A.Y. : 1998-99
Section 9(1)(vii), 191, 195,
200, 201 of the Income- tax Act and Article 13 of India-UK DTAA
Dtd. : 9th April, 2009
Issue
(1) Proceedings under Section
201 are akin to assessment/reassessment and time limit available for
initiating and completing assessment/reassessment proceedings are as equally
applicable to it.
(2) In terms of Section 195, a
payer is required to withhold taxes only where the payment includes a sum
chargeable to tax in India.
(3) No order treating a person
as an assessee in default can be passed if the Department has not taken any
action against the recipient to treat the income as taxable.
Facts
M&M had come out with 2 Euro issues in November
1993 and July 1996. In this connection, M&M had availed services of Lead
Managers (LM) of UK. M&M was obliged to pay management, underwriting and
selling commission to LM. In addition, certain expenses of LM were also
reimbursed by M&M. LM had retained their commission from out of proceeds of
the issue. No taxes were withheld in respect of payments retained by LM.
The Department had initiated action against the
payer (M&M) for failure to withhold taxes and treated M &M to be assessee in
default.
The primary contention of M&M was that there was
no obligation to withhold tax as the payment was not towards technical
services but was for subscription of capital. In any case, the fees were
retained by the service provider and there was no separate remittance so as to
attract obligation of TDS.
By way of an additional ground, M&M raised the
aspect of applicability of time limit to S.201 proceedings; it also challenged
the validity of proceedings by contending that :
.
Section 201 (1)/ 201 (1A) proceedings apply only where taxes are withheld
but have not been remitted to the Government. The proceedings had no
application where the payer had not withheld taxes.
.
The payer cannot be treated as an assessee in default unless the Department
has assessed or initiated action for assessment of income in the hands of
the recipient.
.
As no time limit has been prescribed for initiating action, the proceedings
need to be exercised within a reasonable time. As judicial precedents have
held that 4 years is a reasonable time for initiating and completion of the
proceedings under Section 201(1)/(1A), the same needs to be adhered to. In
the present case, since this limitation period was crossed, no action can be
taken against the payer for not withholding taxes.
As
against the above, the Department contended :
–
Services offered by LM were in the nature of FTS and hence taxable in India.
Retention of amount by LM in effect amounted to making of payment.
–
M&M did not file any application to the Department for determination of the
amount to be withheld on its payments to LM. In absence of lower/nil tax
deduction certificate, taxes were necessarily required to be withheld by
M&M.
–
Section 201(1)/201(1A) proceedings apply to both the categories of
defaulters, i.e., one who has withheld taxes but not remitted it to
the Government and also to those who have not withheld taxes from the
payment.
–
Assessment of recipient is not a pre-condition for enforcing a withholding
tax liability on the payer. The withholding tax provisions are separate and
operate independent of the assessment proceedings of the recipients. For
this, the Tax Department relied on provisions of Sections like 115A , 115AC,
115BBA, 115G, etc. to support the proposition that under certain situations,
the recipients have no obligation of filing the return if there is suitable
tax withholding.
–
Where no provision for limitation is present in a statute, the Courts cannot
artificially introduce a limitation.
Held
The Special Bench admitted the additional ground on the question of limitation
which was raised for the first time before it. It held that the issue involved
a question of law and needed no fresh investigation of facts.
