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2015 (9) TMI 507 - DELHI HIGH COURT

2015 (9) TMI 507 - DELHI HIGH COURT - [2015] 378 ITR 395 (Del) - TAS deduction - amount was credited on account of royalty payable to Telefonaktiebolaget L.M. Ericsson, Sweden (hereafter ‘TLME’) - said entry was subsequently reversed, as according to the Assessee, the payment of royalty to TLME was not permissible as per the Industrial policy in force at the material time - accrual of income - Whether the Tribunal was right in law in holding that the assessee was not liable to deduct TDS under S .....

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rise to an obligation to deduct TAS by the Assessee, as clearly, there is no debt that can be said to be acknowledged by the Assessee. Imposition 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 disput .....

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t 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 ORDER Vibhu Bakhru, J. 1. The Revenue has preferred this Appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) against a common order dated 14th December, .....

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source (hereafter TAS ) in respect of the amount of ₹ 2,24,96,669/- credited to the account of Telefonaktiebolaget L.M. Ericsson, Sweden (hereafter TLME ) in the books of the Assessee. The said amount was credited on account of royalty payable; however, the said entry was subsequently reversed, as according to the Assessee, the payment of royalty to TLME was not permissible as per the Industrial policy in force at the material time. Admittedly, no part of the amount in question was ever p .....

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ent appeal was admitted and this Court framed the following questions of law on 1st February, 2005:- 1. Whether the Tribunal was right in law in holding that the agreement dated 1.1.1997 between the assessee and M/s. L.M. Ericsson, Sweden for payment of royalty is contrary to public policy and void under Section 23 of the Contract Act, 1972 and therefore the order and demand under Section 201 and interest levied under Section 201 (1A) of the Income Tax Act, 1961 are liable to e set aside and del .....

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he 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 proje .....

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LME s Trademark Ericsson . In terms of the said agreement, the Assessee was obliged to pay royalty @1% of the total sales to TLME, for use of the trademark Ericsson . In order to account for the royalty payable under the aforesaid agreement, the Assessee passed an entry in the books of accounts debiting Royalty Account and crediting Accrued Expenses Account for a sum of ₹ 2,24,96,669/-. On 18th August, 1998, the Assessee passed another entry in its books transferring the credit balance sta .....

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see in its books. 6.3 Subsequently, on 17th December, 1998, the Assessee reversed the entries passed in its books of accounts by debiting the account of TLME and crediting Royalty Account; the entries passed earlier were, thus, nullified. 6.4 The AO passed an order dated 2nd March, 2000 under Section 201(1) of the Act holding that the Assessee had defaulted in deducting TAS on the amount of royalty credited by the Assessee to the account of TLME. According to the AO, TAS was deductable at the ra .....

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(1) of the Act. Subsequently, on 16th March, 2000, the AO rectified the aforementioned orders by passing an order under Section 154 of the Act. According to the Indo-Sweden Double Taxation Avoidance Agreement, the withholding tax rates on royalty was specified as 20%. 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 p .....

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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, 1882 and did not result in any enforce .....

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ccount for royalty payable to TLME under the agreement dated 1st January, 1997 and on such entry being passed by the Assessee, its obligation to deduct TAS crystallized. He further submitted that the question whether the amount credited included any element of income or not was not to be determined by the Assessee. He relied upon the judgment of the Supreme Court in Transmission Corporation of AP Ltd. v. CIT, (1999) 239 ITR 587 in support of his contention. 8. Mr Madan had further contended that .....

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ty had been made to TLME. He submitted that the entries passed by the Assessee in its books of accounts had been reversed as the Assessee had been denied the permission to remit any royalty to its holding company. He submitted that at the material time, the industrial policy of the Government of India did not permit payment of royalty by a wholly owned subsidiary to its holding company. He referred to a letter dated 11th July, 2000 issued by the Government of India to the Assessee, clarifying th .....

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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, dedu .....

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xplanation 1-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Explanation 2-For the removal of doubts, it is hereby clarified that the obligation to .....

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ties, and salary) to a non- resident 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, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on that proportion of the sum which is so chargeable: (3) Subject to rules made under sub- section (5), any person entitled to receive an .....

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yment of such interest or other sum without deducting tax thereon under sub- section (1). 11. A plain reading of Section 195(1) of the Act indicates that any person responsible for paying any interest or any sum chargeable to tax under the Act is obliged to deduct TAS at the time of credit of such income to the Account of the non-resident/foreign company or at the time of making payment thereto, whichever is earlier. In view of the plain language of Section 195(1) of the Act, there can be no dis .....

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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 collect .....

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e scope of income deemed to accrue or arise in India. Section 195 of the Act which is a part of the machinery provisions for collection of tax would, therefore, be applicable only in respect of a total income of a nonresident which falls within the scope of Section 5(2) of the Act. Reading the language of Section 195(1) of the Act in the aforesaid perspective, it is clear that credit of any amount to the account of a non-resident or foreign company, maintained in the books of the payer, would be .....

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payer. On analysis of various provisions of Chapter XVII one finds use of different 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 c .....

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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 sec .....

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ry 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 sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly and Co.(India)(P.) Ltd. [2009] 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of .....

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any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act , which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income-tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income-tax Act. 14. It is also necessary to understand that once tax has been deducted by any pe .....

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d) in respect of such amount deposited in its favour. 15. The rationale for imposing an obligation to deduct TAS on a credit entry being passed by a payer in favour of payee, is that such entry represents an acknowledgement of debt by a payer in favour of a payee; the debt acknowledged is in respect of an income that has accrued in favour of the payee; and such income is exigible to tax under the Act. Once a payer has unequivocally acknowledged the debt payable by crediting the account of payee .....

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le, 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 t .....

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principles to the facts of the present case, it is apparent that the Assessee has, in no uncertain terms, denied any obligation for payment of royalty to its holding company in respect of or a period prior to 8th September, 2000 [i.e. the date of issuance of Press Note (2000 series) by the Government of India]. The entries passed by the Assessee in its books of accounts were indisputably reversed and consequently its effect nullified. The Assessee has also not charged the amount of royalty for t .....

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e industrial policy issued by the Government of India. The Guidelines issued by the Ministry of Industry (Department of Industrial Policy and Promotion) for considering Foreign Direct Investment (FDI) proposals by Foreign Investment Promotion Board (FIPB), inter alia, expressly provide as under:- 6. The Board should examine the following while considering proposals submitted to it for consideration. xxxx xxxx xxxx xxxx xxxx (ii) whether the proposal involves technical collaboration and if so (a) .....

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foresaid letter dated 20th June, 2000, the Under Secretary, Government of India, Ministry of Commerce and 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 .....

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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, that entry had been reversed. 22. In our view, mere passing of the book entries, which are reversed, would not give rise to an obligation to deduct TAS by the Assessee, as clearly, there is no debt that can .....

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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. 24. In our view, reliance pl .....

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e amounts paid. The Supreme Court had explained that it was not open for the payer to suo moto take a decision as to the quantum of income embedded in the payments and withhold tax accordingly. And, the question of the quantum of income embedded in the receipts would be determined, subsequently in the assessment proceedings with respect to the payee. The Supreme Court had also noted that in the case where the Assessee had contended that a lower TDS should be deducted, it would be open for the pa .....

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d 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 i .....

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ed to the quantum of management agency commission being charged by the Assessee. In this context, the Assessee was invited to make an offer to reduce the commission charged. The Assessee agreed for reduction in the agency commission in order to put the concerned managed companies on a firm financial footing and at the Extraordinary General Body Meeting of the managed companies held subsequently, the private companies floated by the assessee were accepted as the managing agents in place of the As .....

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Act, 1961, to be considered by the Supreme Court. The Supreme Court referred to the earlier decision of the Bombay High Court in Commissioner of Income Tax v. Chamanlal Mangaldas & Co. (1956) 29 ITR 987, which was approved by the Supreme Court in Commissioner of Income Tax v. Chamanlal Mangaldas & Co. (1960) 39 ITR 8 and held as under: - .....Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz .....

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