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Income Tax Appellate Tribunal, L Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Pawan Singh
These appeals by the assessee are directed against the consolidated order of the CIT(A)-IT/TP, Pune dated 29.11.2013 for assessment years 2007-08 and 2008-09. Common issues being involved, theses appeals were heard together and are being disposed off by way of this common order.
The facts of the case, briefly, are as under: - 2.1 The assessee-company is engaged in the business of marketing, promotion and distribution of ‘Red Hat subscriptions’ to customers in India, enabling users to get updates, upgrades, etc. of Linux and other Red Hat applications through ‘support services’; which include ongoing maintenance during the subscription period and troubleshooting support by responding to questions/queries/problems pertaining to the open source software through web based systems and telephone calls. In the order passed under section 201(1) r.w.s. 201(1A) of the Income Tax Act, 1961 (in short 'the Act') for A.Y. 2007-08 dated 26.03.2013 and A.Y. 2008- 2 & 1086/Mum/2014 Ms. Red Hat India Pvt. Ltd. 09 dated 27.10.2012, the Assessing Officer (AO) held that the amounts remitted by the assessee to its Associated Enterprises (AE) in this period was exigible to tax as ‘royalty’ under section 9(1)(vi) of the Act as well as Article 12(3)(a) of the India-Singapore DTAA. The AO also held that these remittances were also exigible to tax as ‘fees for technical services’ (FTS) under section 9(1)(vii) of the Act as well as under Article 12(4)(a) and 12(4)(b) of the India-Singapore DTAA. The AO was of the view that the assessee ought to have deducted tax at source on the remittances to its AE, which it failed to do and therefore treated the assessee as an assessee in default and raised demand under section 201(1) of the Act and charged interest under section 201(1A) of the Act. 2.2 The learned CIT(A) disposed off the appeals preferred for assessment years 2007-07 and 2008-09 vide the impugned order dated 29.11.2013 substantially upholding the AO’s action but allowed the assessee partial relief. In doing so, the learned CIT(A) (i) upheld the AO’s action in treating the assessee as an assessee in default under section 201(1) of the Act raising tax thereon and in charging interest under section 201(1A) of the Act and but, however, directed the AO to levy TDS @10%, without including surcharge and education cess.
Aggrieved by the order of the CIT(A)-IT/TP, Pune dated 29.11.2013 for both assessment years 2007-08 and 2008-09, the assessee has preferred identical grounds of appeal for both the assessment years which are as under: - “On the facts and circumstances of the case, and in law, the learned Deputy Director of Income tax International Taxation -II, Pune/ the learned CIT(A) have: General ground 1. erred in holding that the Appellant is an assessee in default in respect of the payments made to Red Hat Asia Pacific Pte Ltd, Singapore ('Red Hat Singapore') and thereby levying a tax liability under Section 201(1) of the Act and interest thereon under Section 201(1A) of the Act; Subscription fees taxed as 'Fees for Technical Services' 2. erred in holding that the payments made to Red Hat Singapore for purchase of subscriptions are in the nature of 'Fees for technical 3 & 1086/Mum/2014 Ms. Red Hat India Pvt. Ltd. services' as defined under Article 12(4) of the India-Singapore Double Taxation Avoidance Agreement ('Tax Treaty') and hence, subject to withholding tax in India under Section 195 of the Act; 3. failed to appreciate that Red Hat Singapore has not made available any knowledge/ skills either to the Appellant or to the end users of Red Hat Subscriptions and hence purchase of subscription are not fees for technical services as per Tax Treaty and not liable to tax in India; 4. without prejudice to Ground No. 1 to 3, failed to appreciate that the tax liability arising on payments made to Red Hat Singapore, if any, is to be borne by Red Hat Singapore and hence there is no question of grossing up as per Section 195A of the Act; Levy of interest under Section 201(1A) of the Act 5. erred in levying in interest under Section 201(1A) of the Act. Initiation of penalty proceedings under Section 271C of the Act 6. erred in initiating penalty proceedings under Section 271C of the Act.”
4. Ground No. 1 4.1 In this ground the assessee challenges the validity of the orders of the authorities below, contending that they have erred in holding the assessee as an assessee in default in respect of payments made to its AE, Red Hat Asia Pacific Pte Ltd, Singapore and thereby charging tax under section 201(1) of the Act. At the outset, the learned A.R. of the assessee strongly canvassed the proposition that the AO’s orders passed under section 201(1) r.w.s. 201(1A) of the Act for assessment years 2007-08 and 2008-09 vide orders dated 26.03.2013 and 27.10.2012 respectively would not survive and are unsustainable in these appeals if (i) no action has been taken by Revenue against the recipient/payee, i.e. Red Hat Asia Pacific Pte Ltd., Singapore and (ii) and/or if the possibility of action being taken by revenue is barred by limitation. 4.1.2 In support of the aforesaid proposition, the learned A.R. placed reliance on the decision of the Special bench of ITAT, Mumbai in the case of Mahindra & Mahindra vs. DCIT (2009) 122 TTJ 0577 (SB). According to the learned A.R., in the cited case it has been held that as per Explanation to section 191 of the Act, both conditions, viz. (i) failure on the part of the person to perform his obligation of making TDS and (ii) non payment of tax 4 & 1086/Mum/2014 Ms. Red Hat India Pvt. Ltd. by the payee/recipient directly should be cumulatively satisfied so as to treat a person as an assessee in default. If only one of these two conditions is satisfied then the person responsible for deduction of tax at source cannot be treated as an assessee in default. Therefore, the question of treating the person responsible for paying the amount to the recipient/ payee as assessee in default for non deduction of tax at source thereon is, inter alia, connected with the tax liability of the recipient/payee of such sum. If no liability of the payee to pay tax exists or the liability of the payee to tax has not been determined by Revenue by passing of such an order in its hands and/or the time limit for taking such action on the payee under any provisions of the Act is barred by limitation, the AO is precluded from holding the person responsible for making TDS on such payments as an assessee in default under section 201(1) of the Act. It is contended by the learned A.R. that in the case on hand, in view of the findings rendered by the Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. (supra), the same findings would squarely cover the issue in favour of the assessee since no action has been taken by Revenue to assess the taxability of the assessee payee/recipient in the case on hand, i.e. Red Hat Asia Pacific Pte. Ltd., Singapore and further no action can now be taken by the AO against the payee for the assessment years in question viz. 2007-08 and 2008-09 as the same is barred by limitation. It is prayed that in view of the factual and legal matrix of the case, as discussed above, the assessee’s appeals for assessment years 2007-08 and 2008-09 be allowed on this preliminary legal ground and the AO’s orders under section 201(1) and 201(1A) be held to be unsustainable, as the AO in the case on hand is clearly precluded from holding the assessee to be an assessee in default under section 201(1) of the Act. 4.2 The learned D.R. for Revenue was heard. In response to the propositions raised by the learned A.R. of the assessee, that the AO was precluded from holding the assessee in the case on hand as an assessee in default under section 201(1) of the Act as the payee/recipient has not paid tax thereon and that neither has Revenue determined the payee’s tax liability in the relevant assessment years 2007-08 and 2008-09. On the 5 & 1086/Mum/2014 Ms. Red Hat India Pvt. Ltd. request of the Bench, the learned D.R. ascertained the position from the AO. The learned D.R. submitted that the AO vide letter dated 21.03.2017 (copy placed on record) has confirmed that no orders of assessment have been passed in the case of the payee/recipient, Red Hat Asia Pacific Pte. Ltd., for assessment years 2007-08 and 2008-09 and subsequent years in this regard. 4.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncements cited. For the assessment years 2007-08 and 2008-09 under consideration, the AO passed orders under section 201(1) r.w.s. 201(1A) of the Act holding that assessee to be an assessee in default for failure on its part to deduct tax at source on payments made by it to its AE, M/s. Red Hat Asia Pacific Pte, Ltd., Singapore. According to the assessee the validity of the said orders passed by the AO is in question and that the said orders are unsustainable since both the twin conditions laid down as per Explanation to section 191 of the Act are not satisfied, i.e. (i) failure on the part of the assessee to make TDS on payments to its AE and (ii) non payment of tax by the payee/ recipient since no action has been taken by Revenue against the payee/ recipient and/or if the possibility of action being taken by Revenue against the payee is barred by limitation. On an appreciation of the facts on record it appears to us that it is amply clear that both the aforesaid requisite conditions are not satisfied, in as much as, it is admitted by the AO in his letter dated 21.03.2017 (copy of which has been placed on record by learned D.R.) that no assessment in this regard has been made in respect of the tax liability of the payee/recipient M/s. Red Hat Asia Pacific Pte. Ltd. for assessment years 2007-08, 2008-09 and onwards. The learned D.R. has also not controverted the contention of the learned A.R. of the assessee that the possibility of Revenue taking any action in this regard in the case of the payee/recipient is barred by limitation. In this factual matrix of the case, we are of the considered view that the decision of the Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. vs. DCIT (2009) 122 TTJ 577 (SB) (Mum Trib) would squarely apply and cover the issue in favour of the assessee.
6 & 1086/Mum/2014 Ms. Red Hat India Pvt. Ltd. 4.3.2 In the case of Mahindra & Mahindra Ltd. (supra) the Special Bench observed that in a case where (i) the assessee has been held in default under section 201(1) of the Act and (ii) no assessment has been made in the hands of the payee/recipient, i.e. non payment of tax by the payee (as in the case on hand) and/or Revenue has failed to pass orders in payee’s case in this regard or the possibility of action is barred by limitation, Explanation to section 191 of the Act mandates if only one of the above two conditions is satisfied, then the person responsible for making TDS on such payments cannot be treated as an assessee in default as the above two conditions are inter connected. In para 18.10 of its order the Special Bench held as under: - “18.10 The underlying principle behind the deduction of tax at source is the presumption that there will be some liability of the payee towards tax on the sum paid to him. If there is no such liability then the entire exercise of firstly getting the amount of tax collected/deducted at source and then refunding to the payee will be futile. If there is no tax liability of the payee then there cannot be any question of treating the person responsible for paying the sum without deducting tax at source as assessee in default. Thus the essence of the provisions of deduction of tax at source is that there is a presumption of liability of the payee to tax on the income. As discussed in an earlier para that if there is no or lower liability of the payee to tax on the income so received without deduction of tax at source, then the payer cannot be treated as assessee in default for the whole or that part of the amount, as the case may be. It is therefore clear that though the duty of deduction of tax at source was there at the time of making the payment or crediting the account of the payee, but its failure will not lead to adverse consequence by treating the person paying the income as assessee in default if eventually either the payee is not liable to tax on such sum or he has already paid the tax due on the amount of income so received. Thus the question of treating the person responsible for paying the income as assessee in default by way of passing the order under s. 201(1) is inter alia, tied with the tax liability of the payee on such sum. If no liability of the payee to tax exists at the time when order under s. 201(1) is sought to be passed or though the income is chargeable to tax but the liability of the payee to tax has not been determined by passing any order in his hands and further the time-limit for taking action on the payee under any other provision has also passed out, in such a situation again the passing of order under s. 201(1) will be mere ritual. It is so because the tax now collected from the payer of income under this order will be incapable of adjustment against the tax liability of the payee either existing or likely to arise on the income so paid to him because in the former case there is no tax liability and in the latter case, such a liability cannot be created as the time-limit for taking action having been run out. Like in an action of search under s. 132 or other relevant proceedings under the Act if it comes to the notice of the Department that any income chargeable to tax has escaped assessment, the proceedings are launched against such person and notice is issued under s. 148 within the time prescribed under s.
The present outer limit provided in s. 149 is six years from the end of the relevant assessment year within which a notice under s. 148 can be issued. If the income so found to have been earned by the assessee and escaped taxation falls within a period of six years from the end of the relevant assessment year, notice under s. 148 will be issued and the assessment shall be framed by taxing such income. If however during such proceedings it is conclusively established that the assessee had earned income not disclosed to the Revenue in period prior to the said six years from the end of the relevant assessment year, then such income will escape taxation unless it falls within s. 69 or 69A or 69B or 69C and the Revenue will be restrained from recovering tax by. making the assessment of such income. The logic behind providing such time- limit for taking action is that the Departmental authorities should remain vigilant and bring the escaped income to tax at an earlier point of time and further to work against the inaction on the part of the AOs on one hand and providing certainty to the assessee that after this period no action will be taken against him. Thus it follows that if due to one reason or the other the concealed income of the assessee is unearthed for a period beyond six years from the end of the relevant assessment year, then no tax can be recovered thereon. By the same logic and turning to the point before us 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 under s. 201(1). In the like manner where the payee has not offered such income for taxation and there is no remedy available with the AO for taxing such income in the hands of the payee i.e. the 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. We have seen above that the provisions for deduction of tax at source presuppose the taxability of the sum paid in the hands of the payee and the tax so deducted is finally adjusted against the tax liability of the payee. If tax is collected by way of order under s. 201(1) from the person responsible failing in 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 this collection of tax would be illegal. The CBDT vide its Circular No. 7 of 2007, dt. 23rd Oct., 2007 [(2007) 212 CTR (St) 137] 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 Government to that extent under s. 195, cannot be said to be "tax". From here it follows that unless there is a tax liability capable of being lawfully created and recovered from the deductee, the amount of tax collected by way of deduction of tax at source cannot be characterized as the ‘tax’. In the same circular, it has been directed that in such cases the refund should be made to the person making payment under s. 195, that is the payer. So if tax is recovered in the first instance from the person responsible for paying by virtue of order under 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 been 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. We, therefore, hold that in order to treat the payer as assessee in default it is of the utmost importance that the income so paid or credited to the account of payee is capable of being brought within the purview of tax net and such assessment can be lawfully made on the payee.” 4.3.3 Considering the legal and factual matrix of the case, as discussed above, and respectfully following the above cited decision of the Special 9 & 1086/Mum/2014 Ms. Red Hat India Pvt. Ltd. Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. (supra) we hold that in order to treat the assessee/payee as an assessee in default it is required that the income so paid or credited to the account of the payee/recipient is capable of being brought within the tax net and such assessments should be lawfully made by the AO on the payee/recipient. Since these two conditions as required by Explanation to section 191 of the Act have not been satisfied, the orders of the AO under section 201(1) r.w.s. 201(1A) of the Act for assessment year 2007-08 and 2008-09 treating the assessee as an assessee in default under section 201(1) of the Act and thereby raising tax liability and charging interest thereon under section 201(1A) are unsustainable in law and are accordingly cancelled. We hold and direct accordingly. Consequently, ground No. 1 of the assessee’s appeal is allowed.
Ground No. 2 to 4 – on merits 5.1 In view of our allowing the assessee’s appeal on ground No. 2 (supra), the AO’s order passed under section 201(1) r.w.s. 201(1A) for assessment years 2007-08 and 2008-09 dated 26.03.2013 and 27.10.2012 respectively are cancelled. We are therefore of the opinion that these ground Nos. 2 to 4 raised by the assessee for these two years on merits are now academic in nature and hence are not adjudicating these ground at this juncture.
Ground No. 5 – Charging of interest under section 201(1A) 6.1 It is submitted that the assessee has filed a rectification application on this issue before the AO on 29.05.2014, which is pending disposal. Even otherwise this ground of charging of interest under section 201(1A) is consequential to ground No. 1 of this appeal and since we have allowed the assessee’s appeal on ground No. 1 by cancelling the orders of the AO under section 201(1) r.w.s. 201(1A) of the Act, we direct the AO to consequently delete the interest charged under section 201(1A) of the Act for assessment years 2007-08 and 2008-09.