Any person from whom a non-resident is in receipt of any income can be treated as an agent of such non-resident: Mumbai ITAT

A recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Hindalco Industries Ltd. (Taxpayer) [AIT ­2010-211-1TAT] under the provisions of the Indian Tax Act, 1961 (ITA), held that any person from whom a non ­resident is in receipt of any income can be treated as an agent of such non-resident.

Such an agent is treated as a representative assessee for the purpose of assessment of income of such non-resident under the ITA. The ITAT held that income which has been assessed to tax in the hands of the non-resident recipient cannot be assessed again in the hands of the representative assessee (payer of the income) under the ITA.

Background:- Under the provisions of the ITA, the assessment of the representative assessee is at par with the assessment of the non-resident being represented i.e. tax can be levied and recovered from the representative assessee in the same manner in which tax would be leviable and recoverable from the non-resident being represented. Such representative assessee is entitled to recover the tax paid on behalf of the non-resident being represented. The payer of income to the non-resident can be treated as a representative assessee of the non-resident recipient.

Facts

• The Taxpayer acquired shares of an Indian company from a non-resident. The non-resident being taxable in respect of the transfer of shares, applied for a certificate for lower withholding of tax under the ITA. Pursuant to a lower withholding certificate issued by the Tax Authority, the Taxpayer withheld and deposited the tax under the provisions of the ITA.

• The non-resident filed its tax return declaring the income from the transfer of shares. While the Tax Authority assessed the non-resident, it simultaneously issued notice proposing to treat the Taxpayer as a representative assessee of the non-resident. Thereafter, the Tax Authority assessed both the Taxpayer (as representative assessee) and the non-resident in respect of the income arising from the aforementioned transfer of shares by the non-resident.

• In appeals filed by the Taxpayer and the nonresident before the first appellate authority, the assessment made by the Tax Authority was upheld.

• In an appeal filed by the non-resident against the first appellate authority’s order, the ITAT reversed the assessment order passed by the Tax Authority and upheld the tax return submitted by the non-resident. This order of the ITAT is reported in Alcan Inc. v DDIT [110 ITD 15].

• The Taxpayer is in appeal before the ITAT against the first appellate authority’s order which confirmed the assessment in the hands of the Taxpayer as a representative assessee of the non-resident.

Taxpayer’s contentions

Agent and representative assessee

• The Taxpayer cannot be treated as a representative assessee of the non-resident as the conditions for treating it as a representative assessee under the ITA are not satisfied.
• As the Taxpayer has discharged the withholding tax obligation in respect of the payment to the non-resident, it cannot be again assessed as a representative assessee of the non-resident.
• The liability to be assessed to tax as a representative assessee on behalf of the nonresident is a vicarious liability. The order treating the Taxpayer as representative assessee of the non-resident was passed after a period of two years and 10 months from the end of the previous year in which the Taxpayer made payment to the non-resident. Hence, as the payment has been already made to the nonresident, there is no asset of the non-resident from which the tax liability payable by the representative assessee could be recovered.

Dual assessment

• The provisions of the ITA providing for assessment in the hands of a representative assessee are only meant for assessment and recovery of tax on income which accrues and arises through an agent in India. As the income from the aforementioned transfer of shares has been assessed in the hands of the non-resident, the same income cannot be again assessed to tax in the hands of the Taxpayer as a representative assessee.

Tax Authority’s contentions:- Either a non-resident or the representative assessee or both can be proceeded against for assessment and recovery of tax. Assessment in the hands of the non-resident is relevant only to the extent of computation of capital gain. Assessment made in the hands of the nonresident will not invalidate the proceedings for assessment in the hands of the representative assessee.

ITAT’s ruling

Agent and representative assessee

• The conditions envisaged in the provisions of the ITA for treating the Taxpayer as a representative assessee of the non-resident are attracted. Hence, the Taxpayer can be treated as a representative assessee even if it has withheld and deposited the tax under the provisions of the ITA.
• Neither does the ITA prescribe any time limit for initiating proceedings for treating the Taxpayer as a representative assessee of the nonresident, nor have the proceedings for assessing income in the hands of the nonresident become time-barred. The purpose of proceeding against representative assessee is to secure payment of taxes due from the nonresident.

Dual assessment

• In a similar issue which arose before this ITAT in the case of Saipem UK Ltd. [298 ITR (A.T.) 113]  this ITAT had held that the same income cannot be assessed simultaneously in the hands of the non-resident and in the hands of its agent i.e. representative assessee, as such double taxation militates against the cardinal principles of avoiding duplicated assessment of the same income. In Saipem’s case, the ITAT further held that once the substantive assessment in the case of the non-resident attains finality, it is wholly unjustifiable to make a protective assessment in respect of the same income in the hands of the representative assessee.
• Following Saipem’s ruling (supra), income which has been assessed to tax in the hands of the non-resident cannot be once again assessed to tax in the hands of the Taxpayer as a representative assessee.

Comments:- Under the provisions of the ITA, there is no restriction against parallel initiation of assessment proceedings against any person treated as an agent of the non-resident for recovery of taxes due from the non-resident. A similar view has been expressed by the Kerala High Court in the case of Fertilizers and Chemicals (Travancore) Ltd. [166 ITR 823] which ruling has been interpreted by the ITAT in Saipem’s case (supra) to hold that, though the Tax Authority can initiate parallel assessments on both the nonresident and its agent, the same income cannot be assessed in the hands of both.

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