WHETHER THERE IS LIABILITY TO DEDUCT TDS U/S 195 IF AMOUNT CANNOT BE TAXED IN HANDS OF PAYEE?
Respected Members
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Short note of today's case law for quick reference:
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[2024] 470 ITR 173 (Bom)
[IN THE BOMBAY HIGH COURT]
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COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION)
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RED HAT INDIA PVT. LTD.
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1. The assessee made a foreign remittance to RH, Singapore in the A.Y. 2008-09 without deducting tax at source under section 195 on the ground that the payment for purchase of subscription was not taxable in terms of article 7 read with article 5 of the DTAA between India and Singapore.
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2. The A.O. held that the subscription fees in question were liable to be taxed as royalty within the meaning of section 9(1)(vi) and article 12(3) of the DTAA and also as FTS within the meaning of section 9(1)(vii) and article 12(4)(a) and 12(4)(b) of DTAA.
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3. Accordingly, A.O. treated the assessee as an assessee in default u/s 201(1) and passed orders u/s 201(1) and section 201(1A) for the A.Y. 2007-08 and 2008-09.
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4. The CIT(A) partly allowed appeal of assessee.
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5. On further appeal, it was held that:
In order to treat the assessee as an assessee in default it was of utmost importance that income paid or credited to the account of the payee was liable to be brought within the purview of tax net and such assessment could be lawfully made on assessee.
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6. Since that has not been done, the order of the A.O. u/s 201(1) r.w.s 201(1A) of the Act was unsustainable.
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7. As per the judgement of Mahindra and Mahindra Ltd. v. Dy. CIT, two conditions are required to be satisfied before treating a person as assessee in default. If only one condition is satisfied, the person cannot be treated as an assessee in default. The Bombay High Court approved the view of ITAT in above case.
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8. As per explanation to section 191 of the Act, two conditions have to be cumulatively satisfied i.e. failure on the part of person to perform his obligation of making tax deduction at source and non-payment of tax by the payee/recipient directly.
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9. It is also a trite law that when the payee has paid the tax by offering such income for taxation on which tax was deductible, but not deducted, then the person responsible cannot be treated as assessee in default u/s 201(1).
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10. In the like manner, where the payee has not offered such income for taxation and there is no remedy available with the A.O. for taking such income in the hands of the payee, i.e. time limit for taking action against the payee under any possible provision of the Act has expired, then also the payee cannot be charged on such income nor resultantly the person responsible for paying the income can be treated as assessee in default.
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11. The provisions of tax deduction at source pre-supposes the taxability of the sum paid in the hands of the payee and tax so deducted is finally adjusted against the tax liability of the payee.
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12. If the tax is collected by way of order u/s 201(1) from the person responsible failing his duty to deduct or paying after deduction of tax at source, but such amount cannot be adjusted against the tax liability of the payee, then the collection of tax would be illegal.
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13. The CBDT vide its circular no. 7 dated 23.10.2007 has accepted in para 4 that where income has accrued but no tax is due on that income or tax is due at a lesser rate, the amount deposited to the credit of govt. to that extent u/s 195 cannot be said to tax.
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14. From here it follows that unless there is tax liability capable of being lawfully created and received from the deductee, the amount of tax collected by way of deduction of tax at source cannot be characterized as the tax.
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15. In the same circular, it has been directed that in such cases the refund should be made to the person making payment u/s 195 that is the payer.
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16. So, if tax is recovered in the first instance from the person responsible for paying by virtue of order u/s 201(1) but the income cannot be taxed in the hands of the non-resident either due to such income accruing but no tax remaining due thereon or tax not leviable due to the time limit for taking action under any provisions of the Act having expired, in such a situation, the amount of tax shall need to be refunded to the person liable to deduct tax who is for the time being considered as assessee in default.
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17. Therefore, assessee cannot be treated as assessee in default.