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I.T.A No.787/2017
1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 22ND DAY OF DECEMBER, 2022 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE UMESH M. ADIGA I.T.A NO.787 OF 2017
BETWEEN:
M/s. SUBEX LTD RMZ ECOWORLD DEVARABISANAHALLI OUTER RING ROAD BANGALORE-560 103. (REPRESENTED BY ITS DIRECTOR SRI. ASHWIN CHALAPATHY AGED ABOUT 45 YEARS S/O. SRI. NARAYANA VENKATA CHALAPTHY PAN NO: AABCS 9255 R)
.…APPELLANT
(BY SHRI. CHYTHANYA K.K., SENIOR ADVOCATE A/W SHRI. SHARATH S., ADVOCATE)
AND:
THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 12(3) BMTC BUILDING, 80 FEET ROAD 6TH BLOCK, KORAMANGALA BENGALURU-560 095 …RESPONDENT
(BY SHRI. E.I. SANMATHI, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED:31.05.2017 PASSED IN ITA NO.239/Bang/2014, FOR THE ASSESSMENT YEAR - 2009-2010, ANNEXURE-A,
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2 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED THEREIN AND ETC.
THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 27.09.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S. DINESH KUMAR J., PRONOUNCED THE FOLLOWING:-
JUDGMENT
This appeal by the assessee challenging the order dated September 30, 2016 in ITA No.1298 to 1301/Bang/2013 for the A.Ys. 1995-96 to 1998-99 has been admitted to consider following questions of law: 1. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in sustaining TDS obligation on year end provision made on ad hoc basis and reversed immediately thereafter? 2. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in not considering applicable DTAA while upholding TDS in relation to services from non- residents?
Heard Shri. Chaitanya, learned Senior Advocate for the Assessee and Shri E. I. Sanmathi, learned Senior Standing Advocate for the Revenue.
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Brief facts of the case are, assessee is a Public Limited Company in the business of providing software services and development of various products for Telecommunication Industry. For the A.Y. 2009-10, assessee filed 'Nil' returns, after claiming deduction of Rs.8,37,98,696/- under Section 10(a) of the Income Tax Act, 19611 and carried forward losses amounting to Rs.8,48,07,325/-. Subsequently, it filed a revised income without claiming any carried forward losses. The AO2 referred the case to the TPO3 under Section 92(c) of the Act. Assessee filed its objections to the draft order passed by the Assessing Officer before the DRP4. Pursuant to the directions issued by the DRP, the AO passed order on January 30, 2014 under Section 143(3) of the Act. The Revenue challenged the said order before
1 ‘the Act’ for short 2 Assessing Officer 3 Transfer Pricing Officer 4 Dispute Resolution Panel
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4 the ITAT. The ITAT upheld the relief granted by DRP except the year-end provisions made towards legal and professional charges. In this appeal, we are concerned with the disallowance of the provision for legal and professional charges.
Shri. K.K. Chaithanya, learned Senior Advocate for the assessee submitted that: • assessee maintains accrual system of accounting under which all the income and expenses accrued during a particular financial year are required to be accounted under the mercantile system of accounting in the same year; • ITAT has failed to appreciate that the provisions made by the assessee was not identifiable with respect to the parties; • in course of business, assessee incurs various expenses in connection with services
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5 rendered. In certain cases, the invoices for such services are not received by 31st March of the relevant year. In such cases, year-end provisions are made on ‘estimate basis’. The same are subsequently reversed in the books of account on the first day of next year in consonance with law laid down in KPTCL Vs. DCIT5 and Toyota Kirloskar Pvt Ltd. Vs. ITO6 wherein it is held that no TDS is required for year-end provision which has been subsequently reversed; • in the subsequent year, as and when the party’s account is credited, TDS has been made. TDS is a vicarious liability and not required unless there is an income in the
5[2016] 383 ITR 59 (Kar) 6[2021] 434 ITR 719 (Kar)
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6 hands of the payee as held in Eli Lily & Co.7, GE India Technologies8, Bharti Airtel9; • if the income component itself is not embedded in the amount provided, then there cannot be any liability to deduct tax at the source; • estimated provision made in the books does not attract Section 194J of the Act; • in respect of payments to non-residents, TDS liability would require examination of applicable DTAA10 • assessee had provided for ad hoc amount as year-end provisions. The actual amount of invoice which would be approved by the assessee could vary substantially. If tax were to be deducted at the year end, then it would
7[2009] 312 ITR 225 (SC) 8[2010] 327 ITR 456 (SC) 9[2015] 372 ITR 33 (Kar) 10Double Taxation Avoidance Agreement.
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7 result in higher/lower deduction of taxes payable at a later stage. Therefore, in the absence of definite credit to the account of the payee the liability to pay is not crystallized and therefore, TDS11 provision would not apply.
The sum and substance of Shri. Chaithanya's argument is, the identity of payee was not certain as the actual recipient of professional charges was not identified at the stage when the provision was made.
Opposing the appeal, Shri. Sanmathi learned Senior Standing Counsel for Revenue submitted that: • the ITAT has rightly held that assessee was liable to deduct TDS on provision made for legal and professional charges in the books
11 Tax Deduction at source
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8 of accounts on the professional charges accrued in books of accounts; • Section 40(a)(ia) of the Act read with Section 194J Explanation(C), requires that tax has to be deducted at source when amount is paid or credited to the account of payee whichever is earlier. Though the assessee has credited in the books of account it has not deducted TDS; • failure to deduct tax attracts disallowance under Section 40(a)(ia) of the Act; • scheme of TDS provisions applies not only to the amount paid, which bears the character of “income” but also to gross sums, the whole of which may not be income or profit in India in the hands of the recipient.
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9 7. Shri. Sanmathi has placed reliance on Palam Gas Service Vs. CIT12; CIT, New Delhi Vs. Eli Lily & Co (India) (P) Ltd13 and Associated Cement Co. Ltd. Vs. CIT.14
We have carefully considered the rival contentions and perused the records.
It is not in dispute that the provisions made at the end of the accounting year were reversed in the beginning of the next year and no payees were identified nor the exact amount payable. 10. In Karnataka Power Transmission Corporation Ltd. Vs. Deputy Commissioner of Income Tax (Supra), relied upon by the assessee, this Court has held that if no income is attributable to the payee there is no liability to deduct tax at
12[2017] 394 ITR 0300 (SC) 13Stated Supra 1467 Taxman 346 (SC)
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10 source in the hands of the tax deductor. After quoting a passage from Kedarnath Jute Mfg. Co. Ltd.15, this Court has held that the existence or absence of entries in the books of accounts is not decisive or conclusive factor in deciding the right of the assessee claiming deduction. 11. In Volvo India Pvt. Ltd. Vs. ITO16, this Court has observed that: “It is ex-facie apparent that the contention of the assessee inasmuch as non-identification of the payees in the provisions and the disallowance of deduction expenditure under Section 40(a)(ia) of the Act has not been rightly appreciated by the Tribunal...If the deduction is not claimed for the expenditures made in the provision even in the return submitted and the same is offered to tax in the subsequent year after reversing the entries pursuant to the receipt of the bills/invoices by the payees, the matter has to be analysed having regard to, whether income has accrued to the payees to deduct tax at source.”
15 Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC) 16 ITA No. 369/2018, para 10
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11 12. We may record that it was argued by Shri. Chaithnaya that assessee had deducted tax at source in subsequent year in accordance with the provisions of Chapter XVII-B and remitted within the due date and the same was not refuted.
So far as the authority in Palam Gas Service Vs. CIT (Supra), it is relevant to note that the payees were identified in that case as recorded in para 5 of that judgment. In contradistinction, in the case on hand the payees were not identified. Therefore, the said authority does not lend any support in the contentions urged on behalf of the Revenue.
In view of the law laid down in Karnataka Power Transmission Corporation Ltd. & Volvo India Pvt. Ltd. (supra), we are of the considered opinion that the ITAT’s order reversing
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12 DRP’s Order and issuing further direction to AO is perverse. Hence, the following: ORDER (a) Appeal is allowed. (b) The first question of law is answered in favour of assessee and against the Revenue. (c) In view of first question being answered in favour of the assessee, the second question does not arise for consideration. No costs.
Sd/- JUDGE
Sd/- JUDGE
SPS