In the Case of DIT v M/s Ericsson Communications Ltd. , Delhi High Court held that when the Industrial policy of Government of India mentions that there should be no royalty paid to the parent foreign collaborator company by the Indian wholly subsidiary company then the reversal of royalty payment was rightly done by the Assessee and there would be no income accrued. Hence, no TDS will be made.
Facts of the Case
The facts of the case are that the Assessee is a wholly owned subsidiary of the Swedish Company. The Assessee entered into a “Corporate Visual Identity Agreement” with its holding company. In terms of the said agreement, the Assessee was obliged to pay royalty @1% of the total sales. The Assessee neither deducted nor paid any TDS in respect of the amount credited to the account of the Swedish Company. According to the Revenue there was obligation of the Assessee to deduct tax at source credited to the account of a Swedish Company. The said amount was credited on account of royalty payable and the said entry was subsequently reversed, as according to the Assessee, the payment of royalty was not permissible as per the Industrial policy. No amount in question was ever paid by the Assessee to the Swedish Company. According to the Assessee no income chargeable to tax accrued in the hands of the Swedish Company and, consequently, there was no default on the part of the Assessee to not deduct TDS.
According to the AO, TDS was deductable at the rate of 48% and that have to be deposited with the Income Tax Authorities. The Assessee’s contention that no royalty was payable in terms of the prevalent industrial policy of the Government of India and, therefore, no income chargeable to tax under the Act accrued to the Swedish Company. The AO also passed another order directing the Assessee to pay interest of Rs.39,14,420/- under Section 201(1) of the Act.
Held by the CIT(A)
The Assessee preferred appeals before the CIT(A) but was unsuccessful. By an order dated 26th September, 2000, the CIT(A) confirmed the orders passed by the AO and held that in terms of the agreement entered into between the Assessee and the Swedish Company, income had accrued in the hands of the Swedish Company and this attracted withholding tax obligations (i.e. deduction of TDS) under Section 195 of the Act.
Held by the Hon’ble Tribunal
The Tribunal upheld the contention of the Assessee and held that there was no accrual of income on account of Royalty, which resulted in an obligation on the part of the Assessee to deduct any TDS. The Tribunal accepted the Assessee’s contention that its Agreement with the Swedish Company was void under Section 23 of the Contract Act, 1882 and did not result in any enforceable debt.
Contentions of the Revenue
The ld. Counsel for the Revenue contended that the obligation to deduct TDS is not contingent on the payment being made and the payer is required to deduct TDS even on the amounts being credited in its books of accounts. Further, he contended that the issue whether the Agreement dated 1st January, 1997 was void or not, was not relevant. He urged that the payment of income tax is not contingent on the validity of agreements and even payments made under void agreements are chargeable to tax under the Act.
Contentions of the Assessee
The ld. Counsel for the Assessee contended that the entries passed by the Assessee in its books of accounts had been reversed as the Assessee had been denied the permission to remit any royalty to its holding company. He submitted that at the material time, the industrial policy of the Government of India did not permit payment of royalty by a wholly owned subsidiary to its holding company.
Held by the Hon’ble High Court
The Hon’ble High Court while considering section 4,5 and 195 of the Act observed that the obligation of a payer to deduct TDS arises when the amounts payable are credited into the accounts of the payee. The obligation is contingent on the amount credited being chargeable to tax under the provisions of the Act. According, to Section 4 of the Act, income tax is chargeable on the total income of a person computed in accordance with the provisions of the Act and according to Section 5 of the Act, the total income of a non-resident would include income, which is received or deemed to be received in India or deemed to accrue or arise in India. Section 195 will be applicable only in respect of a total income of a non-resident which falls within the scope of Section 5(2) of the Act. According, to Section 195(1) of the Act, it is clear that credit of any amount to the account of a non-resident or foreign company, maintained in the books of the payer, would be subject to withholding tax only if credit of such amount reflects accrued income in the hands of the payee, which is chargeable to tax under the Act.
The Hon’ble High Court further while summarizing conditions under section 195 held that section 195 would only be applicable when the payer owes a sum to the non-resident (not being a company) or a foreign company on account of interest or any other sum chargeable to tax under the Act; and such sum is acknowledged as a debt payable by the person to the non-resident/foreign company by crediting the account of such non-resident/foreign company or is paid to non-resident/ foreign company.
The Hon’ble High Court further relied on the letter of Assessee which was written to the Government of India regarding payment of royalties. In the answer to the query of the assessee it was mentioned that neither the FC approval dated 5.2.96 permits payment of royalty to the foreign collaborator nor does the extant policy provide for royalty payment to the parent foreign collaborator by the Indian wholly owned subsidiary.
Therefore, it was held that there was no income chargeable to tax which had accrued in favour of the Swedish Company.
Further, the Hon’ble High Court held that It is not disputed that the Swedish Company did not claim the aforesaid amount of royalty in question and no such amount had in fact been paid. Thus, where the parties by their understanding and conduct are ad-idem that no liability to pay any amount arises, it would not be open for the Revenue to insist on collection of any tax.
The Hon’ble High Court further mentioned the Judgment of Commissioner of Income Tax, Bombay City I v. M/s Shoorji Vallabhdas & Co. 46 ITR 144 where there was a reference of Commissioner of Income Tax v. Chamanlal Mangaldas & Co. (1956) 29 ITR 987, where it was held that Income-tax is a levy on income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a “hypothetical income”, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted.
Accordingly, it was held that the Assessee was not obliged to deduct tax at source.