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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]
ORDER Per Shri M. Balaganesh, AM:
This appeal by assessee is arising out of order of CIT(A)-I, Kolkata vide appeal No. 22/CIT(A)-I/C-57/2010-11 dated 03.08.2013. Assessment was framed by DCIT, Circle-57, Kolkata u/s.201(1)/201(1A) read with section 194I of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2004-05 vide his order dated 29.03.2010.
The only issue to be decided in this appeal is as to whether the interest u/s 201(1A) of the Act could be charged in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a domestic company registered under the Companies Act, 1956 and has a petrochemicals plant at Haldia District, Midnapore, West Bengal for the manufacture and sale of petrochemical products. During the assessment year 2004-05, the assessee entered into an agreement with its subsidiary company M/s. Haldia Riverside Estates Limited (hereinafter referred to as ‘HREL’) for the purpose of residential accommodation of the employees of the assessee. Under the aforesaid agreement, the assessee paid a sum of Rs.8,89,74,146/- during the assessment year to HREL under the following heads: Particulars Amount (Rs.) Rent 3,97,05,637.00 The assessee deducted tax of Rs. 4,06,982/- @ 1.025% (including surcharge) on the rent element at a lower rate, on the basis of a certificate issued by the ACIT, Cir.-7, Kolkata authorizing HPCL, the deductor through an order dt. 01.07.2003 to deduct tax at a lower rate of 1%. It was submitted that HREL, the Deductee, was assessed to NIL tax for the year in question by the ACIT, Cir.-7, Kolkata on a total loss of Rs. 2,82,83,400/-. According to the deductor, following the principle laid down in the case of Hindusthan Coca Cola Beverage (P) Ltd., Vs. CIT (2007) 293 ITR 226 (SC), where the payee is not liable to Income Tax, the payer cannot be liable to pay TDS. Regarding the payments made under the heads other than rent, it was stated that the license fee was for right to use roads and other space within the complex and the other amounts were expenses reimbursed on actual basis to HREL, which do not fall under the purview of TDS provisions. A copy of the agreement with HREL for F.Y. 03-04 was produced. The ld AO observed that the assessee had obtained certificate u/s 197(1) of the Act only with effect from 1.7.2003 and the same is also restricted to the payments not exceeding Rs. 409.34 lakhs. Hence, the assessee should have deducted tax at source @ 20% on the payments made in excess of Rs. 409.34 lakhs and also should have deducted tax at source u/s 194I of the Act in respect of payments made for the period 1.4.03 to 30.6.03. The ld AO observed that it was claimed by the deductor that HREL, the deductee, was assessed to NIL tax for the year in question and as the payee was not liable to Income Tax, the payer could not be made liable for TDS. On verification of records, the ld AO observed that HREL, the deductee company filed its return for the A.Y. 04-05 on 28.10.2004 declaring a loss of Rs.6,57,05,480/-. The issue regarding non-liability of deductor to deduct tax when the payee was not liable to Income Tax was clarified by the Central Board of Direct Taxes in its circular No. 275 dt. 29.01.1997 which stated that no demand visualized u/s 201(1) of the Act should be enforced after the tax depositor satisfied the Officer-in-Charge of the TDS that taxes due have been paid by the deductee assessee. It further clarified that it would not alter the liability to charge interest u/s 201(1A) of the Act till the date of payment of taxes by the deductee assessee or the liability for penalty u/s 271C of the I. T. Act. In the instant case the deductee had not paid any tax as it
3 AY 2004-05 Haldia Petrochemicals Ltd. filed a loss return and there was no tax liability. But the fact remains that the assessee deductor, could not have any prior knowledge about such loss return to be filed by the deductee, and as such it was liable to deduct tax at source while making payment to HREL. In reality also HPCL, the deductor, deducted tax at source on the purported rent payment to HREL as per its own statement dt. 23.10.2008, and deposited the same with the Government. Accordingly it was liable to deduct tax at source from the total payment made to HREL amounting to Rs.8,89,74,146/- at the applicable rates. However, by applying CBDT Circular No.275 dt. 29.01.1997, demand visualized u/s 201 (1) of the Act is not enforceable, as the deductor has proved at this stage that there was no tax due to be paid by the deductee for the relevant year. HPCL will, however, be liable to pay interest to be charged u/s 201(1A) of the Act till the date of filing the Income Tax Return by HREL, as prior to that date, it was not possible to know that HREL had no liability to tax. In actual, an amount of Rs.4,06,982/- was deducted by HPCL as TDS. Amount of interest payable u/s. 201(1A) would thus be arrived at after deducting the amount of TDS actually deducted and deposited from the amount of TDS which should have been done and taking into account the period between the date of payment to date of filing the return by the deductee ( i.e. 28.10.2004) and charged interest u/s 201(1A) of the Act to the tune of Rs. 7,88,598/-.
Before the ld CITA , the assessee submitted that it cannot be treated as ‘assessee in default’ as it was having full knowledge of the affairs of the deductee and the fact that the deductee was its 100% subsidiary and having knowledge of the fact of loss of the deductee. It was further submitted that if any taxes were liable to be paid by the deductee, only then the assessee would have been liable to pay interest. Therefore, there was no due date or actual date of payment either by the deductor or the deductee and hence there can be no levy of interest. The assessee placed reliance on several high court and tribunal decisions including that of one Supreme Court decision in support of its contentions. However, the ld CITA placed reliance on the decision of the Hon’ble Madras High Court in the case of CIT vs Chennai Metropolitan Water Supply & Sewerage Board reported in 246 CTR 402 (Mad) wherein it was held that interest u/s 201(1A) of the Act is liable to be charged for non-deduction of tax even when the deductee was not liable to pay tax. The ld CITA further observed that the claim of 4 AY 2004-05 Haldia Petrochemicals Ltd. the assessee that the deductee was not liable to pay any tax was only an afterthought since the assessee had deducted tax at source on the amount it considered as rent u/s 194I of the Act. Based on these observations, he upheld the order of the ld AO.
Aggrieved, the assessee is in appeal before us on the following grounds:- “1. That the Ld. CIT(A)-1 erred in law and facts in upholding the levy of interest of Rs.7,88,598/- u/s. 201(1A) of the Act on purported failure of the Appellant to deduct tax at source even when the deductee was not liable to pay Income Tax on account of losses.
2. That the Ld. CIT(A)-1 erred in law and facts in upholding the order treating the Appellant as ‘assessee in default’ u/s. 201(1) of the Act.
3. That the proceedings initiated and the impugned order is barred by limitation.”
We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. The ld AR argued that there was no liability to deduct tax at source on the payments made to its subsidiary company in as much as the subsidiary company had incurred huge losses which is quite evident from the Assessment order of the subsidiary company i.e. M/s Haldia Riverside Estates Ltd u/s 143(3) dated 22.12.2006 for the Asst Year 2004-05. From the said order it could be seen that there would be no resultant tax payable by the subsidiary company. In response to this, the ld DR vehemently supported the orders of the lower authorities. We find that the TDS provisions mandates deduction of tax at source on the payments made by assessee to parties if it falls within the deductible limits prescribed u/s 194I of the Act. The purpose of TDS is to ensure that the Government is not deprived of its due taxes in time. Moreover, recovery of taxes through TDS is one of the tax collection mechanism formulated by the Government. If the payer (assessee herein) fails to deduct tax at source in respect of certain eligible payments , then the payer assessee could be treated as ‘assessee in default’ and the said tax could be recovered from the payer assessee on behalf of the payee. But in the instant case, there is no resultant tax liability in the hands of the payee due to huge losses. In such circumstances, normally it is expected that the payee should approach the TDS officer by preferring an application in Form No. 13 seeking for lower / nil deduction certificate u/s 197(1) of the Act. In the instant case, section 197(1) certificate has 5 AY 2004-05 Haldia Petrochemicals Ltd. been obtained by the payee only from 1.7.2003 wherein the deductors have been directed to deduct 1% TDS on payments made to payees in respect of payments not exceeding Rs. 409.34 lakhs and hence the ld AO held that the assessee had violated the TDS provisions in respect of payments made upto 30.6.03 and for payments made in excess of Rs. 409.34 lakhs, tax at the rate of 20% should have been deducted. We hold that mere failure to obtain section 197(1) certificate by the payee for the entire payments and for the entire period would not automatically cast a TDS obligation on the payer and make the payer ‘assessee in default’ when it is certain from the records in the form of assessment order of the payee that there is no resultant tax liability for the payee.
6.1. We find that as per section 201 of the Act, the payer assessee could be treated as ‘assessee in default’ only when there is some tax due to be paid to the exchequer on account of this subject mentioned transaction. It is not in dispute that the payee (subsidiary company) had duly reflected the payments made by the payer (assessee) in its returns and even after that inclusion, the net result is only a loss resulting in nil tax liability. Hence it could be safely concluded that there is no tax that is effectively due to be paid to the Government. Hence the assessee could not be treated as ‘assessee in default’ in the facts and circumstances of the case. We find that the interest charged in terms of section 201(1A) of the Act is only compensatory in nature and is collected from the payer by treating the payer assessee as ‘assessee in default’ for depriving the Government of its legitimate dues. We find that this interest is to be calculated from the due date of deduction / payment of expenses warranting TDS till the date of deduction / payment, as the case may be, at the respective interest rates. Admittedly, this interest is calculated on the tax that is due to be paid. When there is no tax due to be paid , then there cannot be any charging of interest u/s 201(1A) of the Act. We find that section 201(1A) of the Act specifies interest has to be paid “on the amount of such tax” as per section 201(1) of the Act. Such tax specified in section 201(1) of the Act should admittedly be ‘tax due to the Government’. As already held that there is no tax due to the Government from the side of the payee (subsidiary company) in view of subsisting losses, the existence of a primary liability of tax payments from the side of the payee is conspicuously absent in the instant case. The revenue had not controverted the fact that the subsidiary company does not have any tax
6 AY 2004-05 Haldia Petrochemicals Ltd. liability pursuant to the assessment framed on it by the income tax department u/s 143(3) of the Act which is also part of the paper book filed by the assessee.
6.2. The primary conditions to be satisfied before treating the payer assessee as ‘assessee in default’ are as below:-
(a) There should be a payment made by the payer assessee to the payee which would be treated as income in the hands of the payee.
In the instant case, the payee had duly shown the amounts received from the payer assessee as its income in its returns.
(b) The payment made by the payer should fall within the eligible payments warranting deduction of tax at source.
In the instant case, certain payments definitely fall within the ambit of eligible payments warranting deduction of tax at source but the same has not been fully complied by the payer. In fact the assessee had deducted tax at source and remitted the same to the Central Government for part of the period and for part of the amounts as stated in the assessment order.
(c) The payee has not paid the taxes on the amounts received from the payer.
In the instant case, the question of payment of tax does not arise in view of subsisting losses of the payee.
(d) The department is not able to recover the taxes due from the payee thereby shifting the onus on the payer by treating the payer as ‘assessee in default’.
Hence, the payer assessee could be treated as ‘assessee in default’ only when there is some tax that is legitimately due to the Government which the department is not able to recover from the payee , and then the payer could be proceeded with for remitting the said tax by treating him as ‘assessee in default’.
7 AY 2004-05 Haldia Petrochemicals Ltd. 6.3. We find that the reliance has been placed by the ld AR on the provisions of section 191 of the Act. For the sake of convenience, the Explanation to said provisions is reproduced below:- “191. In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct. [Explanation.—For the removal of doubts, it is hereby declared that if any person, including the principal officer of a company,— (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act, and where the assessee has also failed to pay such tax directly, then, such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default within the meaning of sub-section (1) of section 201, in respect of such tax.]”
Hence, it could be safely concluded from the aforesaid reading of the provisions of section 191 of the Act, that it is only when tax is not paid both by the deductor and the deductee, that the deductor be treated as assessee in default and he shall remain so until the tax is paid either by him or by the deductee. In the instant case, where there was no tax at all payable at any point in time , then the assessee deductor cannot be treated as ‘assessee in default’ for any period whatsoever and consequently interest u/s 201(1A) of the Act cannot be computed on the assessee. The computation mechanism itself fails in the instant case.
6.4. We find that the Co-ordinate Bench of this tribunal in the case of Ramakrishna Vedanta Math vs ITO reported in (2003) 55 SOT 417 (Kol) wherein it was held that :-
The plea is indeed well taken. Learned Counsel is quite right in his submission that, as a result, of the judgement of the Hon’ble Allahabad High Court in Jagran Prakashan Ltd vs DCIT reported in (2012) 21 taxmann.com 489 (All) and in the absence of anything contrary thereto from Hon’ble Jurisdictional High Court , there is a paradigm shift in the manner in which recovery provisions under section 201(1) can be invoked. As observed by Their Lordships, the provisions of section 201(1) cannot be invoked and the ‘ tax deductor cannot be treated an assessee in default till it is found that assessee has also failed to pay such tax directly’. Once this finding about the non payment of taxes by the recipient is held to a condition precedent to invoking section 201(1), the onus is on the Assessing Officer to demonstrate that the condition is satisfied. No doubt the assessee has to submit all such information about the recipient as he is obliged to maintain under the law, once this information is submitted, it is for the Assessing Officer to ascertain whether or not the taxes have been paid by the recipient of income. This approach, 8 AY 2004-05 Haldia Petrochemicals Ltd. in our humble understanding, is in consonance with the law laid down by the Hon’ble Allahabad High Court.
It is important to bear in mind that the lapse on account of non deduction of tax at source is to be visited with three different consequences – penal provisions, interest provisions and recovery provisions. The penal provisions in respect of such a lapse are set out in section 271C. So far as penal provisions are concerned, the penalty is for lapse on the part of the assessee and it has nothing to do with whether or not the taxes were ultimately recovered through other means. The provisions regarding interest in delay in depositing the taxes are set out in section 201(1A) . These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned, these provisions are set out in section 201(1) which seeks to make good any loss to revenue on account of lapse by the assessee tax deductor. However, the question of making good the loss of revenue arises only when there is indeed a loss of revenue and the loss of revenue can be there only when recipient of income has not paid tax. Therefore, recovery provisions under section 201(1) can be invoked only when loss to revenue is established, and that can only be established when it is demonstrated that the recipient of income has not paid due taxes thereon. In the absence of the statutory powers to requisition any information from the recipient of income, the assessee is indeed not always able to obtain the same. The provisions to make good the shortfall in collection of taxes may thus end up being invoked even when there is no shortfall in fact. On the other hand, once assessee furnishes the requisite basic information, the Assessing Officer can very well ascertain the related facts about payment of taxes on income of the recipient directly from the recipients of income. It is not the revenue’s case before us that , on the facts of this case, such an exercise by the Assessing Officer is not possible. It does put an additional burden on the Assessing Officer before he can invoke section 201(1) but that’s how Hon’ble High Court has visualized the scheme of Act and that’s how , therefore, it meets the end of justice.
In the instant case, it is proved beyond doubt that the deductee does not have any liability to pay tax as could be evident from the scrutiny assessment order u/s 143(3) of the Act for the Asst Year 2004-05 enclosed in pages 50 to 52 of the paper book. This fact was also placed by the assessee before the ld AO and he had also noted the same in the assessment order.
6.5. We hold in the instant case, there is no tax due to the exchequer and accordingly there is no question of compensating the same by way of interest. We find that this aspect is also dealt by the Hon’ble Supreme Court in the case of CIT s Eli Lilly & Company (India) (P) Ltd & Ors reported in (2009) 312 ITR 225 (SC), wherein it was held as below:-
“34. From the above analyses two conclusions flow. Firstly, it cannot be stated as a broad proposition that the TDS provisions which are in the nature of machinery provisions to enable collection and recovery of tax are independent of the charging provisions which determine the assessability in the hands of the employee-assessee. Secondly, whether the home salary payment made by the foreign company in foreign currency abroad can be held to be " deemed to accrue or arise in India" would depend upon the indepth examination of the facts in each case. If the home salary/special allowance payment made by the foreign company abroad is for rendition of services in India and if as in the present case of M/s. Eli Lilly and Company (India) Pvt. Ltd. no work was found to have been performed for M/s. Eli Lilly Inc., Netherlands, then such payment would certainly come under section 192(1) read with section 9(1)(ii). As stated above, the post-
9 AY 2004-05 Haldia Petrochemicals Ltd. survey operations revealed that no work stood performed for the foreign company by the four expatriates to the joint venture company in India and that the total remuneration paid was only for services rendered in India. In such a case the tax-deductor-assessee was statutorily obliged to deduct tax under section 192(1) of the 1961 Act. (iii) On the scope of section 201(1) and section 201(1A)”
6.6. In view of the aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we allow the grounds raised by the assessee.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 03.08.2016