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Income Tax Appellate Tribunal, DELHI BENCHES : B : NEW DELHI
Before: SHRI R.S. SYAL & SHRI KULDIP SINGH
ORDER PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order passed by the CIT(A) on 14.06.2016 in relation to the Assessment Year 2014-15, partly upholding the action of the ITO (TDS), International Taxation, Noida u/s 201(1)/201(1A) of the Act.
Succinctly, the factual matrix of this case is that the assessee is a public limited company registered under the laws of India and is regularly assessed to tax as a resident in India. The assessee is engaged in providing Software development services and Outsourcing services and is also availing Management services from its parent company, namely, Computer Sciences Inc., USA (CSC, USA). In lieu of the Management services obtained, the assessee paid to CSC, USA, after deducting tax at source @ 20% on the premise that the payment made to parent company was in the nature of Royalty and Fees for technical services and hence liable for deduction of tax at source as per Indian Income-tax as well as Indo-US Tax Treaty (hereinafter also called `the DTAA’). As the non-resident parent company did not have any Permanent account number (PAN), the AO opined that the tax ought to have been deducted at source at a higher rate in terms of the provisions of section 206AA of the Act. A show cause notice was issued which was responded by the assessee contending that tax on ‘Royalty’ and ‘Fees for technical services’ was rightly withheld at 20% in terms of the provisions of section 206AA. In support of the contention that the rate of tax withholding at 25%, as proposed by the AO, could not be applied, the assessee relied on certain decisions. Unconvinced with the assessee’s contention, the AO came to hold that the assessee should have deducted tax @ 25% plus surcharge and education cess on payments of royalty and fees for technical services made to its parent company. That is how, the appellant was treated as an assessee in default u/s 201(1) and also made liable to pay interest u/s 201(1A) of the Act. The ld. CIT(A) partly accepted the assessee’s contention by holding that the assessee should have and had rightly deducted tax at source @ 20%. He also held that, in addition, surcharge and education cess should have also been levied. The assessee is aggrieved against the order passed by the ld. CIT(A) on two issues. The first issue is that the rate of tax withholding should be 15% and, second, no surcharge and education cess should have been levied. Admittedly, there is no cross appeal by the Revenue, which implies, that the Department has accepted the decision of the ld. 3 CIT(A) to the extent that tax was rightly deducted at source u/s 206AA at the rate of 20%, being the same rate at which the assessee made the deduction.
We have heard the rival submissions and perused the relevant material on record. The core of the controversy in this appeal is the interpretation of section 206AA, the relevant part of which reads as under :-
`Requirement to furnish Permanent Account Number. 206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:— (i) at the rate specified in the relevant provision of this Act; or (ii) at the rate or rates in force; or (iii) at the rate of twenty per cent. (2) to (7)……’
Sub-section (1) of section 206AA starts with a non-obstante clause providing that any person entitled to receive any income on which tax is deductible under Chapter XVIIB, shall furnish his PAN to the person responsible for deducting such tax. In case the deductee does not furnish his PAN, the deductor shall make deduction of tax at source at the higher of the following three rates, namely, (i) the rate specified in the relevant provision of the Act, which, in the instant case as per the AO, is 25% under section 115A for Royalty/FTS income of the non-resident payee; (ii) at the rate or rates in force, which is 15% as per the DTAA; and (iii) at the flat rate of 20%. The assessee deducted tax at source u/s 195 on payments made to its non-resident principal, namely, CSC, USA at the rate of 20%, being the rate as per clause (iii) of section 206AA(1).
As against the AO’s point of view about the rate of 25% specified in the relevant provision, being section 115A, as per clause (i) of section 206AA, the ld. CIT(A), relying on certain decisions, held that the DTAA would prevail over the provisions of the Act and accordingly such rate would be 15%, being the rate of tax as per the DTAA. Thus, it is clear that after the decision of the ld. CIT(A), which has not been assailed by the Revenue, the tax rate as per clauses (i) and (ii) of section 206AA(1) stood determined at 15%. We are desisting from considering 5 as to what should rightly have been the correct rate of tax as per clause (i) of section 206AA(1) or the overall rate as applicable u/s 206AA, as such issues are not before us.
Now, the assessee is canvassing a view that it is this rate of 15% which should have been considered for the overall section 206AA(1) instead of the rate of 20% as per clause (iii), being the rate at which the assessee deducted tax at source. In support of this contention, the ld. AR relied on the Tribunal order in DDIT (IT) vs. Serum Institute of India Ltd. (2015) 56 taxmann.com 1 (Pune Trib.). The facts of that case are that the assessee therein made payments to non-residents on account of interest, royalty and fees for technical services. Tax was deducted at source at the rate of 15% etc. on the said payments in accordance with the rates provided in DTAAs. Since the recipients did not have PANs, the AO invoked the provisions of section 206AA and held that the tax should have been deducted @ 20% and not the lower rate, namely, 15%, etc., as provided in the DTAA. The CIT(A) upheld the assessee’s stand by holding that the provisions of section 90(2) would override other provisions of the Act including section 206AA and, accordingly, deleted the tax demand. The Revenue’s appeal came to be dismissed by the Tribunal. It is clear from the facts of the case in Serum Institute (supra) that the controversy therein was about the application of 20% rate as suggested by the AO or a lower rate of 15% etc. as per the DTAA, at which deduction of tax at source was actually made by the assessee.
The Tribunal approved the assessee’s stand holding that tax was rightly deducted at source at the lower rate of 15% as per DTAA. It is on the strength of this decision that the assessee is now urging before us that deduction of tax at source should have been made by it at 15% and the excess deduction to the extent of 5% should be refunded to it. It is simple and plain that the facts of the Pune decision lie in a different compartment. In that case the question was whether the assessee’s deduction of tax at source at the rate of 15% etc. was right or some higher deduction of tax should have been made so as to make the assessee in default to the extent of such short deduction u/s 201(1). On the other hand, we are confronted with a situation, in which the assessee is not in default in terms of section 201(1) as it deducted tax at source at 7 the rate of 20% as has been approved by the ld. CIT(A). The appellant in the instant case is no more an assessee in default as per section 201(1) in so far at the rate of deduction of tax at source is concerned, in contrast to the case before the Pune bench in which liability was fastened on the assessee u/s 201(1). As such, it is held that the decision of the Pune bench of the tribunal in Serum Institute (supra) does not advance the case of the assessee any further and is not applicable to the facts obtaining in the instant case.
Adverting to the facts of the instant case, we find that the assessee itself withheld tax at source @ 20% before making payment to its non- resident parent company. The view point of the AO that the rate applicable u/s 115A of the Act at 25% should have been applied, has been overturned by the ld. CIT(A). Now, the assessee is contending that its liability was limited for deducting tax at source @ 15% and the excess tax deducted and paid to the exchequer at the rate of 5% (20% minus 15%) be refunded to it. We have been given a situation in which the assessee itself deducted tax at source @ 20% and the ld. CIT(A) has also upheld the assessee’s stand in deducting tax at source @ 20%.
Now, the assessee wishes to resile from its suo motu rate of deduction of tax at source made at 20% by claiming that the tax ought to have been rightly deducted at source @ 15% and, hence, the excess so deducted by the assessee should be refunded to it. We cannot agree with this contention of the assessee due to the discussion in the ensuing paras.
Chapter XVII of the Act contains provisions for collection and recovery of tax. Section 195 provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest not being interest specifically provided or any other sum chargeable under the provisions of this Act, not being income 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, etc., whichever is earlier, deduct income-tax thereon at the rates in force. Section 199 dealing with `Credit for tax deducted’ provides that any deduction of tax in accordance with the provisions of this Chapter which is paid to the Central Government : `shall be treated as a payment of tax on behalf of the person from whose income the deduction was made’ etc. Section 203 dealing with `Certificate for tax deducted’ provides that every person deducting tax shall within a prescribed period : `furnish to the person to whose account such credit is given or … , a certificate to the effect that tax has been deducted, and specifying the amount so deducted, the rate at which the tax has been deducted …’. A conjoint reading of the above provisions boils down that the person responsible for paying to the non-resident is required to deduct tax at source (section 195); issue certificate for tax deducted to the deductee (section 203); and the credit for tax deducted at source is given to the deductee by treating it as a payment of tax by the deductor on behalf of the deductee (section 199). It clearly emerges that once a deduction of tax at source has been made on behalf of the deductee (payee), the deductor (payer) becomes functus officio and, cannot, under any circumstance, claim refund of the tax deducted at source. The deduction of tax at source is always a payment of tax by the deductor on behalf of the deductee and it is only the deductee, who is entitled to the credit of tax deducted by the deductor on his behalf for which a certificate is issued to him. It goes 10 without saying that once tax has been deducted at source and certificate of such deduction issued to the deductee, only the deductee can claim benefit of deduction of tax at source made by the deductor on his behalf.
If the assessee’s contention is accepted that the tax should have been deducted at lower rate of 15% instead of voluntary deduction made at 20% for which it also issued TDS certificate to the deductee, then, not only the deductee parent company will avail credit for TDS @ 20%, but, the assessee will also get refund of 5%, being the excess amount suo motu paid by it.
Scheme of the above referred relevant provisions can be understood with the help of a simple example. Suppose B earns an income of Rs. 100 from A on which A is obliged to deduct tax at source at the rate of 10%. A will deduct Rs.10 and deposit it with the Government and thereafter a sum of Rs.90 will be paid to B. In turn, B will show his income at Rs.100. He will get credit of Rs.10, being the amount of tax deducted at source by A, against his overall tax liability. In case his total tax liability comes to Rs.11, he will have to pay a further sum of Re.1 and in case his total tax liability comes to Rs.9, he will get refund of Re.1 on filing his return of income. It is axiomatic that A has nothing to do with the transaction of income of Rs.100 in the hands of B. He has simply to deduct tax of Rs.10 at source before making the remaining payment of Rs.90 to B. His act of deducting Rs.10 on behalf of A does not entail his personal liability because he merely makes short payment to A to the extent of the amount of tax deducted at source. Now it is between B and the Department to settle his tax bill and issue demand notice or refund, as the case may be. Suppose A wrongly deducts tax at source to the tune of Rs.12 instead of Rs.10, he will deduct the amount of Rs.12 from the payment due to B and will pay a net sum of Rs.88. It will be for B to claim refund of tax, if any due to him, by filing his return of income. After deducting Rs.12 from the payment due to B, A plays no role except issuing certificate to B for deduction of tax at source to the tune of Rs.12. If by mistake A deducts more than due tax, it is only B, who is entitled to claim refund of excess tax, and that too, by filing his return of income. A cannot claim refund of excess tax deducted, because the deduction of tax at source, at higher rate was 12 made on behalf of B and not on his own behalf. If the contention of A is accepted that he actually deducted excess tax to the extent of Rs. 2 and he be refunded this excess, it would mean that as against the actual net receipt of TDS of Rs.10 (Rs.12 as deducted by A minus Rs.2 refunded to A), the Revenue will be returning a sum of Rs.12 to B on the basis of the original TDS certificate issued. This proposition is beyond any logic.
The nitty-gritty of the matter is that A, after deducting Rs.12 from the amount due to A, cannot claim any refund in his own hands because his action of deducting tax was on behalf of B. It is only B, who can deal with the matter and claim refund of excess tax deducted, and that too, by filing his return of income. No statutory provision permits the deductor to claim refund of the excess tax deducted at source. If we accept the contention of the ld. AR for refunding 5% to the assessee-deductor, the position that would follow is that the Revenue will have to allow credit of tax @ 20% to the payee on the basis of TDS certificate as against its actual receipt of tax by means of deduction of tax at source (net of refund) @ 15%. This position is patently erroneous and cannot be countenanced. When the legislature has clearly provided for allowing 13 credit of tax deducted at source only to the deductee, in no circumstance, can the deductor claim any refund out of the amount of tax deducted at source on behalf of the deductee for which the relevant certificate has been issued to the deductee. It is significant to note that the deduction of tax at source is simply a mode of collection of tax. It does not in any manner affect the chargeability of the income in the hands of the payee.
Section 190 dealing with `Deduction at source and advance payment’, clearly stipulates through sub-section (2) that deduction of tax at source shall not: `prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4.’ There is a vital distinction between two situations viz., one, in which the amount of income is put to tax at high rate; and two in which the deduction of tax is made from it at higher rate. Obviously, the first situation is a cause of concern as no amount of tax more than what is rightfully due to the exchequer, can be recovered. On the other hand, the second situation simply encompasses a payment of tax on behalf of the deductee without impacting his tax liability in any manner. If such a deduction has voluntarily been made at a higher rate, the deductee, at the time of filing his return, is always 14 entitled to claim the benefit of TDS and the resultant refund, if any due to him. The reliance of the ld. AR on Article 265 of the Constitution of India to bolster his point of view is, again, misplaced. The Article provides that no tax shall be levied or collected except by authority of law. This Article deals with the first situation as discussed above and prevents the levy and recovery of excess taxes by unambiguously providing that taxes should not be imposed save by authority of law. On the other hand, we are confronted with a second situation in which the assessee has suo motu deducted tax at source on behalf of the payee and the payee, in turn, is entitled to claim credit for such tax deduction at source in its return of income. Ergo, it is manifest that Article 265 of the Constitution does not come into play in the circumstances as are extantly prevailing before us inasmuch as we are not determining the rightful amount of tax due on the income of the payee. The instant proceedings are in the hands of the deductor-payer and are not in any manner going to affect the tax liability of the payee as has been specifically provided for under section 190(2) of the Act that that deduction of tax at source does not prejudice the charge of tax on such income. In view of the 15 foregoing discussion, we are of the considered opinion that the assessee’s claim for refund of tax deducted at source @ 5% on payments made to its parent company is devoid of any merits. The same is hereby jettisoned.
The other issue taken up by the ld. AR is against the levy of surcharge and education cess. The assessee deducted tax at source @ 20% in terms of clause (iii) of section 206AA(1) of the Act. The AO opined that apart from the correct rate of tax in his view, the assessee should have also been levied surcharge and education cess. The contention of the assessee for non levy of surcharge and education cess was turned down by the ld. CIT(A), against which the assessee has come up in appeal before us.
We have heard the rival submissions and perused the relevant material on record. While dealing with the first issue, we have held that the assessee had suo motu deducted tax at the rate of 20% as per the prescription of clause (iii) of section 206AA(1), which cannot be interfered. This provision provides in unequivocal terms that the tax should be deducted “at the rate of twenty per cent.” This is the prescribed final rate of tax and there is no mention of charging any further surcharge or education cess on the same. Once the section does not provide for the levy of surcharge and education cess on the fixed rate of 20%, we fail to see how the levy of such surcharge etc. can be inferred in the provision. The legislature cannot be understood as oblivious of the levy of surcharge etc. in certain cases in addition to the specific rates prescribed in the Act itself. The term "maximum marginal rate" has been defined in section 2(29C) to mean; `the rate of income- tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year’. Same position follows from a bare reading of section 115JB which is a special provision for payment of tax by certain companies. Explanation to this section provides in comprehensible terms that : `For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include— (i) to (ii) … (iii) surcharge, if any, as levied by the Central Acts from time to time; 17 (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time’.
Thus, it is perceptible that wherever the legislature intended to levy surcharge and education cess etc. on a particular prescribed rate of tax in a provision, it expressly provided the same. In the absence of a specific mention for the levy of surcharge on the rate of 20% as prescribed in section 206AA(1)(iii), we cannot read the same into it.
At this juncture, it would be apt to consider the judgment of the Hon’ble Supreme Court in CIT vs. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 (SC). The issue raised in that case was about the insertion of proviso to section 113 by the Finance Act, 2002 w.e.f. 1.6.2002 providing that the tax chargeable in the case of block assessment or search cases shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search is initiated u/s 132 or the requisition is made u/s 132A. A view was taken by some of the authorities with the insertion of proviso to section 113, that the levy of surcharge on the tax was always intended to be there and hence this proviso being clarificatory, is retrospective in nature. Rejecting this contention, the Constitution Bench of the Hon’ble Supreme Court held that the provision for levy of surcharge is prospective because such surcharge was inserted only w.e.f. 1.6.2002. Turning to the facts of the instant case, we find that the ld. CIT(A) has upheld the levy of surcharge on the rate of 20% u/s 206AA(1)(iii) which provision simply provides for deduction of tax ‘at the rate of twenty percent.’ Unlike section 113 and other provisions as discussed above, there is no mention for the levy of any surcharge or education cess etc. on such rate of twenty percent.
At this stage, it will be pertinent to have a look at para 4.8 of the Circular No.17/2014 dated 10.12.2004, whose relevant part reads as under :-
`4.8 Compulsory Requirement to furnish PAN by employee Section 206AA: 4.8.1 Section 206AA in the Act makes furnishing of PAN by the employee compulsory in case of receipt of any sum or income or amount, on which tax is deductible. If employee (deductee) fails to furnish his/her
PAN to the deductor , the deductor has been made responsible to make TDS at higher of the following rates: i) at the rate specified in the relevant provision of this Act; or ii) at the rate or rates in force; or iii) at the rate of twenty per cent. The deductor has to determine the tax amount in all the three conditions and apply the higher rate of TDS. However, where the income of the employee computed for TDS u/s 192 is below taxable limit, no tax will be deducted. But where the income of the employee computed for TDS u/s 192 is above taxable limit, the deductor will calculate the average rate of income-tax based on rates in force as provided in sec 192. If the tax so calculated is below 20%, deduction of tax will be made at the rate of 20% and in case the average rate exceeds 20%, tax is to deducted at the average rate. Education cess @ 2% and Secondary and Higher Education Cess @ 1% is not to be deducted, in case the tax is deducted at 20% u/s 206AA of the Act.’
On going through the above parts of the Circular, in the context of compulsory requirement to furnish PAN of employees u/s 206AA, it becomes crystal clear that the CBDT has provided that: ‘Education cess @ 2% and secondary and higher education cess @1% is not to be deducted in case the tax is deducted at 20% u/s 206AA of the Act.’ Albeit, this part of the Circular is not relevant for the purposes of deduction of tax at source in terms of section 195, yet it throws some guidance on the non-levy of education cess and surcharge etc. in case tax is deducted in terms of section 206AA on the payments made to non- residents. No contrary provision mandating the levy of surcharge and education cess on the rate of 20% u/s 206AA(1)(iii) has been brought to our notice by the ld. DR. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was not justified in upholding the action of the AO in levying the surcharge and education cess on the amount of tax deducted at source u/s 206AA(1)((iii) of the Act. The same is, therefore, directed to be deleted.
In the result, the appeal is partly allowed.
The order pronounced in the open court on 18.11.2016.