TMI Blog2009 (4) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... the deductor has not deducted tax at sources has resulted into assessment of income in the hands of the deductee. If the contention of the appellant is accepted that it was knowing that the transaction will result into loss in the hands of deductee and, hence, tax has not been deducted then every deductor may not deduct tax at source from payments like interest without collecting the appropriate declaration from the deductee that his income is below taxable limit. When the Act has provided that an assessee can make an application for no deduction or short deduction then such provision cannot be bypassed by merely stating that the deductor was aware that the transaction will result into loss. Hence, the deductor was liable to deduct tax as the transaction was to be considered for computation of income. The deductor was required to deduct the tax at source and, therefore, the deductor was an assessee-in-default since a deductee has filed the return and has disclosed the transaction in the return of income and that shows no tax was payable on such transaction. Therefore, the default will end on the date when the deductee has filed the return. Hence, the deductor will be liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of liabilities. The written down value of the assets was Rs. 4,61,02,591. M/s. Intel accounted the purchase of the above-referred assets in its books on 1-4-2003 by debiting the assets accounts and crediting M/s. Intel Asia account by an amount of Rs. 2,60,00,000. As the assets sold were depreciable assets, the sale proceeds were chargeable to tax as short-term capital gains in terms of section 50 of the Income-tax Act. The payer was required under section 195 to deduct tax as the rates in force at the time of crediting the amounts to the account of the payee, but M/s. Intel failed to deduct tax. Hence, a notice under section 201(1) was issued and the assessee was required to show cause as to why it should not be treated as an assessee-in-default under section 201(1) and also interest on the belated payments should not be levied under section 201(1A). Before the Assessing Officer, the assessee made the following submissions : u The provisions of section 195 are not applicable in the cases where the non-resident or foreign company has presence in India and assessed to tax. u The transfer of the assets has resulted in a loss in the hands of the payee, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich it was held by the Hon ble Apex Court that there could be no recovery of the tax alleged to be in default once again from the assessee deductor considering that the deductee/recipient had already paid taxes on the amount received from the appellant. For this proposition, reliance was also placed on the following decisions : u Singapore Airlines Ltd. v. ITO [2006] 7 SOT 84 (Chennai). u AP Power Generation Corpn. Ltd. v. Asstt. CIT [2007] 11 SOT 221 (Hyd.). u Golkonda Engineering Enterprises Ltd. v. ITO [IT Appeal Nos. 748 and 749 (Hyd.) of 2007]. 7. The learned CIT(A) held that tax was not required to be deducted after observing as under: "I have considered the submissions of the appellant and also perused the judicial decisions relied upon by the appellant. I shall first take up Grounds bearing No. 3, 4 and 5 which are the substantive grounds dealing with the issue of liability of the appellant to deduct tax and, upon his failure to do so, to be treated as an assessee-in-default under section 201(1). It is a matter of record that the appellant credited the sale consideration towards transfer of assets to the account of Intel Asia Branch on 1-4-2003. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at where the payer 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 Assessing Officer to determine the appropriate proportion of such sum so chargeable and, upon such determination, tax shall be deducted accordingly. In the instant case, however, no proportion of the sale consideration of Rs. 2.60 crores credited to the account of Intel Asia Branch on 1-4-2003 was chargeable to tax, as the transfer of assets resulted in capital loss. It appears that in view of the capital loss to its related Intel Asia Branch, the appellant did not make an application to the Assessing Officer under section 195(2) as it would have been a mere formality. But just because no such application was made by the appellant, it cannot be treated as an assessee-in-default and required to pay tax on the entire sum of sale consideration. The question of treating the appellant-payer as an assessee-in-default under section 201(1) of the Act would arise if the payee, i.e., Intel Asia Branch failed to pay the taxes due from the latter. Once the payee paid the taxes due on its return, the purpose sought to be achieved under the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent to Intel Asia Branch. Payment was made without deduction of tax at source. November 1, 2004 Filing of return of income by Intel Asia Branch in India. The acknowledged copy of the return and computation of total income are enclosed at pages 49 to 53 of this submission. Total income determined at Rs. 5,43,930. Entire tax (including interest) of Rs. 2,33,046 paid as advance tax on March 12, 2004. Advance tax payment challan is enclosed at page 54 of this submission). July 8, 2005 Intimation issued to Intel Asia Branch under section 143(1) of the Income-tax Act, 1961 ("the Act") (copy enclosed at page 55 of this submission). September 4, 2006 Notice issued under section 201 of the Act by Income-tax Officer, International Taxation, Ward 19(1), Bangalore ( ITO ) on the Respondent (copy enclosed at page 56 of this submission). September 27, 2006 Order under section 201 of the Act passed by ITO treating the Respondent as assessee-in-default and charging - Tax under section 201(1) of Rs. 1,06,60,000; and - Interest under section 201(1A) of Rs. 49,30,250. December 27, 2006 Assessment order under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign company, who is being assessed in India on account of its business presence, will be exempt from section 195. 13. The Tribunal had an occasion to consider the applicability of section 195 in a case where the deductor paid consideration and on account of that consideration, the deductee was liable to capital gain but in case the carried forward capital loss was to be adjusted then there would have been no income. The issue before the Tribunal was that under such circumstances whether the deductor was obliged to deduct the tax at source, under section 195 of the Income-tax Act. The Tribunal vide order dated 11-7-2008 in the case of Madura Coats (P.) Ltd. [IT Appeal No. 1403(Bang.) of 2007] held that the deductor was liable to deduct tax at source because the deductor failed to apply for deduction of tax at source under section 195 and has not availed the provisions of section 248. It will be relevant to reproduce the following paras from that order : "14. We have heard both the parties. Before we proceed further, it will be useful to reproduce sections 195(1) and (2), 197 and 248 of the Act : 195. (1) Any person responsible for paying to a non-resident, not being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit of income or each payment of income. The words such income will refer to the income in respect of the payment or of the credit. The word such precede before the word has been a subject of interpretation. 16. The expression "such profits" was a matter of deliberation before the Hon ble Calcutta High Court in the case of CIT v. Belliss Morcom (I) Ltd. [1982] 26 CTR (Cal.) 76 : [1982] 136 ITR 481 (Cal.). The said matter was with reference to the allowability of deduction to priority industries under section 80-I of the Act. The Hon ble Calcutta High Court held that the expression "such profits" must relate to the quality of the profits or descriptive of the profits. 17. Black s Law Dictionary , 7th Edn., defines the word "such" as, "of this or that kind". 18. Garner s Dictionary of Modern Legal Usage , 2nd Edn., defines the word "such" as, "as an adjective when reference has previously been made to a category of persons or things". 19. K.J. Aiyar, Judicial Dictionary , 13th Edn., defines the word "such" as under: "The word "such" always refers to someone else and is generally and naturally refers to its last antecedent. The normal meaning of "such" is sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o mean that such audit means, an audit required to be carried out under section 44AB. 25. Hence from section 195(1), it is clear that a deduction of tax at source is to be considered at the time of each credit or payment. 26. Similarly, in section 195(2), it is mentioned that where a person responsible for paying any such sum chargeable under this Act considers that the whole of such sum would not be income chargeable in the case of recipient, he may make application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable. The words such sum mentioned in section 195(2) of the Income-tax Act refers to the sum mentioned in section 195(1) of the Income-tax Act. 27. The Authority for Advance Ruling in the case of Timken India Ltd. 273 ITR 67 = (2005 - TIOL -4-ARA-IT) had an occasion to consider the deduction of tax at source where the agreement provided that compensation payable by subsidiary not to include profit element. The Authority for Advance Ruling held that subsidiary to deduct tax at source on whole amount when paying to non-resident determining profit element does not arise at stage of application before the Assessing Officer. No o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee has not filed any application under section 197 of the Income-tax Act. 30. The Hon ble Apex Court in the case of CIT v. Williamson Financial Services 297 ITR 17 = (2007-TIOL-228-SC-IT) has observed that the definition of the term total income as contained in section 2( 45 ) of the Income-tax Act involves two ingredients - firstly, the income must consist of the total amount of income referred to in section 5; and secondly, it must be computed in the manner laid down in the Income-tax Act. Hence, for the purposes of issuing certificate under section 197, the Assessing Officer was to be satisfied that the total income of the recipient justifies either no deduction of tax at source or deduction of tax at lower rate. Section 4(2) of the Income-tax Act says that income chargeable under sub-section (1) of section 4 is subject to income-tax and income-tax should be deducted at source or paid in advance. It refers to the income chargeable in the Income-tax Act. It does not refer to income under any particular head. The paper book contains the return filed for the assessment year 2007-08 which is under reference. As per this return, total income is Rs. 31,10,38, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd does not refer to the total income. Hence, the learned CIT(A) was justified in holding that the appellant was required to deduct tax at source after admitting the appeal of the assessee under section 248 of the Income-tax Act." 14. It is seen that the credit was made on 1-4-2003 while the valuation report is dated 1-11-2003. Hence, on the date of credit, it was not known to the deductor that the amount paid will be resulting into loss. The deductor cannot make an assessment of income in the hands of the deductee. The deductee filed the return of income and since the transaction in question was between the associated concerned, therefore, as a result of transfer pricing adjustment, it was held that there was short-term capital gain. Hence, the transaction on which the deductor has not deducted tax at sources has resulted into assessment of income in the hands of the deductee. 15. If the contention of the appellant is accepted that it was knowing that the transaction will result into loss in the hands of deductee and, hence, tax has not been deducted then every deductor may not deduct tax at source from payments like interest without collecting the appropriate declaration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on which the deductor was required to deduct tax at source. Hence, the liability of the deductor to deduct tax at source will end when the deductee has filed the return. The deductor cannot be supposed to deduct tax at source in respect of adjustment if any made by the Assessing Officer in respect of income-tax assessment of the deductee. 18. Hon ble Apex Court in the case of CIT v. Eli Lilly Co. (India) (P.) Ltd. [2008] 297 ITR 300 (Delhi) (available on ITAT online.org.) observed as under: "A Perusal of section 201(1) and section 201(1A) shows that both these provisions are without prejudice to each other. It means that the provisions of both the sub-sections are to be considered independently without affecting the rights mentioned in either of the sub-sections. Further, interest under section 201(1A) is compensatory measure for withholding the tax which ought to have gone to the exchequer. The levy of interest is mandatory and the absence of liability for tax will not dilute the default. The liability of deducting tax at source is in the nature of vicarious liability, which presupposes existence of primary liability. The said liability is a vicarious liability a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
