ITA No. 71/Bang./2009
S. 195, S. 197, S. 200, S. 201, S. 248,
Income-tax Act
A.Y. : 2004-2005. Dated : 9-4-2009
Liability to deduct tax — Payer not an assessee in default
u/s.201 if payee has paid tax on income but payer liable to interest
u/s.201(1A).
Facts :
US Co. is an American company. US Co. was carrying on
business in India through a branch (‘Indian branch’). The appellant is an
Indian company. On 15th March 2003, the appellant entered into an agreement
with US Co. for acquisition of the entire assets and liabilities of the Indian
branch. In terms of the agreement, on 1st April 2003, US Co. transferred all
the assets and the liabilities of the Indian branch to the appellant. The
consideration for the transfer was the difference between the WDV of the
assets and the liabilities. The appellant accounted for the purchase price by
debiting the assets and accounted for the consideration payable by crediting
US Co.
Being depreciable assets, in terms of S. 50 of the Act, the
sale proceeds were chargeable to tax as short-term capital gains. In terms of
S. 195 of the Act, the appellant was required to deduct tax from the purchase
consideration, which it failed to do. Hence, the AO issued the notice to the
appellant to show cause why u/s.201(1) it should not be treated as an assessee
in default, and further that why interest should not be levied u/s.201(1A).
In reply to the notice, the appellant submitted that :
à The
provisions of S. 195 are not applicable in a case where the non-resident or
foreign company has presence in India and is assessed to tax.
à The
transfer of the assets has resulted in a ‘loss’ in the hands of US Co.
Therefore there was no requirement to deduct tax at source u/s.195(1). In
its support, the appellant submitted valuation report dated 1st November
2003.
à Though
tax was not deducted, the Indian branch had deposited the tax. Therefore, in
terms of Explanation to S. 191, the appellant cannot be treated as an
assessee in default u/s.201(1).
The AO rebutted the submissions in the following manner and
concluded that the appellant was required to deduct tax from gross
consideration :
à S. 195
does not exempt a foreign company from the purview of S. 195 on the ground
that the foreign company is assessed to tax in India.
à The
appellant credited the consideration on April 1, 2003 and therefore,
liability to deduct tax arose on that date. As the valuation report was
subsequent to the date of credit, the appellant did not have any material to
reach the conclusion that the transaction will result in a loss.
à The
deductee paid tax on other income and not on the transactions on which tax
was to be deducted.
Before CIT(A), The appellant relied on the Supreme Court’s
decision in Hindustan Coca Cola Beverage P. Ltd. v. CIT, (2007) 293 ITR
226 (SC), wherein it was held that if the deductee/recipient had already paid
taxes on the amount received, tax cannot be recovered again from the
defaulting deductor. The appellant further relied on the following decisions :
à
Singapore Airlines Ltd. v. ITO, (2006) 7 SOT 84 (Chennai)
à AP
Power Generation Corporation Ltd. v. ACIT, (2007) 11 SOT 221 (Hyd.)
à
Golkonda Engineering Enterprises Ltd. v. ITO, (2008 TIOL 169 ITAT Hyd.)
The CIT(A) held that : deductee was a regular assessee
under the Act is not a relevant consideration u/s.195; as the appellant and US
Co were related, the appellant was aware that the transaction will result in a
loss; as the deductee has filed its return of income and has paid due tax,
deductor cannot be treated as assessee in default; and therefore, the
appellant was not liable to any interest u/s.201(1A) of the Act.
Before the Tribunal, the tax authorities argued that if the
deductee has not obtained certificate u/s.197, the deductor is required to
deduct tax. Alternatively, after deducting tax, the deductor could have filed
an appeal u/s.248 and could have claimed that tax was not deductible. The
appellant argued before the Tribunal that purpose of S. 195 was to prevent
remittance to a non-resident without payment of tax and where the non-resident
was assessed to tax in India, S. 195 was not intended to apply. IndCo. also
relied on Circular No. 7/2003, dated 5th September 2003 and stated that if the
deductee has duly discharged his tax liability, deductor would not be treated
as assessee in default due to non-deduction and as a corollary, he would not
be chargeable interest u/s.201(IA).
The Tribunal observed that S. 195 nowhere provides that a
foreign company assessed to tax in India is exempt from S. 195. It supported
this observation with its order dated July 11, 2008 in Madura Coats Pvt. Ltd.
[ITA No 1403/Bang/07]. US Co. had not applied u/s.197 for non-deduction of
tax. If the appellant denied its liability for tax deduction u/s.195 and 200,
it could have filed an appeal u/s.248, which it did not. The appellant had
also not made any application u/s.195(2). The appellant credited the amount on
1st April 2003, whereas valuation report was of 1st November 2003. Hence, on
the date of credit, the appellant did not know that the amount paid will
result in loss and that the deductor cannot make an assessment of income in
the hands of the deductee. Therefore, the appellant was obliged to deduct tax
@ 40%. The Tribunal also referred to the observations of the Supreme Court in
Transmission Corporation of AP Ltd. & Another v. CIT, (1999) 239 ITR
587 (SC) to the effect that the assessee has to file an application
u/s.195(2), u/s.195(3) and u/s.197 in case the sums being paid are not
chargeable to tax in the hands of the recipient.
The deductee had filed the return of its income on 1st
November 2004 and as per the return, no tax was payable on the consideration
from which the appellant was required to deduct tax. Hence, liability of the
appellant ended on the date when the Indian branch filed the return. The Tribunal referred to the Supreme Court’s decision in CfT v. Eli Lilly Company (India) Pvt. Ltd., (2009) 312 ITR 225 (sq, wherein it was held that the object underlying S. 201(1) is to recover the tax. As far as the period of default is concerned, it starts from the date when the tax should have been deducted and lasts up to the date of actual payment. As the appellant was required to deduct tax but had not deducted it, it was an assessee in default. Since the Indian branch had filed the return, disclosed the consideration and the return showed that no tax was payable on the consideration, the default ended on the day the Indian branch filed the return. Hence, there would be no deduction u/s.201, but the appellant will be liable to interest u/s.201(lA) up to the date of filing the return by the Indian branch.
Held:
i) S. 195 does not exempt a foreign company assessed to tax in India from its provisions.
(ii) In the absence of certificate issued u/ s.197 or determination u/s.195 or order u/s.248, the deductor is required to deduct tax u/s.195. If however, the deductor has not deducted tax but the deductee has paid tax on his returned income, the deductor cannot be considered an assessee in default.
(iii) Even if the deductee has paid tax, the deductor would be liable to charge of interest u/s. 201(lA) up to the date of filing the return by the deductee.
