No Sec. 201 default for foreign remittances when payees paid tax: ITAT Mumbai

State Bank of India Vs ACIT (ITAT Mumbai)

ITAT, Mumbai: SBI not ‘assessee in default’ for non-deduction of TDS on foreign remittances, as payees discharged tax liability.

Facts:

• The assessee in this case was the State Bank of India (SBI), a public sector undertaking and the largest commercial bank in India. For assessment years 2013-14 to 2018-19, the Assessing Officer (AO) initiated proceedings under sections 201(1) and 201(1A) of the Income-tax Act, 1961. The allegation was that SBI had failed to deduct tax at source (TDS) on certain payments made to foreign entities.
• The payments were made to three key recipients:

a. MasterCard International Inc., a company based in the USA (A.Ys 2013–14 to 2015–16),

b. Visa International Trust Ltd., a Singapore-based entity (A.Ys 2013–14 to 2015–16), and

• MasterCard Asia Pacific Pte Ltd., also based in Singapore (A.Ys 2016–17 to 2018–19).
• The AO, upon examination of these transactions, held that the amounts remitted to the aforesaid entities constituted royalty within the meaning of section 9(1)(vi) of the Income-tax Act as well as Article 12 of the relevant Double Tax Avoidance Agreements (DTAAs). Since SBI had made these payments without deducting tax at source, the AO treated SBI as an assessee in default under section 201(1). The AO further imposed liability for interest under section 201(1A) for the period of non-deduction.
• SBI contested this view, and its defence was based on the claim that these payments represented business income of the non-resident recipients, which was not taxable in India in the absence of a Permanent Establishment (PE) of the recipients in India. SBI argued that it was under no obligation to deduct TDS in such circumstances. Moreover, SBI highlighted that the recipients themselves had either already discharged their tax liability or the question of taxability remained pending before competent authorities or courts. Specifically, MasterCard International USA had offered the income in question to tax and discharged its liability; Visa International Trust Ltd. had settled its tax position through a Mutual Agreement Procedure (MAP), which was duly implemented by the AO; and MasterCard Singapore had challenged the taxability of its receipts before the Authority for Advance Rulings (AAR) and, following an adverse ruling, had moved the Delhi High Court, which granted an interim stay on assessment proceedings. Thus, SBI argued that it could not be saddled with the liability of being an assessee in default when either the recipients had already paid tax, or where the determination of taxability was still sub judice.
• SBI submitted that the Explanation to section 191 makes it clear that a deductor can be treated as an assessee in default only if the payee has also failed to discharge its tax liability. In this case, MasterCard International USA had already offered the income to tax and paid the liability in India, confirmed by its letter of 18 June 2019. Visa International Trust Ltd. had settled its position through a MAP resolution between India and Singapore, which was duly implemented by the AO. As for MasterCard Singapore, its taxability is pending before the Delhi High Court, which has granted a stay. SBI therefore argued that unless the recipients themselves defaulted in paying their taxes, it could not be saddled with liability.
• The Revenue, through the Departmental Representative, took the stand that the payments in question were in the nature of royalty under domestic as well as treaty law. Consequently, SBI was obliged under section 195 to deduct tax at source before making remittances. The failure to deduct tax constituted a statutory default, making SBI liable under section 201(1) as an assessee in default. It was further argued that section 191 cannot be used as a shield by SBI because the obligation to deduct tax at source is independent and mandatory.

Issues:

• Whether SBI can be treated as an assessee in default u/s 201(1) when the payees have already discharged their tax liability or when taxability is pending determination.
• Whether interest u/s 201(1A) is chargeable, and if so, whether it should be restricted till the date of actual payment of tax by the payees.

Observations:

• The Tribunal began its analysis by focusing on the Explanation to section 191. This provision makes it abundantly clear that the liability of the deductor to be treated as an assessee in default arises only when the payee has also failed to pay such tax directly. Therefore, where the payee has itself paid the tax on the income, the deductor cannot be penalised under section 201(1).
• Applying this principle to the facts, the Tribunal observed that MasterCard International USA had indeed confirmed to SBI that it had discharged the tax liability on the payments received for the years in question. Likewise, Visa International Trust Ltd. had resolved the matter through a MAP procedure, and the AO had given effect to the MAP resolution. In both these cases, therefore, SBI could not be regarded as an assessee in default, subject to factual verification by the AO.
• With respect to MasterCard Singapore, the Tribunal noted that while the AAR had given a ruling adverse to the assessee, the matter was carried to the Delhi High Court. The High Court had granted a stay on the assessment proceedings, which remained operative. As such, the Tribunal held that until the taxability of receipts in the hands of MasterCard Singapore is finally determined, SBI cannot be treated as an assessee in default. If, however, the High Court eventually upholds the taxability and MasterCard Singapore fails to pay taxes, then only can SBI be fastened with liability under section 201(1).
• On the question of interest under section 201(1A), the Tribunal referred to the decision of the Supreme Court in Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT, where it was held that while the demand against the deductor cannot be enforced once the deductee has paid tax, this does not alter the liability to pay interest under section 201(1A). The interest, however, can only be computed up to the date the deductee actually discharged the tax liability. The Tribunal directed the AO to carry out factual verification of the exact dates of such tax payments by the recipients and compute the interest accordingly.
• The Tribunal partly allowed the appeals of SBI and issued specific directions. It held that in the case of payments made to MasterCard International USA, the Assessing Officer (AO) must verify whether the tax liability on the receipts had been discharged by the payee, and if so, SBI could not be treated as an assessee in default. Similarly, with respect to Visa International Trust Ltd., the AO was directed to examine whether the Mutual Agreement Procedure (MAP) resolution had been duly implemented and taxes paid, in which case SBI could not be considered in default. In relation to MasterCard Singapore, the Tribunal noted that since the issue of taxability was stayed by the Delhi High Court, SBI could not presently be treated as an assessee in default; however, if the High Court eventually upheld the taxability and the payee failed to pay, SBI might then be regarded as in default. On the matter of interest under section 201(1A), the Tribunal clarified that such interest could be levied only up to the date on which the non-resident recipients actually discharged their tax liability. Accordingly, the appeals were allowed for statistical purposes and the matter was remanded to the AO for factual verification.

FULL TEXT OF THE ORDER OF ITAT MUMBAI