Case Law Details
RELEVANT PARAGRAPH
12. We have heard both the parties. The first contention of the learned AR is that section 195 is not applicable because the deductee is a tax resident of India and is being assessed in India. This ground of appeal has been decided by the learned CIT (A) against the deductor and the deductor has not filed any cross objection. Therefore, it cannot be held that section 195 will not be applicable because the deductee is a tax resident of India and is being assessed in India as the deductee is having business presence in India. Moreover, it is clear from the assessment order of the deductee that status of the deductee has been taken as foreign company. Section 195 refers to payment to a foreign company. It nowhere mentioned that a foreign company, who is being assessed in India on account of its business presence, will be exempt from section 195.
14. It is seen that the credit was made on April 1, 2003 while the valuation report is dated 1st November, 2003. Hence, on the date of credit, it was not known to the deductor that the amount paid will be resulting into loss. The deductor cannot make an assessment of income in the hands of the deductee. The deductee filed the return of income and since the transaction in question was between the associated concerned, therefore, as a result of transfer pricing adjustment, it was held that there was short-term capital gain. Hence, the transaction on which the deductor has not deducted tax at sources has resulted into assessment of income in the hands of the deductee.
15. If the contention of the appellant is accepted that it was knowing that the transaction will result into loss in the hands of deductee and hence tax has not been deducted then every deductor may not deduct tax at source from payments like interest without collecting the appropriate declaration from the deductee that his income is below taxable limit. When the Act has provided that an assessee can make an application for no deduction or short deduction then such provision cannot be bypassed by merely stating that the deductor was aware that the transaction will result into loss. Hence, the deductor was liable to deduct tax as the transaction was to be considered for computation of income.
16. Section 195 provides deduction that income tax is to be deducted at the rate in force. The rates in force are given in para 2 of the Finance Bill, 2003, In respect of any other income, the rate mentioned is 40%. It is true that the entire consideration paid by the deductor may not be income in the hands of the deductee but for such a case, the deductor is required to make an application u/s 195(2) so that it can be ascertained as to how much is the income portion in respect of the payment made. In the instant case, no such application u/s 195(2) was made and therefore, the deductor was obliged to deduct tax at the rate of 40%.
17. The Hon’ble Apex Court in the case of Hindustan Coca Cola Beverage P. Ltd. (supra) observed at page 230 as under.-
“Be that as it may, Circular No.275/201/9S- IT(B) dated January 29, 1997, issued by the Central Board of Direct Taxes, in our considered opinion, should put an end to the controversy. The circular declares “no demand visualized under section 201(1) of the Income-tax Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under section 271C of the Income-tax Act”.
Thus, the deductee has disclosed the transaction and according to the deductee, it has resulted into loss. Of course, while making assessment, the AO has not accepted the loss and as a result of transfer price adjustment, held that the transaction has resulted into short term capital gain at s.1,21,37,891/ -as compared to the short term capital loss declared by the assessee at Rs.2,01,03,430/ -. Hence, in respect of transaction, the deductee filed the return and as per that return filed on 1 November, 2004, no tax was payable on the transaction on which the deduct or was required to deduct tax at source. Hence, the liability of the deductor to deduct tax at source will end when the deductee has filed the return. The deductor cannot be supposed to deduct tax at source in respect of adjustment if any made by the AO in respect of income tax assessment of the deductee.
18. Hon’ble Apex Court in the case of CIT vs M/s Eli Lilly & Company (India) Pvt. Ltd. in Civil Appeal No.5114/2007
“A Perusal of section 201(1) and section 201(1A) shows that both these provisions are without prejudice to each other. It means that the provisions of both the sub-sections are to be considered independently without affecting the rights mentioned in either of the subsections. Further, interest u/s 201(1A) is compensatory measure for withholding the tax which ought to have gone to the exchequer. The levy of interest is mandatory and the absence of liability for tax will not dilute the default. The liability of deducting tax at source is in the nature of vicarious liability, which presupposes existence of primary liability. The said liability is a vicarious liability and the principal liability is of the person who is taxable. A bare reading of section 201(1) shows that interest u/s 201(1A) r.w.s. 201(1) can only be levied when a person is declared as an assessee in default. For computation of interest u/s 201(1A), there are three elements; one is the quantum on which interest has to be levied; second is, the rate at which interest has to be charged; third is, the period for which interest has to be charged. The rate of interest is provided in the 1961 Act. The quantum on which interest has to be paid is indicated by section 201(1A) itself. Sub-section (1A) specifies -on the amount of such tax”, which is mentioned in sub-section (1) wherein, it is the amount of tax in respect of which the assessee has been declared in default. The object underlying section 201(1) is to recover the tax. In the case of short deduction, the object is to recover the short fall. As far as the period of default is concerned, the period starts from the date of deductability till the date of actual payment of tax. Therefore, the levy of interest has to be restricted for the above static period only”.
Hence, in the instant case, the deductor was required to deduct the tax at source and therefore, the deductor was an assessee in default since a deductee has filed the return and has disclosed the transaction in the return of income and that shows no tax was payable on such transaction. Therefore, the default will end on the date when the deductee has filed the return. Hence, the deductor will be liable to interest u/s 201(1A) up to 1st November, 2004. However, there will be no deduction u/s 201 since the deductee has filed the return and has disclosed the transaction and no tax is payable as per the return on such transaction by the deductee. Hence, order of learned CIT(A) in canceling the demand u/s 201 is upheld. However, it is held that the deductor will be liable to pay interest on the amount of tax to be deducted from the date of deduction till November 1, 2004.
In the result, the appeal of the revenue is partly allowed.
