Spectrum Power Generation Ltd.,, ... vs Department Of Income Tax

ITA.No. A.Y. Appellant Respondent Spectrum Power DCIT, TDS, 438/H/2007 Generation Ltd., Circle 14(2) 439/H/2007 2000- Hyderabad Hyderabad. 440/H/2007 2001 PAN AAECS3685A 484/H/2007 ACIT, Circle Spectrum Power 14(1), (TDS), Generation Ltd., Hyderabad. Hyderabad PAN AAECS3685A

For Assessee : Mr. M.V. Anil Kumar For Revenue : Mr. Rajat Mitra

Date of Hearing : 09.06.2015 Date of Pronouncement : 12.06.2015

ORDER

PER P.M. JAGTAP, A.M.

Out of these four appeals, three appeals being ITA.No.438 & 439/Hyd/2007 (assessee's appeals) and ITA.No.484/Hyd/2007 (Revenue's appeal) are directed against the order of the Ld. CIT(A)-II, Hyderabad dated 24.01.2007, while the fourth appeal being ITA.No.440/Hyd/2007 of the assessee is directed against the order of Ld. CIT(A)-II, Hyderabad dated 09.01.2007. Since the issues involved in all these appeals are inter- linked, the same have been heard together and are being disposed of by a common order for the sake of convenience.

2 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

2. First, we shall taken-up the appeal of the Revenue being ITA.No.484/Hyd/2007 wherein the following grounds are raised :

1. "The CIT(A) ought to have upheld the order of the A.O.

2. The Hon'ble CIT(A) erred in holding that actual date of payment has preceded actual date of credit entry made.

3. The Hon'ble CIT(A) ought to have noticed that there was no evidence to hold that the credit entry relating to PLF bonus was made in January 2003.

4. The Hon'ble CIT(A) ought to have noticed that it is the provision for TDS that was made at the time of finalization of accounts i.e., in 2003 and not the credit entry relating to PLF bonus.

5. The Hon'ble CIT(A) ought to have noticed that TDS liability depends on the date of credit of amount to the account of non-resident and not on the date of provision for the TDS made.

6. Even otherwise assuming but not admitting that the credit entry relating PLF bonus was made while finalizing the accounts i.e., 2003, the learned CIT(A) ought to held that the same takes effect as made on 31.3.2000 as the amount in question was debited in the accounts for the F.Y. 99-00.

Consequently the TDS liability arose for the F.Y.99-00 for which no exemption certificate is available.

7. Any other ground that may be argued at the time of hearing."

3. The assessee in the present case is a company incorporated in India on 26.10.1992 with the main object 3 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

to generate and sale power. The generation of electricity is done through the natural gas supplied by GAIL. The operation and maintenance of the power unit of the assessee is done by M/s. Rolls Royce Industrial Power India Limited (in short "RRIPL"), London having its permanent establishment in Delhi. A survey operation under section 133A was carried out in the case of the assessee wherein certain defaults in the matter of TDS compliance allegedly committed by the assessee were detected. One of such defaults, according to the A.O., was the failure of the assessee to deduct tax at source amounting Rs.1,11,39,688 from the payment made to M/s. RRIPL on account of Plant Load Factor (in short "PLF") bonus for the F.Y. 1999-2000 relevant to A.Y. 2000-2001. In this regard, the explanation of the assessee as offered before the A.O. was that the PLF bonus to M/s. RRIPL for the F.Y. 1999-2000 was paid in the month of November, 2000 and February, 2001 falling within the F.Y. 2000-2001 and since the said payee had furnished an exemption certificate issued by the A.O. for the F.Y. 2000-2001, the assessee company was not liable to deduct tax at source. It was also submitted on behalf of the assessee company before the A.O. that the annual accounts for the year 1999-2000 were closed in January, 2003 when the liability for PLF bonus was actually provided in the accounts. This explanation of the assessee was not found acceptable by the A.O. According to him, the assessee company as per the provisions of section 195(1) was liable to deduct tax at source from the 4 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

payment made to a non-resident of any sum chargeable under the provisions of the Act at the time of credit of such income to the account of the payee or at the time of payment thereof whichever is earlier. He held that the liability on account of PLF bonus payable to M/s. RRIPL was provided for in the books of account of the assessee company for the F.Y. 1999-2000 and since there was no exemption certificate furnished by the payee for the F.Y. 1999-2000, the assessee company was liable to deduct tax at source from the amount credited to M/s. RRIPL on account of PLF bonus. Accordingly, he treated the assessee company as in default for its failure to deduct tax at source to that extent under section 201(1) and also levied interest under section 201(1A).

4. Against the order passed by the A.O. under section 201(1)/201(1A), an appeal was preferred by the assessee before the Ld. CIT(A). During the course of appellate proceedings before the Ld. CIT(A), the submission made before the A.O. was reiterated on behalf of the assessee company. It was also contended that the earliest point of making a provision and making of payment, which is the prime consideration for fastening liability under section 195 of the Act, arose when the payment was made and not when the provision was made. Alternatively, it was also contended that in the transactions between the residents of countries where DTAA existed, the provision of DTAA would prevail over the provisions of the I.T. Act as per section 90. Relying on 5 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

Article-7 of the DTAA between India and U.K., it was contended on behalf of the assessee company that the said article does not have the provision similar to section 195 of the Act relating to the credit of the income in favour of the person which would be deemed to be the credit of income in the account of the payer requiring application of section 195. It was contended that the provisions of tax applicable during the year in which payments have actually been made to M/s. RRIPL thus should be considered and the same being A.Y. 2001-2002 for which M/s. RRIPL had already furnished exemption certificate, the assessee company was not liable to deduct tax at source from the impugned payment made to M/s. RRIPL.

5. After considering the submissions made on behalf of the assessee company and perusing the relevant material on record including the relevant provisions of section 195(1), the Ld. CIT(A) found merit in the first contention raised on behalf of the assessee company that the payment made to M/s. RRIPL having been made before crediting the corresponding amount to the account of the said party, the time of payment was relevant for fastening the TDS liability under section 195. Accordingly, he held that the assessee company could not be treated as in default for the payment made to M/s. RRIPL without deduction of tax at source for the following reasons given in paragraph No. 6.1 and 6.2 of his impugned order.

6 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

"6.1. Sec.195(1) of the of the I T Act fastens responsibility to the payer for deduction of tax at source for the payment made to non-resident or to a foreign company for the payment made or for credit of such income to the account of the payee. No doubt the appellant has made an entry in the books of accounts relating to the payments to be made. But the question that arises is when was the entry made? A reference can be made to the Annual Report of 2004-05 based on which the present order under section 201(1) and 201(1A) has been passed by the Assessing Officer. It can be seen that as "Annexure to the Auditor's Report" appearing in Page-15 (Para-9a) the Auditors have pointed out the arrears in respect of Income-tax & Sales-tax which was due to be paid by the appellant but not paid or partly paid. In the said paragraph, the Auditors have mentioned the TDS dues for the year ending 31st March, 2000, 2002, 2003, 2004, 2005 etc. The Directors have given their comments / observations to the Auditors Report which appears at page-9 of the said report. For each of the entry mentioned by the Auditors, there is a categorical observation / reply by the Board of Directors. In reply to the Auditor's observation relating to TDS of Rs.1,11,39,688/-, the Board of Directors have replied that the payments were made to the payee in November, 2000 and February, 2001 on the basis of Tax Exemption Certificate furnished by the payee for such payment period. However, the accounts for the year 1999-2000 were closed in January, 2003 when the liability was actually provided in the accounts. The matter is under discussion with the payee company and steps will be taken to appropriately issue. It is thus clear from the Board of Directors' reply that the provision of the TDS liability was created In January, 2003 when books of accounts for 1999-2000 were finalized and closed. It is obvious that since the liability pertained to the Financial Year 1999- 2000, the entry has to be made in the books of 7 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

accounts for the Financial Year 1999-2000 there is no categorical finding either by the Auditor or by the Assessing Officer that the provision for the liability for TDS had been created during the financial year 1999-2000.· As per the accounting norms and standards, necessary adjustment entries can be made even after the close of the Financial Year if pointed out by the Auditors during the course of audit of the books of accounts. This appears to have happened in the case of the assessee. While auditing the books of accounts for the F.Y. 1999-2000, the Auditors might have suggested that provision for liability of TDS be created for the remittances to be made to RRIPL on account of O & M payments. It is but natural that if such a provision is to be made, the entries have to be made for the period 1999- 2000 even though the entry for the same has actually been made in the year 2003 i.e., at the time of finalization of accounts. With this background, it is now to be seen whether the provisions of sec.195 of the I T Act, shall be applicable for the remittances made by the appellant. No doubt the appellant has also disputed the application of provision of sec.195 for such remittances. In fact the appellant has filed separate Appeals under sec.248 of the IT Act denying its liability for TDS.

6.2. As per Sec.195(1) any person responsible for paying to a non-resident, not being a company, or to a foreign company any interest or any other sum chargeable under the provisions of the Act shall at the time of credit of such income to the account of the payee or at the time of payment thereof .........whichever is earlier, deduct income-tax thereon at the rates in force. Based on the Annual Report for 2004-05, it appears that the actual time of credit for the payment by way of creating the provision for the F.Y 1999-2000 has been made in the year 2003 when the books of account were being closed. Before that the assessee claims to have made the payment to the 8 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

non-resident (RRIPL) in November, 2000 & February, 2001. Going by this, it can be assumed that in the present case, the payment has been made prior to the actual credit entry though the entry pertains to an earlier year. Now the question arises whether the appellant was liable to deduct tax at the time when the payment was made. In support of non-deduction of tax, the appellant relies on the exemption certificate issued by the Assessing Officer of the payee i.e. RRIPL. Perusal of the records also shows that before making the remittances, the appellant has sought for the opinion of the Auditors and It was opined -by the Chartered Accountants that in view of the certificate issued under section 197(1) of the I.T. Act by DCIT, TDS, Circle-28(1), Mayur Bhavan, New Delhi valid upto,31st March, 2001, no tax at source needs to be deducted so long 'as the total payment does not exceed the sums specified in the certificate. In course of the appellate proceedings on 12-01-2007, the Authorised Representative of the appellant has filed a copy of the Certificate under sec.197(1) of the I.T. Act, 1961 issued by DCIT, TDS Circle-28(1) vide Certificate No. DCIT/Cir.28(1)/R-28/2000-01/72 dated 31st August, 2000. As per the said Certificate, the DCIT, TDS has authorized the appellant to pay without TDS the sums credited in the name of Rolls Royce Industrial Power (India) Limited as per Col. No.4 of the Schedule. At Column-4, the sum expected to be credited/paid during the Financial Year was stated to be Rs.862,151,440 US $2,705,700 and GBP 105,15 and the Certificate was stated to be valid upto 31.03.2001. It is the appellant's plea that the payment on which the TDS liability of Rs.1,11,39,688/- arises had been made during the period when the exemption certificate was valid and hence there : was no necessity for tax deduction at source. During the course of appellate proceedings, the Authorised Representative of the appellant has pointed out that the TDS liability of Rs.1,11,39,688/- has 9 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

been worked out on the O & M additional charges of Rs.2,32,07,682/- and the TDS has been calculated at 48%. Apparently this amount of Rs.2,32,07,682/- has been paid in the month of November, 2000 and February, 2001. The details of these payments have been furnished before the A.O. in course of the hearing as evident from the record perused. These amounts have been remitted through SBI, Hyderabad Main Branch based on the certificate issues by TDS authority, New Delhi. Accordingly, in my view, since in the present case the actual payment has preceded the actual credit entry made, the TDS liability of the appellant is to be reckoned as on the date when the payment was made. Since at the time of making the payment, there was a valid exemption certificate issued by TDS authority at New Delhi, the appellant had a reasonable ground for not deducting TDS at the time of remittance. To that extent, the appellant cannot be treated as an assessee in default for the payment made to RRIPL on which a TDS liability of Rs.1,11,39,688/- has been worked out. Thus, in so far as the TDS liability under section 195 is concerned, the appellant's ground is allowed."

6. Keeping in view the above decision rendered by him accepting the first contention of the assessee, the Ld. CIT(A) did not go into the merits of the alternative claim made by the assessee company relying on the relevant provisions of Article-7 of the DTAA between India and U.K. Aggrieved by the order of the Ld. CIT(A), the Revenue has preferred this appeal before the Tribunal.

7. We have heard the arguments of both the sides and also perused the relevant material on record.

10 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

Although the learned D.R. has emphatically contended that the provision for PLF bonus having been made by the assessee company in its books of account for the F.Y. 1999-2000, the account of the said party ought to have been credited in that financial year, it is observed that the Ld. CIT(A) after taking into consideration all the relevant facts of the case as well as the material placed on record before him, has come to the conclusion that the relevant entries making provision for the PLF bonus in the books of account of the assessee company for the F.Y. 1999- 2000 were actually made only in January, 2003. It is thus clear that when the payments were made by the assessee company to M/s. RRIPL on account of PLF bonus in the months of November, 2000 and February, 2001, the amount of PLF bonus was not credited by the assessee company to the account of M/s. RRIPL and as per the provisions of section 195(1), the tax at source was deductible by the assessee company at the time of making payments in the F.Y. 2000-2001. Since M/s. RRIPL had furnished an exemption certificate obtained from the A.O. for the F.Y. 2000-2001, we find ourselves in agreement with the Ld. CIT(A) that there was no default on the part of the assessee in making the payment to M/s. RRIPL without deduction of tax at source. Consequently, the assessee could not be treated as in default under section 201(1) and no interest under section 201(1A) could be levied as rightly held by the Ld. CIT(A). We therefore, uphold the impugned order of the Ld. CIT(A) on this issue and dismiss the appeal filed by the Revenue.

11 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

8. Keeping in view our decision rendered above dismissing the appeal of the Revenue by holding that the assessee could not be treated as in default under section 201(1) for making the payment of PLF bonus to M/s. RRIPL without deduction of tax at source, all the grounds raised in the appeals of the assessee being ITA.No.438 and 439/Hyd/2007 have either become infructuous or the Ld. Counsel for the assessee has not pressed the same. Accordingly, the said appeals filed by the assessee are dismissed.

9. As regards the remaining appeal of the assessee being ITA.No.440/Hyd/2007, the Ld. Counsel for the assessee has submitted that the same emanating from the order passed by the A.O. under section 154 rejecting the application filed by the assessee for rectification of the order passed under section 201(1)/201(1A) has also become infructuous as a result of dismissal by us of the appeal of the Revenue being ITA.No.484/Hyd/2007 upholding the decision of the Ld. CIT(A) that the assessee could not be treated as in default under section 201(1)/201(1A) for the payment of PLF bonus made to M/s. RRIPL without deduction of tax at source. This appeal of the assessee is accordingly dismissed.

10. In the result, all the three appeals of the assessee as well as the appeal of the Revenue are dismissed.

12 ITA.No.438 to 440/H/07 & ITA.No.484/H/07 Spectrum Power Generation Ltd., Hyderabad.

Order pronounced in the open Court on 12.06.2015.

Sd/- Sd/- (SAKTIJIT DEY) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 12th June, 2015.

VBP/-

Copy to

1. Spectrum Power Generation Ltd., Hyderabad.

C/o. M. Anandam & Co., Chartered Accountants, 7A, Surya Towers, S.D. Road, Secunderabad - 3.

2. DCIT, TDS, Circle 14(2), Hyderabad.

3. Commissioner of Income Tax (Appeals)-II, Hyderabad.

4. Commissioner of Income Tax-I, Hyderabad.

5. D.R. I.T.A.T. "B" Bench, Hyderabad.

6. Guard File