TMI Blog2015 (9) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of an obligation to deduct TAS in these circumstances would amount to enforcing payments from one person towards a tax liability of another, even where the person does not does not acknowledge that any sum is payable. This, in our view, is contrary to the scheme of provisions relating to collection of TAS under the Act. It is also not disputed that TLME had not claimed royalty payable from the Assessee and, concededly, no royalty for the period has been paid either. In the circumstances, we are unable to accept that any income had accrued or arisen or deemed to have accrued or arisen, which is chargeable to tax in the hands of TLME. It is not disputed that the agreement dated 1st January, 1997 was not acted upon at the material time. In the absence of any income chargeable to tax arising on account of royalty in the hands of TLME at the material time, the question of withholding TAS would not arise. - Decided in favour of assessee. - ITA 106/2002 - - - Dated:- 4-9-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr Rohit Madan and Mr Zoheb Hossain For the Respondent : Mr M.S. Syali, Sr. Advocate with Mr Mayank Nagi Mr Harkunal Singh ORD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24,96,669/- to the account of M/s. L.M. Ericsson on account of royalty? 4. We have heard the learned counsel for the parties. 5. In our view, for the reasons stated hereafter, it is not necessary to decide the question whether the contract between the Assessee and TLME was void under Section 23 of the Contract Act, 1882 and it would suffice to address the issue - whether in the given circumstances, the Assessee could be considered to be in default of its obligation to deduct TAS under Section 195 of the Act. The said issue has been articulated in the second question framed by this Court, which is answered hereafter. 6. Briefly stated, the facts necessary to consider the controversy are as under:- 6.1 The Assessee is engaged in the business of installation and commissioning of telecom projects and information technology systems relating thereto. The Assessee is a wholly owned subsidiary of TLME, which is a company incorporated under the laws of Sweden and has its principal place of business situated in Sweden. The Assessee was incorporated in India pursuant to the approval granted by the Government of India, Ministry of Industry on 5th February, 1996. 6.2 The Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO in the said order dated 16th March, 2000 took note of the same and recomputed the Assessee s liability under Section 201(1) of the Act at ₹ 44,99,334/- (being 20% of ₹ 2,24,96,669/-). Consequently, the interest payable under Section 201(1A) was also recomputed at ₹ 16,31,000/-. 6.5 The Assessee preferred appeals before the CIT(A) against the orders passed by the AO but was unsuccessful. By an order dated 26th September, 2000, the CIT(A) confirmed the orders passed by the AO and held that in terms of the agreement entered into between the Assessee and TLME, income had accrued in the hands of TLME and this attracted withholding tax obligations (i.e. deduction of TAS) under Section 195 of the Act. 6.6 The Assessee carried the common order passed by the CIT(A) dated 26th September, 2000 in appeal before the Tribunal. The Tribunal upheld the contention of the Assessee and held that there was no accrual of income on account of Royalty in the hands of TLME, which resulted in an obligation on the part of the Assessee to deduct any TAS. The Tribunal accepted the Assessee s contention that its Agreement with TLME was void under Section 23 of the Contract Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation of withholding tax was not applicable. Analysis and Reasoning 10. Before proceeding further, it would be relevant to refer to Section 195 of the Act, which reads as under:- (1) Any person responsible for paying to a non- resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income- tax thereon at the rates in force: Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation 1-For the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment thereto, whichever is earlier. In view of the plain language of Section 195(1) of the Act, there can be no dispute that the obligation of a payer to deduct TAS arises when the amounts payable are credited into the accounts of the payee, even if the same is credited prior to making the payment thereto. However, this obligation is contingent on the amount credited being chargeable to tax under the provisions of the Act. Thus, all sums credited/paid are not to be subjected to withholding tax and the provisions of Section 195(1) of the Act are only applicable where the sums in question either credited to the account of the intended recipient or actually paid are chargeable to tax under the Act. 12. In the present case, the Assessee stoutly disputes that any income chargeable to tax arose or accrued in relation to or as a result of the entries in question, passed by the Assessee in its books of accounts. It is necessary to bear in mind that the provisions of Section 195 of the Act fall in Chapter XVII of the Act, which relates to collection and recovery of tax. The machinery sections of collection and recovery of tax cannot be read in isolation of the charging provisions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that no mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income-tax Act one cannot read the charging sections of that Act de hors the machinery sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver is earlier), the provisions of Chapter XVII of the Act relating to deducting TAS and depositing with the Income Tax Authorities are triggered and not otherwise. 16. It is also necessary that the question whether a transaction results in an obligation to deduct TAS, be viewed from the standpoint of the payer and not from the standpoint of a person claiming any amount from the payee. Thus, if a debt owed by a person is not acknowledged as payable, there would be no obligation to withhold or deposit any tax. The obligation imposed on a person to deduct TAS and deposit the same with the Authorities is an obligation similar in nature to the directions in garnishee proceedings where the person obliged to deduct TAS stands as a garnishee and Income Tax Authorities stand as a garnisher; there cannot be an obligations to pay, where the debt allegedly payable is disputed by a garnishee. 17. To summarise the above, the obligation of a person to deduct TAS under Section 195(1) of the Act would arise only if the following conditions are met:- (a) The payer owes a sum to the non-resident (not being a company) or a foreign company on account of interest or any other sum chargeable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Industry, Department of Industrial Policy and Promotion sent a letter dated 11th July, 2000 the relevant extract of which reads as under:- I am directed to refer to your letter dated 28.6.2000 on the above mentioned subject and to clarify that neither the FC approval dated 5.2.96 permits payment of royalty to the foreign collaborator nor does the extant policy provide for royalty payment to the parent foreign collaborator by the Indian wholly owned subsidiary. 21. The Assessee had not contested the above position and had accepted that no royalty was to be payable by the Assessee to TLME at the relevant time. The Assessee having accepted the above position that no royalty was payable had also not charged the same as an expense in its books and as indicated earlier, the entries passed for payment of royalty has been reversed. Indisputably, the Assessee neither paid royalty during the period nor reflected the same as payable. In such circumstances, it is difficult to accept that there was any income chargeable to tax which had accrued in favour of TLME. In any view, the Assessee cannot be held to have acknowledged the same by crediting the account of TLME, as admittedly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court is not an authority for the proposition that TAS has to be deducted and paid where there is neither any payment nor any acknowledgement of debt which reflects any accrual of income chargeable to tax or in cases where no income accrues or arises which is chargeable to tax under the Act. 25. It is not disputed that TLME also did not claim the aforesaid amount of royalty in question and no such amount had in fact been paid. Thus, where the parties by their understanding and conduct are ad-idem that no liability to pay any amount arises, it would not be open for the Revenue to insist on collection of any tax. In the case of Commissioner of Income Tax, Bombay City I v. M/s Shoorji Vallabhdas Co. 46 ITR 144 the Supreme Court had considered the case where the Assessee firm was a managing agent of inter alia two shipping companies and as per its agreements with the concerned shipping companies, was entitled to managing commission @10% of the freight charged and entries for the same had also been passed in the books of accounts. The Assessee floated two private companies and desired that the said private companies be substituted as managing agents in its place. In this backgro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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