1. The question referred for our decision is as follows :
'Whether on the finding that all the services by the non-resident company were performed outside the taxable territories, and, therefore, the interest accured outside the taxable territories, the assessee was liable to deduct under section 18(3B) of the Act, tax on interest payments of Rs. 2,224 made to the non-resident company, Tata Ltd. ?'
2. The department had, however, posed for reference before the Tribunal a slightly different question. They had omitted all reference to the findings of the Tribunal and had merely posed the following question :
'Whether the assessee was liable to deduct under section 18(3B) of the Act, tax on interest payments of Rs. 2,224 made to the non-resident company, Messrs. Tata Ltd. ?'
3. The Tribunal, however, has referred the question as posed by the assessee and not the letter question and before us the Commissioner has taken out a notice of motion for reframing of the question. We shall presently show after discussing the question that has been actually referred that there is really no substantial difference between the two questions and that the question as referred by the Tribunal correctly represents the question that arises in this reference.
4. The facts upon which the reference arises are briefly as follows : We are concerned with the disallowance of an amount of Rs. 2,224 paid by the assessee to Messrs. Tata Ltd. London, by way of interest during the accounting year ending June 30, 1955. The assessee claimed a deduction in respect of the two items which comprised that amount but the deduction was disallowed on the ground that tax on that amount had not been deducted at source as required by section 18(3B). The Appellate Assistant Commissioner in appeal agreed with the order of the Income-tax Officer. The matter then went up in appeal before the Tribunal. It was urged before the Tribunal that Messrs. Tata Ltd. were rendering services to the assessee in making purchases of machinery pats and stores in foreign countries and as and when purchases were made invoices used to be sent to the assessee for the net amount payable by the assessee. The amounts were only mentioned in pound sterling. On receipt of periodical statement of accounts the assessee used to remit moneys to Messrs. Tata Ltd., but in the process there used to be some delay and, therefore, the assessee was required to pay interest to Messrs. Tata Ltd. The amount represents the interest paid in the assessment year 1956-57 with which we are concerned. Before the Tribunal it was pointed out on behalf of the assessee that the services were rendered by Messrs. Tata Ltd., London in England and, secondly, that no part of the services were performed in the taxable territories and, therefore, the amount outstanding on account of interest had only accured in England and was therefore not subject to tax in India. The Tribunal, accepting this contention, has held that the services were rendered wholly in London and not part of them as rendered in India and, therefore, they have held that the amount of interest paid to Messrs. Tata Ltd. was 'outside the scope of section 18(3B) '. Upon these facts the question which we have mentioned above has been referred for out decision.
5. Section 18(3B) provides that any person responsible for paying to a person not resident in the territories any interest (not being interest on securities) or any other sums chargeable under the provision of this Act shall, at the time of payment, unless he is himself liable to pay any income-tax and super-tax thereon as an agent, deduct income-tax at the maximum rate and super-tax at the rate applicable to a company or in accordance with the provisions of sub-clause (b) of sub-section (1) of section 17, as the case may be. There is no question here of the assessee being liable to pay income-tax or super-tax as an agent and that case may, therefore, be left out of account. Now the facts found here are clear. Admittedly, Messrs. Tata Ltd. are a non-resident and it has been found that all the services they had rendered were in London and 'no part of the services was performed in the taxable territories'. Sub-section (3B) in terms says that the person responsible for paying to a person not resident in the territories any interest (other than interest on securities) chargeable under the provisions of the Act, shall at the time of payment deduct income-tax and super-tax at the rates applicable. Now, no doubt payment has actually been made. So one of the conditions of sub-section (3B) has been satisfied but the other condition is that it should be interest 'chargeable under the provisions of this Act. ' But upon the facts found, it is difficult to see how this amount of interest could be chargeable in india under any of the provisions of the Indian Income-tax Act. By virtue of section 4(1) the Act can only apply to income, profits or gains which are received or deemed to be received in the taxable territories. Clearly, therefore, upon the facts found the decision which the Tribunal reached was a correct decision.
6. But then it was urged upon a construction of the section 18(3B) that the words used in the sub-section are 'any interest..... or any other sum chargeable under the provisions of this Act' and the words 'chargeable under the provisions of this Act' govern only 'any other sum' but not 'interest' and the words 'or' by which the two clauses are separated is in the context disjunctive. Section 18 deals with every kind of deduction of income-tax and super-tax to be made at source and if one consider the several clauses of the section, in each one of those clause (we will leave clause (3C) and (3D) out of account for the time being) the decision has to be made upon the particular amount 'chargeable'; for instance in subsections (2), (2A) and (2B) 'salaries' which are chargeable are referred to and in sub-section (3) 'interest on securities' again provided it is an income chargeable. Similarly in sub-section (3A) is dealt with the head 'Interest on securities'. We do not suppose that the payment of 'any interest' could on any recognizable principle be subject to any special exception in this matter and that whether it is chargeable to tax or not the person responsible for paying it must deduct income-tax and super-tax at source.
7. The contention was raised on the basis of sub-section (3C) where the provision is made 'the person responsible for paying any sum chargeable under this Act other than interest, to a person not resident in the taxable territories, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Income-tax Officer..... ' Sub-section (3C) provides for a case where there may be some doubt as to whether the whole of such sum would not be 'income chargeable', in the case of a person not resident in the taxable territories for the person responsible for payment, to apply to the Income-tax Officer for determination of 'the appropriate proportion of such sum so chargeable'. Now the contentions is that in making that provision though all sums are referred to which are chargeable under the Act there is a specific exception made in the case of interest by the use of the words 'other than interest'. It was contended, therefore, that this exception was specifically made in sub-section (3C) because interest under sub-section (3B) was not qualified by clause 'chargeable under the provisions of this Act' and that in the light of sub-section (3C) sub-section (3B) should be so construed.
8. When every other head of payment is dealt with under section 18, it is qualified by the word 'chargeable' or by the words 'chargeable under the head', etc. We can see no reason or principle why the legislature should exempt interest from the qualification that it should be also chargeable under the Act. So far as sub-section (3C) is concerned, it seems to us that it deals with a specific subject, namely, the case where a payment to be made in the opinion of the person responsible for payment is only partially chargeable and apart of it is not so chargeable. Then the provision is that the person responsible for paying the same should made an application to the Income-tax Officer to determining the question. Since this was a special subject which sub-section (3C) dealt with and such a contingency would not arise in the case of interest we can understand why the head of payment of interest was excluded from the operation of sub-section (3C) by the use of the words 'other that interest. ' In our opinion, those words were not put in the sub-section (3C) in order to indicate any distinction in sub-section (3B) between 'interest' and 'any other sum chargeable under the provisions of that Act'. It seems to us that a fair reading of sub-section (3B) would show that the words 'chargeable under the provisions of this Act' equally govern the words 'interest' as the words 'any other sum'. At any rate there is nothing to show or suggest that the provisions of section 4(1) would not apply to 'interest'.
9. Therefore the position upon the statute is this that unless any payment of interest is such that that interest is chargeable under the Act, the liability upon the person responsible for paying it to deduct the tax at source is not there. In the present case, upon the facts found we have already shown that the amount of interest payable to Messrs. Tata Ltd., London, was not an amount chargeable under the Act. Therefore, there was no obligation upon the assessee to deduct the amount of interest at source. If that be so, it seems to us that the assessing officer and the Appellate Assistant Commissioner were in error in adding it back to the assessment. We think that the view taken by the Tribunal was the correct view. In our opinion, the assessee was entitled to claim this amount as a deduction under section 10(2).
10. The question referred is, therefore, answered in the negative. The Commissioner to pay the costs of the assessee. In the view we have taken no separate order on the notice of motion.