Case Law Details

Case Name : Deputy Commissioner of Income Tax Vs Rediff.com India Limited (ITAT Mumbai)
Appeal Number : ITA No. 3061/Mum/2009
Date of Judgement/Order : 05/09/2011
Related Assessment Year : 2005- 06
Courts : All ITAT (4278) ITAT Mumbai (1426)

DCIT Vs Rediff.com India Limited (ITAT Mumbai) – Certificate issued by a Chartered Accountant has no decisive impact on tax ability of income in the hands of a non-resident but it is only prima-facie evidence about the tax ability. In order to disallow the payments under Section 40(a)(i) of the Act, the AO needs to examine whether the recipient has a tax liability in India and that aspect can be examined only when all the relevant details were duly furnished by the taxpayer. However, a certificate issued by a CA could not be considered as a conclusive document while determining tax liability of a non-resident. Accordingly, such a certificate is not a substitute for determining the tax liability of a nonresident.

The Tribunal observed that even when the remittance has been made on the basis of the CA certificate, the taxpayer runs a risk of consequences of short deduction or non-deduction of tax at source. However, the taxpayer has to give an undertaking to that effect. Therefore, the CA certificate is not a conclusive document in deciding the tax liability.

The certificate issued by the CA has no decisive impact on tax ability of income in the hands of a non-resident recipient but it was only a prima facie evidence about the tax ability status. Its acceptability by the tax department was confined to permitting the remittance on the basis of tax ability status certified by the CA. The certificate could not substitute for adjudication on tax ability in the hands of non-resident by the AO, nor could it be used as a shield by the taxpayer to prevent any probe of the matter by the tax authorities.

The Tribunal did not adjudicate on the tax ability of the payments in the hands of the taxpayer and remitted the matter to the lower authorities for examining the tax ability of the said payments.

INCOME TAX APPELLATE TRIBUNAL

MUMBAI D BENCH, MUMBAI

ITA No. 3061/Mum/2009

Assessment year: 2005- 06

Deputy Commissioner of Income Tax

Vs.

Rediff.com India Limited          

Date of hearing : June 09, 2011

Date of pronouncement : September 5th , 2011

O R D E R

Per Pramod Kumar:

1. By way of this appeal, the Assessing Officer has challenged the correctness of CIT(A)’s order dated 18th February, 2009, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2005-06.
2. In the first two grounds of appeal, which are interconnected, the Assessing Officer has raised the following grievances:

1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to delete the dis-allowance of Rs 3,04,03,553 made under section 40(a)(i) on account of legal and professional fees, photography charges and bandwidth charges paid to the overseas parties, without deducting tax at source, as required under section 195(1) of the Income Tax Act.

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1A. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the facts that the assessee’s case is covered by the decision of Honourable Supreme Court in the case of Transmission Corporation of AP Ltd vs CIT (239 ITR 587).

3. The relevant material facts are like this. The assessee is engaged in the internet related services and is one of the prominent online provider of news, information, communication, entertainment and shopping services. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction, in respect of legal and professional fees, photography charges and bandwidth charges, aggregating to Rs 3,04,03,553, payable to the persons resident outside India, but has not deducted any tax at source from the same. The Assessing Officer was of the view as per Section 195 of the Income Tax Act, 1961, tax has to be deducted at source while remitting the monies outside India, and since assessee has not deducted tax at source , the amount so paid to the non-residents is not deductible in view of the provisions of Section 40(a)(i) of the Income Tax Act. The Assessing Officer was of the view that even if there were any doubts about tax ability of payment made to non-resident, in view of Tribunal’s decision in the case of Arthur Anderson & Co (ITA No. 9125/Mum/95; order dated 29th July 2003), the tax is required to be deducted as a measure of abundant caution, i.e. ex abundenti cautela. According to the Assessing Officer, as the assessee failed to deduct the tax at source from these payments, the assessee did not discharge his tax withholding obligations, and, accordingly, dis-allowance under section 40(a)(i) was to be invoked. Aggrieved by the dis-allowance so made, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) was of the view there is no finding by the Assessing Officer to the effect that income embedded in these payments non-residents is taxable in India, and, therefore, the assessee did not have any obligation to deduct tax at source from this payment. It was also noted that the assessee had made payments to non-residents after duly obtaining the chartered accountant’s certificate to the effect that no tax is deductible from these payments and, therefore, it cannot be said that the assessee had any doubts about non tax ability of these amounts in India. The CIT(A) further observed that, “.. now the CBDT has entrusted the job of obtaining such certificate ( certifying non tax ability in the hands of the recipient) from the chartered accountants”, and, therefore, “where remittances have been (so) made to respective parties, whose income is not chargeable to tax under the Indian Income Tax Act, there will be no liability to make any TDS”. The CIT(A) thus apparently proceeded on the basis that as long as a chartered accountant has certified, in terms of the CBDT circular, that no tax is deductible at source from these payments, dis-allowance under section 40(a)(i) cannot be made for non-deduction at source from such payments. Since the assessee had duly obtained the chartered accountant’s certificate in respect of all the remittances, in the absence of which he could not have made the foreign remittances anyway dis-allowance under section 40(a)(i) was held to be not sustainable in law, and was deleted. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.

4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. We find that, as held by Honourable Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456), tax deduction at source obligations under section 19 5(1) arise only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. The underlying principle is this. Tax withholding liability of the payee is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, the Assessing Officer can not proceed on the basis that the payer had an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. That exercise was not carried out by the Assessing Officer on the facts of this case. The Assessing Officer was thus clearly in error in proceeding to invoke dis-allowance under section 40(a)(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance. To that extent, CIT(A) was justified in deleting the impugned dis-allowance.
6. However, what also follows from the above discussions is that, in order to examine whether a dis-allowance under section 40(a)(i) can be made, the first step is that the Assessing Officer has to examine whether the recipient of a payment has tax liability in respect of the remittance in question, and that aspect of the matter can only be examined when all the relevant details are duly furnished by the assessee. A certificate issued by chartered accountant, on which a lot of reliance is placed by the learned CIT(A), cannot be a conclusive determination of tax ability in the hands of the recipient of income. In our considered view, such a chartered accountant’s certificate is not a substitute for such a determination of tax-ability in the hands of the recipient by the Assessing Officer.
7. It is, in our considered view, essential to understand the nature of a chartered accountant’s certificate on the basis of which foreign remittances are made. The certificate in question is issued by a chartered accountant under CBDT Circular No. 759, dt. 18th Nov., 1997 [(1997) 143 CTR (St) 290] as modified by CBDT Circular No. 10 of 2002, dt. 9th Oct., 2002 [(2002) 177 CTR (St) 41]. In view of the provisions of s. 195, it is obligatory for a person making any payments to any non-residents that income-tax thereon in connection with the same is deducted at source. It was with a view to ensure compliance with this requirement that the RBI requirement was to obtain a ‘no objection certificate’ from the AO for each such remittance, so as to ensure that all remittances were examined by the AO. This procedure resulted in inordinate delays in making the remittances because on many occasions the process of determining tax deductions by the AO took long time. It was in this backdrop and in the light of, to our mind commercial realities, as also increased measure of faith in taxpayers and professionals, that the system was simplified in 1997. The CBDT has, vide Circular No. 759, dt. 18th Nov., 1997 [(1997) 143 CTR (St) 290], dispensed with the requirement of obtaining a no objection certificate from the AO before making a foreign remittance. Under the new scheme set out in the aforesaid circular, which has been subsequently modified by the CBDT Circular No. 10 of 2002, dt. 9th Oct., 2002 [(2002) 177 CTR (St) 41], it is not necessary for an assessee to obtain prior determination of tax withholding liability. The assessee could, under the new scheme, approach any independent chartered accountant for determining his withholding tax liability from a remittance, and make a remittance on the basis of this certification, as long as the assessee tax deductor gave an undertaking to the AO on the following lines:

I/ We…………………. (Name, address and PAN Number) propose to make a remittance of……………….. being (nature of payment)  to………………… (Name and complete  address of the person to whom the remittance has been made) after deducting a sum of Rs. …….. being tax @ ………. which is the appropriate rate of TDS on the said amount of remittance.

2. A certificate from the accountant, as defined in Explanation below s. 288 of the IT Act, certifying the nature and amount of income, amount of tax payable and the amount actually paid is also annexed.
3. In case it is found that the tax actually payable on the amount of remittance made, has either not been paid or has not been paid in full, I/ we undertake to pay the said amount of tax along with interest found due, in accordance with the IT Act.
4. I/ We will also be subject to provisions for penalty and prosecution for the said default as per the IT Act.
5. I/ We also undertake to submit the requisite documents etc. for enabling the IT Department to determine nature and amount of income and tax, interest, penalty etc. payable thereon.

8. In our humble understanding, so far as TDS under the revised procedure of making remittances to non-residents is concerned, the position is now like this. In case a person has to make a remittance to a non-resident, and he is of the view that the no TDS is warranted or tax is required to be deducted at a certain rate, he can approach an independent chartered accountant for certifying, in the prescribed format, the rate at which tax is to be deducted or that tax is not to be deducted, and make the remittance on the basis of such a certificate. Even this remittance on the basis of the chartered accountant’s certificate is at assessee’s own risk of consequences which follow the short deduction or non-deduction of tax at source. The assessee has to give an undertaking to that effect. However, as long as assessee’s stand is at least supported by a chartered accountant’s certificate, the assessee is at least allowed to make the remittance on that basis. Contrast this with the old procedure of prior certification of withholding tax requirement by the AO, in which, the assessee has to first pay the tax and then make the remittance. Under the revised scheme, the assessee can, subject to the support of a chartered accountant’s certificate and furnishing of an undertaking extracted earlier in this order, first make the remittance and the finalisation of withholding tax liability follows. All it does is that the real time control mechanism to ensure revenue collections from foreign remittance at the point of remittance, which was in the nature of steering control, is given up, though naturally with the right to take suitable remedial measures when any loss of revenue is caused by the tax-deductors. Nothing more than this paradigm shift in approach needs to be read into this scheme of things. It is not abandonment of the institution of AO (TDS) in favour of the professionals in accountancy practice. It is also important to take note of a clarification issued by the CBDT. As clarified by the CBDT, vide Circular No. 767, dt. 22nd May, 1998 [(1998) 147 CTR (St) 1] to the effect that “if an order under s. 195(2) has been obtained by the person responsible for deducting tax, the new procedure of filing an undertaking along with the certificate prescribed in Circular No. 759 would not be applicable.” It is thus clear that the new scheme of remittances being allowed on the basis of chartered accountant’s certificate is not in substitution of the scheme of things envisaged under s. 195(2) of the Act, but merely to supplement the same. However, the CIT(A) appears to have proceeded on the basis that as long as chartered accountant’s certificate is on record, it is not necessary for the Assessing Officer to examine the matter any further, so far as disallowance under section 40(a)(i) is concerned. By implication thus, the chartered accountant’s certificate is treated as conclusive to finalise the status of tax ability, in the hands of the recipient of payment, in India.

9. In our considered view, the certificate issued by the chartered accountant, on the question of tax ability of payment to non-resident in India, has no decisive impact on determination of tax ability of income in the hands of the recipient non-resident; it is only a prima facie evidence about the tax ability status and its acceptability by the revenue authorities is confined to permitting the remittance on the basis of tax ability status certified by the chartered accountant. It cannot substitute for adjudication on tax ability in the hands of non-resident by the Assessing Officer, nor can it be used as a shield by the assessee to thwart any probe on that aspect of the matter by the tax authorities. As a matter of fact, as assessee tax deductor’s mandatory undertaking accompanying this certificate shows, the question of tax ability in the hands of the recipient remains open and the assessee continues to have obligation to file all the relevant details, enabling determination of such liability, before the revenue authorities. In this view of the matter, the CIT(A) was clearly in error in accepting the chartered accountants’ certificates, on the basis of foreign remittances were made, as decisive of the question that the assessee did not indeed have any obligation to deduct taxes at source from these payments. In our considered view, the CIT (A) ought to have directed the assessee to furnish complete details about each of the foreign remittance, and examine these details to determine whether or not tax was indeed deductible under section 19 5(1) from each of these payments – particularly as admittedly assessee did not furnish these details before the Assessing Officer, and the Assessing Officer had no occasion to decide the matter on merits. To that extent, relief granted by the CIT(A) cannot be sustained by us. And Learned counsel for the assessee has now filed some of these details before us, and urged us to adjudicate the issue of tax ability of these payments on merits. Some of these details, on sample basis, are as follows:

Sl No. Name and address of the non resident Amount The basis on which amounts the non resident payee are said to be not taxable in the hands of the recipient
1 Russel Nelson

Crynwer Software as Russel Nelson

521, Pleasant Valley Road Potsdam NY 13676

$ 17,753Professional fee payment did not have fixed base in India, the income was not taxable in India under Article 15 of the India US DTAA.

2Sasam & F LLP

P.O. Box 1764

White Plains, NY 10602

$ 3,82,952Professional fee payment-  as this concern did not have a fixed base in India, the income was not taxable in India under Article 15 of the India US DTAA.

3Orrick, Herrington

& Sutcliffe LLP

666, Fifth Avenue

New York NY 10103$ Professional fee payment as this concern did not have a fixed base in India, the income was not taxable in India under Article 15 of the India US DTAA.

10. In view of the fact that none of the authorities below had any occasion to examine the status of tax ability in the hands of the recipient, we are not inclined to adjudicate on the tax ability of these payments in the hands of the recipient for the first time at this stage. In our considered view, the ends of justice will be met by remitting the matter to the file of the Assessing Officer for examining, on merits, the tax ability of these payments in the hands of the recipients, and with a direction to restrict the dis-allowance under section 40(a)(i) in respect of only such cases, if any, where the amounts remitted abroad have been held to be chargeable to Indian Income Tax Act.

11. Ground Nos. 1 and 1 A are thus allowed, for statistical purposes, in the terms indicated above.

12. In ground no. 2, the Assessing Officer is aggrieved of CIT(A)’s deleting the disallowance of Rs 53,12,824 even as , according to the Assessing Officer, failed to give complete details of expense so as to facilitate necessary verifications.

13. During the course of assessment proceedings, the Assessing Officer made the impugned dis-allowance under section 40(a)(ia) on the ground that no taxes were deducted at source by the assessee, and also observed that “apart from the above (reason), the assessee has not been able to give further details of address of the above parties and the proof of services actually rendered by the said parties so as to qualify the expenses wholly and exclusively for the purposes of business”. Aggrieved, assessee carried the matter in appeal before the CIT(A) and contended that taxes were duly deducted at source and that the payments were made for editorial charges, photography charges, music streaming charges which was wholly and exclusively for the purposes of business of the assessee. The CIT(A) accepted these contentions and remitted the matter to the file of the AO for verification about compliance with tax deduction obligations. The Assessing Officer is aggrieved and in appeal before us.

14. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in the matter. The matter is remitted to the file of the AO for verifications about factual aspects of discharging TDS obligations, and, as regards non submission of information, it is not even learned Departmental Representative’s case that any specific requisition made by the Assessing Officer was not complied with. As evident from details taken on record even in the assessment order, the expenses are incurred for editorial and other contents on the website and the Assessing Officer has not disputed the purposes either. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.

15. Ground No. 2 is thus dismissed.
16. In ground no. 3, the Assessing Officer is aggrieved of CIT(A)’s deleting the disallowance of Rs 63,74,486 in respect of software and product development expenses.
17. In the course of the assessment proceedings, the Assessing Officer disallowed Rs 1,91,60,012 in respect of software usage charges and product development charges incurred by the assessee, even as the assessee contended that these expenses are routine expenses incurred on website content up gradation and not for creation of new assets. When the matter was carried in appeal before the CIT(A), he deleted the dis-allowance to the extent the expenses were indeed routine and periodic expenses, such as annual maintenance contracts, up gradations and technical support- which aggregated to Rs 63,74,486. The Assessing Officer is not satisfied and is in appeal before us.
18. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

19. Having carefully perused the nature of items which have been held to be of routine and periodic nature, having regard to the fact that no new assets came into existence and no enduring advantage was gained by the assessee as a result of this expenditure as also having regard to the fact that learned DR also could not point out any specific item which could be said to be non routine and one time expense either, we uphold the order of the CIT(A) and decline to interfere in the matter.

20. Ground No. 3 is also dismissed.

21. In the result, the appeal is partly allowed for statistical purposes in the terms indicated above. Pronounced in the open court today on 5th day of September, 2011.

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Tags : ITAT Judgments (4458) section 195 (139)

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