2019 (9) TMI 1068 - AT - Income Tax

Validity of order passed u/s 201(1) 201(1A) - period of limitation - TDS u/s 195 - assessee had made a remittances to certain foreign parties without deduction of any tax at source - disallowance under Sec. 40(a)(ia) - HELD THAT - We are persuaded to subscribe to the claim of A.R that the order under Sec. 201(1) 201(1A) r.w.s 195 for A.Y 2007-08 in the case of the assessee before us could have been passed latest by 31.03.2011. Accordingly as the order under Sec. 201(1) 201(1A) r.w.s 195 had been passed by the ITO (IT)-TDS2 Mumbai on 31.10.2013 therefore the same being beyond the prescribed time period envisaged in the proviso to Sec. 201(3) is thus barred by limitation. On the basis of our aforesaid observations we are of the considered view that the order passed by the A.O under Sec. 201(1) 201(1A) r.w.s195 dated 31.10.2013having been passed beyond the prescribed period of limitation cannot be sustained and is liable to be vacated. Order passed the ITO(IT) Mumbai under Sec. 201(1) 201(1A) - a perusal of the letters/notices that the ITO(IT)-TDS Range-2 Mumbai had only called upon the assessee to furnish certain documentary evidence along with its explanation as to why tax on the payments therein stated was not deducted at source. Neither of the aforesaid letters dated 28.09.2007 15.02.2008 and 05.09.2013 can be construed as a Show cause notice under Sec. 201(1). In fact as is discernible from the order passed by the A.O under Sec. 201(1) 201(1A) r.w.s 195 dated 31.10.2013 the Show cause notice was issued by the ITO(IT)-TDS Range-2 Mumbai to the assessee for the first time on 18.10.2013, wherein it was called upon to explain as to why it may not be deemed to be an assessee in default and therein be directed to pay the defaulted tax along with interest as per the provisions of Sec.201(1) 201(1A). A perusal order of the ITO(IT)-TDS Range-2 Mumbai reveals that till 05.09.2013 neither any order under Sec. 201(1) 201(1A) had been passed nor any proceedings were pending with him under Chapter XVII of the I.T. Act in the case of the assessee for A.Y. 2007-08. Proceedings under Sec. 201(1) were initiated by the ITO(IT)-TDS Range-2 Mumbai for the first time on 18.10.2013 therefore the contention advanced by the ld. A.R that the said order having been passed beyond a time period of one year from the end of the financial year in which the said proceedings had been initiated was thus not sustainable. Department has not taken any action against the payee viz. Entec U.K. Ltd. and also the time for taking any such action had expired - As in the case before us the revenue had not taken any action against the payee viz. Entec U.K Limited for nondeduction of tax at source and also the time limit for taking such action against them under Sec. 148 had expired therefore the order against the payer assessee under Sec. 201(1) 201(1A) r.w.s. 195 dated 31.10.2013 would be invalid. Accordingly the order passed the ITO(IT)-TDS Range-2 Mumbai under Sec. 201(1) 201(1A) r.w.s. 195 dated 31.10.2013 is also struck down on the said count. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the order passed by the AO under Sec. 201(1)/201(1A) r.w.s. 195 of the Income Tax Act, 1961.
2. Nature of payments made to Entec UK Ltd. as "Fees for Technical Services" under the DTAA with the UK.
3. Applicability of Article 7 read with Article 5.2(k) of the India-UK Treaty regarding "Business Income."
4. Limitation period for passing an order under Sec. 201(1)/201(1A) r.w.s. 195.
5. Action against the payee (Entec UK Ltd.) and its impact on the assessee's liability under Sec. 201(1)/201(1A).

Detailed Analysis:

1. Validity of the Order under Sec. 201(1)/201(1A) r.w.s. 195:
The assessee challenged the validity of the order dated 31.10.2013 passed by the AO under Sec. 201(1)/201(1A) r.w.s. 195 on the grounds of limitation. The Tribunal observed that the order was passed beyond the prescribed time limit under the proviso to Sec. 201(3), which mandates a limitation period for passing such orders. The Tribunal relied on the judgment of the Hon’ble High Court of Delhi in Bharti Airtel Limited Vs. Union of India, which stated that the limitation period prescribed in Sec. 201(3) applies to both resident and non-resident deductees. Therefore, the order dated 31.10.2013 was deemed barred by limitation and was vacated.

2. Nature of Payments to Entec UK Ltd.:
The CIT(A) had held that the payments made to Entec UK Ltd. were in the nature of "Fees for Technical Services" (FTS) under the DTAA with the UK. The assessee argued that the services rendered by a non-resident to an Indian payer, even if technical, should be considered as "Business Income" if the non-resident does not make available any technology to the payer. However, since the order was struck down on the ground of limitation, the Tribunal did not adjudicate on this issue.

3. Applicability of Article 7 and Article 5.2(k) of the India-UK Treaty:
The CIT(A) had ruled that the payments to Entec did not fall under Article 7 read with Article 5.2(k) of the India-UK Treaty as "Business Income" since Entec did not have a permanent establishment in India. The assessee contested this, arguing that the payments should be considered as "Business Income" and not "Fees for Technical Services." Again, due to the order being vacated on jurisdictional grounds, the Tribunal did not address this issue.

4. Limitation Period for Passing the Order:
The assessee contended that the order was passed beyond the period specified by the proviso to Sec. 201(3) and beyond one year from the end of the financial year in which proceedings were initiated. The Tribunal noted that the proceedings under Sec. 201(1) were initiated by a notice dated 18.10.2013, and the order was passed on 31.10.2013. However, the Tribunal found that the order was indeed barred by limitation as it was passed beyond the prescribed period of four years from the end of the relevant financial year.

5. Action Against the Payee:
The assessee argued that since no action was taken against the payee (Entec UK Ltd.) and the time for taking such action had expired, no order under Sec. 201(1)/201(1A) could be passed. The Tribunal agreed, citing the "Special Bench" decision in Mahindra & Mahindra Ltd. Vs. DCIT, which held that if no action is taken against the payee and the time limit for such action has expired, the payer cannot be treated as an assessee in default. Therefore, the order under Sec. 201(1)/201(1A) was invalidated on this ground as well.

Conclusion:
The Tribunal allowed the appeal of the assessee, vacating the order passed by the AO under Sec. 201(1)/201(1A) r.w.s. 195 on the grounds of limitation and the absence of action against the payee. The merits of the case were not adjudicated as they were rendered academic due to the jurisdictional issues. The order was pronounced in the open court on 13.09.2019.