Nil TDS certificate issued by AO U/s. 195(2) in contravention of provisions not binding on revenue

ISSUE NO.2: Whether the issue of shares by the Assessee on 30.3.2004 and 30.9.2004 can be said to be covered by the order of non- deduction of tax at source issued by the AO in his order dated 22.2.2005 and therefore in respect of issue of shares on the above two dates the Assessee cannot be proceeded against u/s. 201(1) & 201(1A) of the Act?

It was contended by the ld. counsel for the assessee that since the AO has passed an order u/s. 195(2) of the Act allowing the assessee to issue shares without tax deduction at source, the issue of shares made by the assessee on 30.03.2004 and 30.09.2004 cannot be the subject-matter of proceedings u/s. 201(1) & 201(1A) of the Act.

In  the present case, the assessee has made an application for NIL deduction of tax at source. Such application can be made only by a payee u/s. 195(3) of the Act. When an application is made u/s. 195(2) of the Act, the AO cannot assume jurisdiction to hold that the entire payment is not chargeable to tax and the payer need not deduct tax at source.

According to the ld. Counsel for the assessee, the objective of section 195 is to avoid revenue loss as a result of tax liability of a non­resident. According to him, if taxes are withheld on payments which are not chargeable to tax, that would result in excess remittance of taxes. According to him, tax deduction cannot extend beyond the primary levy of tax. According to him, if excess taxes are deducted, then there would be a requirement of applying for refund of excess tax deducted at source. To avoid two way traffic of paying taxes and then claiming refund, it should be possible for a payer to apply for a Nil deduction of tax at source. It is the stand of the assessee that section 195(2) of the Act provides that when the person responsible for paying any sum chargeable under this Act to a non­resident, considers that the whole of such sum would not be income chargeable in the case of the recipient. According to him, the above expression used in section 195(2) of the Act contemplates a situation where the payer can also make an application for a Nil deduction of tax at source. We are of the view that the above submission of the assessee is without any basis. The provisions of section 195(2) have to be read in its entirety and the later portion of section 195(2) of the Act authorizes the payer to make an application to determine the appropriate proportion of such sum which is chargeable to tax. It is not possible to read the first part of section 195(2) in isolation and it has to be read to the later part of section 195(2) of the Act. In view of the clear language of the provisions of section 195(2) of the Act, we do not think it necessary to elaborate on the submissions made by the ld. Counsel for the assessee by drawing analogy to various provisions in the Act and case laws referred to in this regard. In none of the case laws elaborated by the ld. Counsel for the assessee in his written submissions deal with the scope of section 195(2) in the context of a payer making an application for Nil deduction of tax at source. We are of the view that the submissions made by the assessee in the written submissions are a desperate attempt to justify the Nil deduction of tax granted by the AO which fortunately for the revenue did not operate at the relevant point of time when the assessee issued shares to CIMAB.

The question for consideration would be as to what is the effect of the order dated 22.02.2005 passed by the Assessing Officer u/s. 195(2) of the Act holding that no tax is deductible by the payer. In our view, when there is no power u/s. 195(2) of the Act to hold that no tax is deductible at source, on an application filed by the person making payment to a non­resident, the order passed by the AO holding that no tax is deductible at source would be non est in law. In fact, this aspect is clear from the decision of the Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., 327 ITR 456 (SC), wherein the Hon’ble Supreme Court has observed that section 195(2) provides a remedy by which a person may seek determination of the appropriate proportion of such sum so chargeable, where a proportion of the sum so chargeable is liable to tax. The Hon’ble Supreme Court has also observed that an application u/s. 195(2) presupposes that the person responsible for making the payment to a non-resident is in no doubt that tax is payable in respect of the some part of the amount to be remitted to a non-resident, but is not sure as to what should be portion so taxable or is not sure as to the amount of tax to be deducted. It is thus clear from the aforesaid observations of the Hon’ble Supreme Court that the payer cannot ask for a non-deduction of tax at source u/s. 195(2) of the Act.

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