (supra) where the assessee admitted its liability to pay tax on the




ITA Nos.327-330 & 336-340/2012                                 Page 13 of 33
Indian income in the return filed by it and the payer was, therefore, found

clearly liable to deduct tax. It was in those circumstances that this Court

held that the tax was "deductible" and the non-resident assessee can

rightly take credit for the same, even though the tax was not actually

deducted, while computing its advance tax liability, According to the

learned standing counsel, it is not open to the non-resident assessee in the

present case to say that though it was not liable to pay tax on its Indian

income, but still the Indian telecom equipment dealer ought to have

deducted the tax under Section 195 of the Act. According to him, this

would be a contradictory stand which cannot be accepted at all.

13.    The learned counsel for the assessee inter alia made the following

submissions: -

       (a)     The liability of the payer of the monies to the non-resident to

       deduct tax from the payment under Section 195(1) is absolute and

       does not depend on the stand taken by the non-resident assessee

       with regard to the question whether or not the amount remitted

       gives rise to tax liability under the Act in India. In case the payer

       has any doubt about the taxability of the sum remitted by him in

       the hands of the non-resident assessee, it is open to him to make an




ITA Nos.327-330 & 336-340/2012                                  Page 14 of 33
       application under Section 195(2) to the appropriate authority to

       have the income portion of the sum determined for the purpose of

       deduction of tax;

       (b)     If the payer fails to deduct the tax, his liability to make good

       the payment along with interest is governed by Section 201(1) and

       (1A). This liability is absolute and exhaustive of the remedy

       available to the revenue;

       (c)     Section 201(1A) which imposes the liability upon the payer

       to pay interest on the amount which ought to have deducted from

       the sum paid to the non-resident and Section 234B which levies

       interest on the non-resident assessee for non-payment of advance

       tax are mutually exclusive and operate on different fact-situations.

       They are not alternative courses in the sense that the department

       can choose to proceed under the one or the other;

       (d)     There is no concession given by Section 201 in the sense that

       no plea of reasonable cause for the failure to deduct the tax can be

       entertained under that Section;

       (e)     The proviso to Section 209(1) inserted by the Finance Act,

       2012 amending the sub-section to provide that the non-resident




ITA Nos.327-330 & 336-340/2012                                  Page 15 of 33
             assessee can take credit only for the amount of tax actually

             deducted by the payer while computing his advance tax liability

             was inserted only w. e. f. 01.04.2012 and would apply only from

             the assessment year 2012-13. The amendment is not clarificatory or

             explanatory and has been made expressly prospective.


14.   In his rejoinder, the learned standing counsel for the income tax

      department submitted that the definition of the expression "assessed tax"

      appearing in Section 215(5) is different from the definition of the said

      expression appearing in Explanation 1 below Section 234B and this

      makes a crucial difference in the assessee's case. He pointed out that

      under the aforesaid Explanation, as it stood both before being amended

      by the Finance Act, 2006 w. e. f. 01.04.2007 and thereafter, only the tax

      actually deducted at source is permitted to be deducted from the tax on

      the total income determined under the regular assessment and if no tax

      is deducted at source, no such adjustment from the tax on the total

      income assessed is permissible. In other words, his contention was that

      the Explanation below Section 234B overrides the provisions of Section

      209(1)(d) and, therefore, the benefit of reducing the tax on the estimated

      income by the tax which was "deductible", but not actually deducted,

      was not available to the non-resident assessee. , He further pointed out



      ITA Nos.327-330 & 336-340/2012                                Page 16 of 33
that in the present case the payer knew that no income was chargeable to

tax in the hands of the non-resident assessee as the sum remitted

represented the purchase price of the telecom equipments and, therefore,

advisedly did not deduct any tax from the remittance. When the assessee

accepted its tax liability in India, it follows that it would also be liable to

pay interest under Section 234B for failure to pay the advance tax and

such a consequence cannot be avoided, once the tax liability is admitted.

He further submitted that the decision of this Court in Jacabs (supra) did

not deal with all the factual situations possible, because in that case the

assessee admitted the taxable income even in the return and the payer was

also found liable to deduct tax. According to him, the present case stands

on a completely different footing.

15.    Both the sides filed written submissions which have also been

taken into consideration while disposing of the appeals.

16.    In the light of the judgment of this Court in Jacabs (supra), the

interpretation to be placed on Section 209(1)(d) in juxtaposition with

Section 195(1) is that which is canvassed before us on behalf of the

assessee. However, we find merit in the submission of the learned

standing counsel for the income tax department that on the facts of the

present case, the aforesaid legal position cannot be applied. As pointed



ITA Nos.327-330 & 336-340/2012                                  Page 17 of 33
out by him, in the case of Jacabs (supra) the assessee filed its return of

income admitting tax liability on income of `296,83,278/-. On this

income it did not pay advance tax on the due dates. The assessing officer

proceeded to charge interest under Section 234B, overruling the assessees

objection that tax was "deductible" by the National Highway Authority of

India for whom the assessee was executing the projects. The plea was,

however, accepted by the CIT (Appeals) and the Income Tax Appellate

Tribunal. It was in those facts that this Court held that since it was the

duty of NHAI to deduct tax under Section 195(1) from the payments

made to the assessee, and even though no tax was actually deducted and

paid by the NHAI, the assessee was entitled to take credit for the tax

which was "deductible" by the NHAI while computing its advance tax

liability. In the present case, the factual position is quite different.

Herein the assessee did not admit any income in the returns. In the

note appended to the return (which we have extracted earlier) the

assessee denied its liability to be taxed in India on the ground that it

had no PE in India. The assessee also pointed out that no income from

the supply of telecom equipment to the Indian dealers arose in India

since all sales were made from outside India (in the USA). The

assessing officer did not accept the claim made in the note and



ITA Nos.327-330 & 336-340/2012                              Page 18 of 33
proceeded to assess the assessee in respect of the income arising in India

from the supply of the telecom equipment on estimate basis. The

assessment was not accepted and appeals were filed but in the appeals

the assessee did not press the ground of appeal against the computation

of the income, but pressed the appeals only against the levy of interest

under Section 234B. Thus it was at the stage of the CIT (Appeals) that

the assessee accepted its tax liability in India. It would be incongruous,

as pointed out on behalf of the revenue, to hold that even though the

assessee did not admit any tax liability in India while filing the return and

even up to the stage of first appeal, and correspondingly the payers were

also not liable to deduct tax under Section 195(1), still it can take credit

for the tax "deductible", though not deducted, by the Indian payers from

the remittance made to the assessee. In our opinion this factual position

makes a crucial difference to the legal position also and, therefore, the

benefit of the decision of this Court in Jacabs (supra) cannot be extended

to the assessee.

17.    The learned counsel for the assessee, however, put forth two

arguments in rebuttal. The first is that this Court also decided the case of

Mitsubishi Corporation in the same judgment dated 30th August, 2010 by

which Jacabs (supra) was decided. In this behalf, he drew our attention



ITA Nos.327-330 & 336-340/2012                                 Page 19 of 33
to the first paragraph of the judgment in which this Court observed that

except in ITA No.491/2008, in all other appeals, M/s. Mitsubishi

Corporation was the assessee-respondent. However, the issue in all the

cases was the same i.e. chargeability of interest under Section 234B.

While narrating the facts, this Court took note of the facts appearing in

ITA No.491/2008 which related to Jacabs (supra). The Court proceeded

to observe that "under similar circumstances, in the assessment orders

passed for the various assessment years in the case of M/s. Mitsubishi

Corporation, interest charged under Section 234B of the Act has been

deleted by the Tribunal". On the basis of these observations, the learned

counsel for the assessee submitted that the facts of Jacabs and Mitsubishi

Corporation were the same.

18.    In order to ascertain the correct position, we summoned the file of

ITA No.229/2010 in Director of Income Tax vs. Mitsubishi

Corporation. The order of the Tribunal is dated 23.06.2009.

Paragraph 2 of the said order reads as under: -

       "2. The appellant Mitsubishi Corporation is a Japanese
       non-resident company and it had been carrying on its
       activities through its liaison office in New Delhi and offices
       in other cities called "divisions". It claimed that it has no
       income taxable in India. The department, however, carried
       survey and recorded statement of General Managers in
       India and, on the basis of documents recovered in survey,



ITA Nos.327-330 & 336-340/2012                                  Page 20 of 33
       held that a portion of income of the assessee attributable to
       Indian activities was liable to be taxed in India under
       Article 4, 5 and 6 of DTAA between India and Japan and
       under provisions of the Indian Income Tax Act. Initially, the
       assessee resisted such assessment but ultimately accepted
       that income taken by the AO was rightly taxed. The
       quantum of assessments was not challenged before the ld
       CIT(A). The challenge was restricted to the levy of interest
       u/s 234B of the Act. Before the ld. CIT(A), assessee placed
       reliance on decision of ITAT in assessee's own case for AY
       2005-06 wherein similar interest u/s 234B imposed on the
       assessee was deleted vide order in ITA No.848/D/08 dated
       08.08.2008 after a detailed discussion. As a matter of
       judicial discipline, the ld. CIT (A) should have followed
       order of ITAT given in identical circumstances and deleted
       theinterest levied, more particularly, when decision of
       Hon'ble Supreme Court in the case of Union of India
       and others vs. Kamalakshi Finance Corporation Ltd.,
       [1992 AIR 711 (SC)] and of Hon'ble Jurisdictional High
       Court (Del) in case of Nokia Corporation v. Director of
       Income Tax (International Taxation) (2007) 292 ITR 22
       were brought to his notice and placed on record. He
       also noted that judicial discipline required that
       subordinate authorities should follow decision of higher
       authorities. He, however, acted just the opposite."
                                                (underlining ours)

19.    It is thus noticed that the facts of Mitsubishi Corporation are

different from the facts of Jacabs and are akin to the facts of the present

case. Therefore, the observation of this Court in Jacabs case (supra)

that in the case of Mitsubishi Corporation, interest was charged under

Section 234B under circumstances similar to those obtaining in Jacabs

case appears, with respect, to be inaccurate. The facts of the present



ITA Nos.327-330 & 336-340/2012                                 Page 21 of 33
case being similar to those of Mitsubishi Corporation, have to be,

therefore, dealt with separately. This Court would appear to have

proceeded on the assumption that the facts of Mitsubishi Corporation

were similar to those of Jacabs (supra). Since it is not so, different

considerations will have to be applied and the legal position laid down

in Jacabs case cannot automatically be invoked and applied to the

present case.

20.    The other argument on behalf of the assessee that the liability of

the payer under Section 201 is absolutely different from the liability of

the non-resident assessee under Section 234B need not be examined and

for the purpose of the present case it would not make any difference, on

account of the peculiar facts of the present case. It may be recalled that

the argument put forth by the revenue before the Income Tax Appellate

Tribunal was that at the time of the receipt of monies from India, the

assessee took the plea that it did not have any PE in India and,

therefore, the payment was not chargeable to tax in India, with the

consequence that Section 195(1) was not applicable, whereas in the

appeals before the CIT (Appeals), a contradictory stand was adopted by

the assessee, by accepting the fact that it had a PE in India and by




ITA Nos.327-330 & 336-340/2012                              Page 22 of 33
admitting that the income earned in India was chargeable to tax. It was

further argued by the revenue that such a contradictory plea cannot be

permitted to be taken by the assessee. It was pointed out that consistent

with the stand taken in the return, the assessee would have told the

Indian payer that no tax should be deducted from the remittance and it

was, therefore, not open to the assessee, merely because at the first

appeal stage it chose not to contest the assessment of the income

attributable to the Indian PE, to turn around and say that since it has

now accepted its liability to pay tax on the Indian income, it was for the

Indian payers to have deducted the tax and if they had not done so the

assessee cannot be held liable for the interest. This argument of the

revenue was rejected by the Tribunal on the ground that there was no

material in support of the plea that the assessee represented to the Indian

payers not to deduct tax, nor did any such facts or circumstances emerged

from the impugned orders.

21.    We are unable to uphold this part of the decision of the Tribunal.

It must be remembered that in the note appended to the return the

assessee was quite categorical in denying its liability to be assessed in

India. It relied on the double taxation avoidance agreement between




ITA Nos.327-330 & 336-340/2012                               Page 23 of 33
India and USA and pointed out that there was no permanent

establishment in India. It further stated that the telecom equipments were

sold outside India and the payments were also received outside India and

thus the assessee did not have any taxable presence in India so as to be

liable for tax on its Indian income. If this was the stand of the assessee, it

is not impermissible or unreasonable to visualise a situation where, the

assessee would have represented to its Indian telecom dealers not to

deduct tax from the remittances made to it. On the contrary it would be

surprising if the assessee did not make any such representation; such a

representation would only be consistent with the assessee's stand

regarding its tax liability in India. Moreover, no purpose would have

been served by the assessee taking such a categorical stand regarding its

tax liability in India and at the same time suffering tax deduction under

Section 195(1). Therefore, in our opinion, even though there may not be

any positive or direct evidence to show that the assessee did make a

representation to its Indian telecom dealers not to deduct tax from the

remittances, such a representation or informal communication of the

request can be reasonably inferred or presumed. The Tribunal ought to

have accorded due weightage to the strong possibility or probability of

such a request having been made by the assessee to the Indian payers



ITA Nos.327-330 & 336-340/2012                                 Page 24 of 33
since otherwise the denial of its tax liability on its Indian income would

have served little purpose for the assessee.

22.    In Esthuri Aswathiah vs. CIT, Mysore : (1967) 66 ITR 478, a

three Judge bench of the Supreme Court, while expounding on the

functions of the Tribunal and its duties while disposing of the appeals,

had this to say:

       "The function of the Tribunal in hearing an appeal is
       purely judicial. It is under a duty to decide all questions
       of fact and law raised in the appeal before it: for that
       purpose it must consider whether on the materials relied
       upon by the assessee his plea is made out. Conclusive
       proof of the claim is not predicated: the Tribunal may
       act upon probabilities, and presumptions may supply
       gaps in the evidence which may not, on account of delay
       or the nature of the transactions or for other reasons, be
       supplied from independent sources. But the Tribunal
       cannot make arbitrary decisions: it cannot found its
       judgment on conjectures, surmises or speculation.
       Between the claims of the public revenue and of the
       taxpayers, the Tribunal must maintain a judicial
       balance.".
                                                (underlining ours)




23.    The Tribunal, keeping in mind the above observations, underlined

by us, ought to have drawn the inference that the Indian payers did not

deduct the tax under Section 195(1) because of the request made by the




ITA Nos.327-330 & 336-340/2012                               Page 25 of 33
assessee, consistent with its stand that it was not liable to be taxed in

India.

24.      The learned counsel for the assessee submitted in the course of his

arguments that the assessee and the Indian telecom equipment dealers

cannot contract out of the statute and, therefore, even if such an

arrangement had been made between them, it cannot be given effect to

and the liability of the Indian payer under Section 195(1) has to be strictly

enforced. In other words, it was his contention that the Indian payers

ought not to have paid any heed, and should have acted strictly in

accordance with Sections 195(1), even assuming, but not admitting that

there was such a request from the assessee. Taking a practical view of the

matter, it is difficult to see how the Indian payers could have resisted the

request which, according to our inference, was made by the assessee to

them not to deduct tax from the remittances. The Indian payers have to

keep in mind the future business prospects and it was necessary for them

to keep the assessee in good humour so that the business relationship

remains profitable for them. They would have been in no position to

resist the request. Moreover, since the sales were claimed to have been

concluded outside India, again it would be a fair and reasonable inference

to be drawn that the Indian dealers would have had an interface with the


ITA Nos.327-330 & 336-340/2012                                Page 26 of 33
assessee in USA while concluding the sale contracts and on such an

occasion it is normal for the parties to finalise all aspects touching on

their relationship including the tax compliances. It should also be

remembered that no reason whatsoever has been given by the assessee as

to why it did not press its appeals before the CIT (Appeals) on the

question of liability to tax on its Indian income.

25.    In the light of the view taken by us on the facts of the present case,

we do not consider it necessary to discuss the plethora of authorities

cited by both the sides. It is, however, necessary to just highlight one

aspect of the matter. This was in fact pointed out on behalf of the

revenue also. It is open to the assessee to deny its liability to tax in India

on whatever grounds it thinks fit and proper. Having denied its tax

liability, it seems unfair on the part of the assessee to expect the Indian

payers to deduct tax from the remittances. It is also open to the assessee

to change its stand at the first appellate stage and submit to the

assessment of the income. When it does so, all consequences under the

Act follow, including its liability to pay interest under Section 234B

since it would not have paid any advance tax. Such liabilities would

arise right from the time when the income was earned. Advance tax was

introduced as a PAYE Scheme ­ "pay as you earn". It is not open to



ITA Nos.327-330 & 336-340/2012                                 Page 27 of 33
the assessee, after accepting the assessment at the first appellate stage

to claim that the Indian payers ought to have deducted the tax

irrespective of the fact that the assessee itself claimed the Indian

income to be not taxable. We can understand an assessee who admits its

tax liability right from the beginning to contend that it was the

responsibility of the payers to deduct the tax and if they did not, even

then the tax which ought to have been deducted by them should be set

off against the assessee's advance tax liabilities. That is the type of case

dealt with in the decision of this Court in Jacabs (supra). We were not

referred to a single case where on facts similar to the case of the

assessee before us, the Court took the view that no interest under

Section 234B was chargeable. The case of Mitsubishi Corporation

decided along with the case of Jacabs, was on facts similar to the

assessee's case. However, as pointed out by us earlier, this Court in

Jacabs case proceeded on the assumption that the facts in Mitsubishi

Corporation were similar to those in Jacabs. That assumption, as we

have earlier demonstrated, with respect, is not borne out by the facts.

26.    It further seems to us inequitable that the assessee, who accepted

the tax liability after initially denying it, should be permitted to shift the

responsibility to the Indian payers for not deducting the tax at source



ITA Nos.327-330 & 336-340/2012                                 Page 28 of 33
from the remittances, after leading them to believe that no tax was

deductible. The assessee must take responsibility for its volte face. Once

liability to tax is accepted, all consequences follow; they cannot be

avoided. After having accepted the liability to tax at the first appellate

stage, it is unfair on the part of the assessee to invoke section 201 and

point fingers at the Indian payers. The argument advanced by the learned

counsel for the assessee that the Indian payers failed to deduct tax at their

own risk seems to us to be only an argument of convenience or despair.

As we have pointed out earlier, it is difficult to imagine that the Indian

telecom equipment dealers of the assessee would have failed to deduct

tax at source except on being prompted by the assessee. It may be true

that the general rule 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 case

justify it, it is open to the court to invoke the principles of equity even in

the interpretation of tax laws. Tax laws and equity need not be sworn

enemies at all times. The rule of strict interpretation may be relaxed

where mischief can result because of the inconsistent or contradictory

stands taken by the assessee or even the revenue. Moreover, interest is,

inter alia, compensation for the use of the money. The assessee has had

the use of the money, which would otherwise have been paid as advance



ITA Nos.327-330 & 336-340/2012                                 Page 29 of 33
tax, until it accepted the assessments at the first appellate stage. Where

the revenue has been deprived of the use of the monies and thereby put to

loss for no fault on its part and where the loss arose as a result of

vacillating stands taken by the assessee, it is not expected of the assessee

to shift the responsibility to the Indian payers. We are not to be

understood as passing a value-judgment on the assessee's conduct. We

are only saying that the assessee should take responsibility for its actions.

27.    It is not unusual for the courts to invoke equitable considerations

even while interpreting tax laws. In Jodha Mal Kuthiala v. CIT : (1971)

82 ITR 570 (SC), Hegde, J., opined thus: "It is true that equitable

considerations are irrelevant in interpreting tax laws. But, those laws,

like all other laws, have to be interpreted reasonably and in consonance

with justice". In CIT v. J.H. Gotla : (1985) 156 ITR 323 (SC), it was

held by the Supreme Court that though equity and taxation are often

strangers, attempts should be made (to ensure) that they do not always

remain so and if a construction results in equity rather than injustice, that

should be preferred to the literal or strict construction. In Calcutta Jute

Manufacturing Co. v. Commercial Tax Officer : (AIR 1997 SC 2920)

the Supreme Court held that if there is a provision in a taxing statute to

compensate the state by charging interest, that provision need not be



ITA Nos.327-330 & 336-340/2012                                 Page 30 of 33
strictly construed but may be so construed as to effectuate its purpose.

The Court held:

       "10. The State is empowered by the legislature to raise
       revenue through the mode prescribed in the Act so the State
       should not be the sufferer on account of the delay caused by
       the taxpayer in payment of the tax due. The provision for
       charging interest would have been introduced in order to
       compensate the State (or the Revenue) for the loss occasioned
       due to delay in paying the tax (vide Commr. of Income-tax
       A.P. v. M. Chandra Sekhar : 1985 (1) SCC 283 : (AIR 1985
       SC 114) and Central Provinces Manganese Ore Co. Ltd. v.
       Commr. of Income-tax : 1986 (3) SCC 461 : (AIR 1987 SC
       438). When interpreting such a provision in a taxing statute a
       construction which would preserve the purpose of the
       provision must be adopted. It is well-settled that in
       interpreting a taxing statute normally, there is no scope for
       consideration of principles of equity. It was so said by
       Rowlatt J. in Cape Brandy Syndicate v. Inland Revenue
       Commissioners : (1921) 1 KB 64 at page 71:

               "In a taxing Act one has to look merely at what
               is clearly said. There is no room for any
               intendment. There is no equity about a tax.
               There is no presumption as to a tax. Nothing is
               to be read in, nothing is to be implied. One can
               only look fairly at the language used."

             The above observation has been quoted with approval
       by a Bench of three Judges of this Court in Commissioner of
       Income-tax Madras v. Ajax Products Ltd. : 55 ITR 741:
       (AIR 1965 SC 1358). In another decision rendered by a



ITA Nos.327-330 & 336-340/2012                               Page 31 of 33
       Bench of three Judges of this Court in State of Tamil Nadu v.
       M. K. Kandaswami : 36 STC 191 : (AIR 1975 SC 1871) It
       has been observed thus:

               "In interpreting such a provision, a construction
               which would defeat its purpose and, in effect,
               obliterate it from the statute book should be
               eschewed. If more than one construction is
               possible, that which preserves its workability
               and efficacy is to be preferred to the one which
               would render it otiose or sterile."


       11. We are, therefore, not adopting a construction which
       would upset or even impair the purpose in introducing
       Section 10A in the Act. The return to be filed by the dealer is
       the full and correct return as referred to in Section 10 and on
       failure to furnish such a return the liability to pay interest
       from the prescribed date would arise when assessment is
       completed."

28.    We think that the present case is one where such considerations

should prevail in the interpretation of section 234B; otherwise, it will not

merely result in injustice but the purpose of the provision would not have

been achieved. In any case, the facts of the present case are different, as

we have earlier pointed out, from the facts obtaining in Jacabs (supra)

and therefore the said decision cannot be applied.




ITA Nos.327-330 & 336-340/2012                                Page 32 of 33
29.    For the aforesaid reasons we answer the substantial question of law

framed by us in the affirmative, against the assessee and in favour of the

revenue. The appeals are allowed.




                                                       R.V.EASWAR, J



                                        BADAR DURREZ AHMED, J
November 7, 2013
hs




ITA Nos.327-330 & 336-340/2012                              Page 33 of 33

 
 
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