When tax proceedings are pending against payee, the admission of application is barred by limitation of pendency of proceedings. Advance Ruling is not just applicant-specific, but also transaction-specific and binds payee as also the payer.
Determination of payee’s taxability is a primary question and not incidental while determining withholding obligation of payer u/s.195.
Facts:
The applicant, an Indian public sector company (ICO), entered into various offshore supply and service contracts with a company incorporated in Russia (FCO), for setting up a power plant in India.
In terms of the contract between ICO and FCO, it was agreed that FCO had primary obligation to pay taxes in India and ICO was required to reimburse the same. Effectively, tax obligation in respect of FCO’s income was on ICO.
For the purpose of TDS obligation, ICo had contended that the income from onshore service contract alone was taxable in India and the income from offshore supply contract was not taxable in India.
The AAR, before considering ICO’s application, raised primary question of whether the application filed by ICO was maintainable having regard to the bar imposed u/s.245R(2) (i), wherein AAR is precluded from ruling on a question, which is already pending before any Income-tax Authority, Appellate Tribunal or any Court.
Held:
AAR rejected ICO’s contention and held:
AAR ruling is binding not only on the applicant (payer), but also for the transaction for which the ruling is sought.
An AAR ruling is sought by ICO in relation to a transaction between resident and non-resident and not in terms of the other provisions of ITA which could have entitled ICO to claim tax implications of its own. This ruling is in relation to ‘transaction’ and, hence, pendency of proceedings in the case of any party to the transaction would operate as a bar against the other in approaching AAR.
Reliance was placed on Foster’s ruling1 wherein it was held that if a proceeding in respect of a transaction to which the applicant (as a payee) was a party, was pending before the Tax Authority in the case of the other party (payer) to the transaction, the application would be barred for the reason that the question posed before the Tax Authority and the AAR would be the same.
Withholding tax provisions under ITA obligate a payer to withhold tax on every payment to a non-resident, provided the same is chargeable to tax in India. Thus, the liability of the payee to pay tax on the payment received is not a question that is incidental to the issue of whether the payer is bound to withhold tax; this question is primary and not incidental.
As the issue of whether the payment made under the transaction was taxable under the ITA was already pending before the Tax Authority in the case of FCO before ICO approached the AAR, the application was not maintainable.
