No TDS u/s 195 on crediting income to payee if taxable on receipt basis under treaty: ITAT

Milin Mehta for the Appellant. Mahesh Shah and Vinod Tanwani for the Respondent.

ORDER

Pramod Kumar, Accountant Member – By way of this appeal, the assessee has challenged correctness of the order dated 24.12.2013 passed by the CIT(A), in the matter of tax withholding demand raised under Section 201(1A) r.w.s. 195 of the Income-tax Act, 1961, on the following grounds:-

The learned Commissioner of Income-tax (Appeals)-V, Baroda (“the CIT(A)”) erred in fact and in law in conforming the action of the Income Tax Officer, TDS-I, Baroda (“the AO”) in treating assessee as an assessee in default and consequently directing the appellant to pay a sum of Rs.5,56,880/- u/s 201(1A) of the Income-tax Act, 1961.

2. The issue in appeal lies in a very narrow compass of material facts. The assessee before us was liable to make a payment of Rs.5,02,35,336 on account of Technical-Know-How, to Saira Europe SPA, Italy. This liability was duly accounted for in the books of accounts on 22.11.2010, though the payment was made, a bit later, on 12.05.2011. The tax of Rs.53,03,595 was duly withheld from the payment so made, and it was deposited on 20.06.2011. There is a small variation in the amount credited, amount paid and the amount of tax but that was because of the fact that the amount was payable in Euros and the conversion rates at different points of time varied. Suffice to note that on these facts, a demand for interest under Section 201(1A) was raised on the assessee by treating the due date for depositing tax deductible at source as 07.12.2010, being 7 days from the end of the month in which amount was credited in the books of accounts. This demand was quantified at Rs.6,90,530 Aggrieved, assessee carried the matter in appeal before the CIT(A). It was contended by the assessee that the taxability on the amount of Rs.5,02,35,336, which is taxable under article 12(3) of India Italy Double Taxation Avoidance Agreement [(1996) 220 ITR (St) 3] only at the point of time when it is actually paid, did not arise at the point of time when credit was afforded to the recipient in the books of accounts. Learned CIT(A) rejected this plea, and, while doing so, he observed as follows:-

“4.2 I have given my careful consideration to the facts of the case and the submission of the AR. The first issue to be decided is whether the appellant was liable to deduct tax at source at the time of crediting sum in the account of Saira Europe S.P.A. Italy or at the time of payment thereof. In this regard, it will be useful to refer to the provisions of section 195 of the income tax act under which the tax was deductible by the appellant: –

“195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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, deduct income tax thereon at the rates in force:

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode:

Provided further that no such deduction shall be made in respect of any dividend referred to in section 115 – O”

From the plain reading of above provisions, it is very clear that the appellant was liable to deduct tax at source at the time of credit of sum to the account of the payee or at the time of payment thereof whichever was earlier. The case laws quoted by the appellant are not relevant to the facts of the case of the appellant. The provisions of DTAA quoted by the appellant are relevant for the payee in regard to taxation of Income from royalty in his hands. So far as the claim of the appellant that – “as per the provisions of Article – 13 of the India -Italy DTAA such payment would be taxable only at the time of payment/’remittance, the liability of tax deduction at source would arise under section 195 only at the time of remittance only”, is concerned, I am not in agreement with the claim of the appellant. There is no provision in the Income Tax Act which empowers the appellant to deduct the tax at source in respect of the amount payable in the year of taxability of the same in the case of the payee. The DTAA quoted by the appellant also does not contain any such provision. Therefore, any person responsible for making payment to another person shall have to deduct tax at source at the time of credit thereof to the account payee or payment thereof to the payee whichever is earlier. Taxability of the amount in the hands of the payee shall be determined in accordance with the relevant provisions of the Act. The circumstances under which the tax is deductible at the time of payment, have been provided in the first proviso to subsection (1) quoted above. In case the amount payable is not chargeable in the hands of the payee, subsections (2) and (3) of section 195 provide for procedure to be followed for non-deduction of tax at source. In view of this, the action of the AO in treating due date of payment of tax as 07/12/2010 and charging interest from the date of deduction of tax to the date of payment, in accordance with the provisions of section 201(1A) of the IT Act, is hereby upheld.”

3. The assessee is aggrieved and is in appeal before us.

4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

5. It is only elementary that the tax deduction source liability under Section 195 is a vicarious liability in the sense that it’s survival in the hands of tax-deductor is wholly dependent on existence of tax liability in the hands of recipient of income. When a credit afforded by, or a payment made by, an Indian resident, to a non-resident, does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all. This scheme of the Act is implicit from the wordings of Section 195 (1) which state that “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, deduct income-tax thereon at the rates in force” (Emphasis, by underling, supplied by us). When income embedded in a payment is not taxable under the Income Tax Act, 1961, the tax withholding liability does not get triggered at all. This is what Hon’ble Supreme Court has also held in the case of G E Technology Centre Pvt Ltd v. CIT [(2010) 327 ITR 456(SC)]. While holding so, Their Lordships have, inter alia, observed as follows:

……….The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at source only if the tax is assessable in India. If tax is not so assessable, there is no question of tax at source being deducted. [See: Vijay Ship Breaking Corporation and Others v. CIT 314 ITR 309]…….

9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the 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 tax at source 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 chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act.

6. The decision to withhold tax from a credit or payment to a non-resident is not taken in vacuum. It is taken in the light of the tax liability of the non-resident in respect of the amount in question, and, if there were any doubts on this proposition, these doubts have now been set at rest by Their Lordships. Essentially, therefore, the provisions of Section 195 are to be read in conjunction with the charging provisions under the statue, as also in conjunction with the relevant double taxation avoidance agreements which override these charging provisions. Of course, this is subject to the rider, as set out in Section 90(2) itself, that the provisions of the relevant DTAA are to be ignored in a situation in which provisions of the Act are more beneficial to the assessee vis-à-vis the provisions of the Act. As we make these observations, we may refer to, for the sake of completeness, wordings of Section 90(2) which are as follows: “Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee“.

7. Clearly, therefore, so far as tax deduction at source liability under section 195 is concerned, all that is required to be seen is the taxability of income embedded in a payment, in the hands of the non-resident, as existing in law If there is no tax liability in the hands of the recipient at the point of time when event triggering tax deduction liability takes place- i.e. at the point of time when credit is afforded and when the payment is made. If the recipient does not tax any tax liability, in respect of the said amount at that point of time, there is no question of tax deduction at source, and, as a corollary to this proposition, if there is a tax liability in respect of that amount at that point of time, the said tax liability is to be withheld by the person crediting or paying the money. Of course, if there is same tax liability in either of the situation, the tax is to be withheld at the point of time when either of these events, whichever is earlier, takes place. We may also, while on the subject, reproduce Article 13 of India Italy DTAA, which deals with taxation of royalty, as below:

ARTICLE 13

ROYALTIES AND FEES FOR TECHNICAL SERVICES

[Emphasis, by underlining, supplied by us]

8. As for the point of time of crediting the amount payable to non resident, i.e. “at the time of credit of such income to the account of payee“, the royalty so paid by the assessee was not taxable in the hands of the resident, for the simple reason that, in terms of article 13 of Indo Italian DTAA- which is reproduced above for the ready reference, taxability of royalty is dependent on the payment by the resident of a contracting state and receipt of the same by the resident of the other contracting state. Unless, therefore, the actual payment takes place, the taxability under article 13 of Indo Italian DTAA does not arise. In other words, the mere fact that an Indian resident credits the amount of royalty payable to an Italian resident does not trigger taxability under article 13 of the Indo Italian DTAA. Such is also the view taken by a series of decisions by the coordinate benches, including the decision in the case National Organic Chemical Industries Ltd [(2005) 96 TTJ 765 (Mum)], with which we are in respectful agreement. When the royalty so credited by the assessee is not taxable at the time of credit of such amount to the account of payee, in the light of law laid down by Hon’ble Supreme Court in the case of GE Information Technology (supra), it does not give rise to any tax withholding obligations under section 195 (1) either.

9. As regards the point of time when the payment is actually made, i.e. the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, the taxability in the hands of the recipient arises by @ 20% in terms of the provisions of article 13(2) above. However, even though the assessee is covered by the Indo Italian DTAA, the provisions of the Income Tax Act continue to apply to the extent such domestic law provisions are more beneficial to the assessee, as, even in the cases covered by the DTAAs and in terms of the provisions of Section 90(2), “the provisions of this (Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. However, the provisions of Section 115A prescribed taxability of royalty in the hands of the non-resident @ 10%, and, therefore, adopting the more beneficial rate of 10%, the payer was required to deduct tax at source from the royalty payment so made by the assessee. That is precisely what the assessee has done. The payment was made by the assessee on 12.5.2011 and the tax so deducted was payable within 7 days from the end of May 2011, i.e. by 7th June 2011. The assessee has, however, deposited the said tax deducted at source on 20th June 2011. The delay in depositing the tax deducted at source was thus only for 12 days. To this limited extent, the Assessing Officer could have levied interest under section 201(1A) of the Act. However, the authorities below have upheld the tax liability under section 20(1A) by computing the period of delay with reference to the date on which the amount was credited to payee’s account. That is where the authorities below were in error and we vacate the action of the authorities below to that extent.

10. We may also a deal yet another argument in favour of the stand of the revenue to the effect that if tax liability of the non- resident is to computed on the basis of domestic law anyway, which permits taxation of royalties at the point of accrual, the tax withholding should have taken place at the point of time when royalties accrued i.e. when the account of the non-resident was credited. However, we are unable to see any legal merits in this plea because what is material is the tax liability of income embedded in the related payment as at the point of time when event triggering tax withholding liability takes place, i.e. crediting the amount or paying the amount. When the income embedded in the payment is not liable to be taxed at the point of time when account of the non-resident was credited, in view of the fact that, under the related DTAA, tax liability can only arise at the point of a subsequent event i.e. payment. When income embedded in the payment is not taxable at that point of time of crediting the amount, there cannot be any occasion for deduction of withholding the tax on such income. It is only at the point of time when payment takes place, that the income embedded in payment becomes taxable under the DTAA as also under the domestic law, but then rate of tax prescribed in domestic law being lower, vis-à-vis the rate prescribed in the domestic law, the assessee has the option of adopting the lower rate under the domestic law. The adoption of lower rate under the domestic law, in our humble understanding, does not imply that non resident recipient could have been saddled with tax liability at the point of accrual when, under the DTAAA provisions, the non-resident could not have been taxed, in respect of accrual of the said income, in India. In view of these discussions, as also for the detailed reasons set out above, and to the extent indicated above, we uphold the grievance of the assessee and direct the Assessing Officer to grant resultant relief. The assessee gets the relief accordingly.

11. In the result, the appeal is partly allowed in the terms indicated above.