TMI Blog2015 (1) TMI 1168X X X X Extracts X X X X X X X X Extracts X X X X ..... edy; the payer may be regarded an assessee-in-default under Section 201, and the consequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed - Decided against revenue. - ITA 352/2014 to ITA 392/2014, ITA 402/2014 - - - Dated:- 12-1-2015 - MR. S. RAVINDRA BHAT AND MR. R.K. GAUBA, JJ. For the Appellant : Sh. Balbir Singh, Sr. Standing Counsel with Ms. Rubal Maini, Advocate, for CIT For the Respondent : Sh. Sachit Jolly and Ms. Gargi Bhatt, Advocates, JUDGEMENT MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. In these appeals under Section 260A of the Income Tax Act, 1961 (hereafter referred to as the Act ), the Revenue questions the common order of the ITAT dated 16.7.2013 in ITA No.6034/Del-2010 and connected appeals, by which the order of the Commissioner of Income Tax (Appeals) ( CIT(A) ) deleting the interest levied under Section 234B, was confirmed. The Revenue argues that the substantial question of law which arises for consideration is whether the Income Tax Appellate Tribunal (ITAT) fell into error in holding that the assessee could not be saddled with interest liability under Section 234B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aswala (supra) was also considered in Jacabs(supra). The Revenue is in appeal before this Court against the said order of the ITAT. 4. The Revenue argues that the ITAT's reliance on Jacab (supra) in the impugned order was misplaced as the proposition that interest, under Section 234B, is not chargeable cannot be unqualified, because regard must be had to the role of the assessee/payee in the non-deduction or short-deduction of tax at source. Mr. Balbir Singh for the Revenue argues that the relevance of the assessee's role was made clear in DIT - International Taxation v. Alcatel Lucent USA Inc, by a Division Bench of this Court in ITA No. 327 of 2012, dated 07.11.2013, in which it was held that interest could be imposed on an assessee foreign company which denies tax liability, for non-payment of advance tax, because there exists a presumption that the assessee had represented to the Indian payer that tax should not be deducted from the remittances made to it. In Alcatel Lucent (supra), the foreign assessee first contested the PE status, but later, during the appellate stage, in a volte face, admitted that it was a PE and that its income was chargeable to tax in India. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stage. There being no admission here of tax liability, it is argued that the obligation rests upon the payer to deduct tax at source. Reliance was also placed on CIT v. Madras Fertilizers Ltd. [1984] 149 ITR 703 (Mad.); DIT (Int. Taxation) v. NGC Network Asia LLC 313 ITR 187 (Bom.); Sedco Forex International Drilling Inc. v. DCIT 264 ITR 320 (Utt.); Motorola Inc. v. DIT 95 ITR 269 (Delhi SB) and Qualcomm Inc. v. ADIT, 153 TTJ 513 (Del.), for this proposition. 7. The question that arises for consideration is whether interest should be levied on the assessee under Section 234B, on the ground of non-payment of advance tax. The case of the Revenue, in short, is that the position of law in Alcatel Lucent (supra) is applicable, since the assessee, having denied tax liability during reassessment, caused the payer to erroneously refrain from deducting tax under Section 195; it must thus suffer an interest for nonpayment of advance tax. The case of the assessees on the other hand is that the position of law in Jacabs (supra) must apply, and that the obligation was upon the payer to deduct tax at source before making remittances to them; the payer s failure to do so cannot invite an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, a foreign company assessee that receives remittances that are attributable as business profits to a PE in India, is permitted a tax credit while computing its advance tax liability under Section 209, since a tax is deductible at source under Section 195.Section 209(1)(d), prior to the Finance Act, 2012, read: Section 209. Computation of advance tax (1) The amount of advance tax payable by an assessee in the financial year shall, subject to the provisions of sub-sections (2) and (3), be computed as follows, namely:- a. b. c. d. the income-tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income-tax, which would be deductible [or collectible] at source during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable: 10. The position in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the AY 2007-08. Based on the materials found in the survey at the premises of Alcatel Lucent India Ltd., the Indian subsidiary, the AO for Alcatel Lucent France concluded that the assessee had a PE in India. Reassessment proceedings were initiated against the assessee for AYs 2004-05 to 2007-08. The assessee maintained the position that it was not liable to tax in India, as it did not have a PE in India. Consequently, it filed NIL returns. However, the AO found that a percentage of its income was taxable in India, attributable to its PE, and levied interest under Section 234A, 234B and 234C. In the appeal to the CIT(A), the assessee claiming inter alia, first, that the computation of income, by attributing business profits to a PE, was incorrect, and second, that the interest levied under Section 234B was incorrect, since the whole consideration received by it was liable to tax deduction at source under Section 195, thus precluding any advance tax liability on its part. However, it did not press the first ground in the proceedings. The CIT(A) ultimately deleted the interest under Section 234B, on the ground that while the nonresident assessee was liable to tax, it could not be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set off against the assessee's advance tax liabilities. [emphasis added] 15. Apparently, it is this part of the decision that the Revenue seeks to rely upon, in arguing that the view in Alcatel Lucent (supra) did not turn on the volte face by the assessee as to its PE status, but instead on the fact that, at the time of assessment, the assessee denied its tax liability altogether. This Court, upon consideration, is of the view that the fact that was central to the decision of this Court in Alcatel Lucent (supra) is the assessee s initial denial of PE status, and consequently of its tax liability, that was aggravated by its subsequent volte face by way of its admission that it was a PE liable to tax in India. This resulted in the Court s view that the assessee had played a role in influencing the payer s non-deduction of tax at source, and was thus required to compensate for such a volte face, by paying interest under Section 234B. 16. This Court respectfully cannot apply the view taken in Alcatel Lucent (supra) to this case. This is because if the payer deducts tax at source only when the assessee admits tax liability, then deductions would not be made in cases where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it stands at present, after the Finance Act, 2012; should a situation akin to that in Alcatel Lucent (supra) arise, the payer would be treated as the assessee-indefault according to Section 201, and the payee/assessee would not be permitted a tax credit under the proviso in Section 209(1)(d). Clearly, the anomaly of an assessee denying tax liability (whether under a bona fide mistake or by deceit), thereby not suffering a tax deduction at source, and still being permitted a tax credit for the tax deductible, is remedied after the Finance Act, 2012. 19. Alcatel Lucent (supra), in any event, can be distinguished on the ground that the Court was persuaded to confirm the levy of interest under Section 234B, only on account of the equities that needed to be balanced in those peculiar facts, in favour of taxability. This is evident from the following words of the Court: 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 from the remittances, after leading them to believe that no tax was deductible. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax that was not deducted under Section 191. 20. This court also notices that the Madras High Court decision in Madras Fertilizers Ltd. (supra) and that of the Uttarakhand High Court in Sedco (supra) was considered and affirmed by the Bombay High Court in Director International Taxation v NGC Network Asia LLC [2009] 313 ITR 187(Bom) that We are clearly of the opinion that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee-assessee. An important decision is that of the Karnataka High Court in Commissioner of Income Tax v Samsung Electronics Co Ltd. 2012 (345) ITR 494 (Kar), which also considered the same issue, i.e. the obligation under Section 195 (1). The High Court in the first instance had rejected the Revenue's appeal; the Supreme Court remitted the matter - for determination as to whether income by way of royalty had been made out in the facts of the case. The High Court decision first set out the order of the Supreme Court inter alia, as to the nature of obligation cast upon the payer under Section 195: While remanding the matter, Hon'ble Supreme Court has made certain observations whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the nonresident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, chargeable under the provisions of the Act . It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act, In CIT v. Cooper Engineering (MANU/MH/0040/1967 : 68 ITR 457) it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under Section 18(3B) (now Section 195(2) of the I.T. Act). The application of Section 195(2) pre-supposes that the person responsible for making the payment to the non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent expressions however, the expression sum chargeable under the provisions of the Act is used only in Section 195. For example, Section 194C casts an obligation to deduct TAS in respect of any sum paid to any resident . Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of any amount referred to in the specified provisions. In none of the provisions we find the expression sum chargeable under the provisions of the Act , which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted as source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words sum chargeable under the provisions of the Act in Section 195(1). The fact that the Revenue has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section237 read with Section 199 implies that only the recipient of the sum. i.e., the payee could seek a refund. It must therefore follow, if the Department is right that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum changeable under the Act. The interpretation of the Department, therefore, not only requires the words chargeable under the provisions of the Act to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the appropriate proportion of such so cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. The Karnataka High Court first addressed this question and stated that: 17. It is clear from the scrutiny of the material on record and the contentions of the parties viz., revenue and the respective respondent in these cases that the fact that payments have been made by the respondent herein to non-resident for having imported shrink wrapped software/off-the-shelf software is not disputed. There is also no dispute that no tax was deducted at source by the respondent und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the Act to which the aforestated requirement of TDS applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the Act read with rule 30 of the Income Tax Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the Act. In addition, he would also be liable under Section201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Therefore, if the amount is held to be royalty, the other consequences as referred to above would follow. After holding that the transaction in that case amounted to royalty and, therefore, taxable, the Court ruled that the obligation to deduct tax was with the payer: In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tel Lucent (supra) can be explained as a decision turning upon its facts; its seemingly wide observations, limited to the circumstances of the case. This Court, therefore, holds that the view taken by ITAT was correct; the primary liability of deducting tax (for the period concerned, since the law has undergone a change after the Finance Act, 2012) is that of the payer. The payer will be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act. 23. For the above reasons, this Court finds that no interest is leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under Section 201, and the consequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed without any order as to costs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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