Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Lucent Technologies GRL LLC Vs DCIT (ITA No. 6353 /Mum/09) (Judgment date: 31 December 2010, Assessment Year: 2002- 03) held that the credit for tax withheld cannot be denied to the taxpayer on the basis of subsequent grant of tax refund to the tax deductor when all the obligations under the provisions of the Income-tax Act, 1961 (the Act) relating to tax deduction are duly complied with and TDS certificate has been issued in accordance with the provisions of the Act.
Facts of the case
• The taxpayer, a tax resident of USA, was in the business of supply of copyrighted software for telecommunication project. The taxpayer received consideration from Reliance Infocomm (deductor) for supply of software. The deductor made an application to the Assessing Officer (AO) requesting him to make remittance without tax deduction on the grounds that the payment was for copyrighted article and not copyright.
• However, the AO rejected taxpayer’s application against which the deductor filed an appeal to Commissioner of Income-tax (Appeals) [CIT(A)]. The deductor as per the AO’s direction withheld taxes while making payments to the taxpayer as per the provisions of Section 195 of the Act and deposited tax with the Government. The deductor also issued TDS certificates for the said amount withheld under Section 195 of the Act. Subsequently, the deductor was successful in its appeal for NIL tax deduction at source and the deductor was also granted full refund of taxes paid.
• The taxpayer, in its return of income filed for the year under consideration, claimed credit for the taxes so withheld on the basis of TDS certificates issued by the deductor. However, the AO held that since the tax has been refunded to the deductor, the TDS certificates are not valid and hence, no credit for TDS can be granted to the taxpayer.
• The CIT(A) directed AO to verify whether the TDS refunded to the deductor has been re-deposited by deductor with the Government or not, and, if yes, the credit of the same be granted to the appellant as per law, on the basis of original TDS certificates filed by the appellant.
Issue before the Tribunal
• Whether lawful implications of a valid tax deduction certificate can be declined if the deductor has been refunded the taxes which he had deposited with the Government?
• The Tribunal observed that all the requirements for grant of TDS credit such as deduction of tax under section 195, fulfillment of obligations of tax deductor under section 200 and issue of TDS certificate have been duly complied with. Further, the fairness of these procedures has not been questioned by the AO.
• The refund to the tax deductor is not prescribed under the scheme of the Act but appears to be an administrative exercise and the same has been granted without approval of the person whose taxes have been deducted or without his being party to the whole exercise of the granted refund i.e. taxpayer. The Tribunal held that such an exercise cannot take away, curtail or otherwise dilute the rights of the person from whose income, taxes are so deducted and to whom such certificate is issued.
• Since the taxes have been deducted from the payment made to the taxpayer and the taxpayer is also in receipt of the appropriate TDS certificates, the credit for TDS cannot be declined on the basis of an administrative action of refund which is neither envisaged by the provisions of the Act nor in the control of the taxpayer.
• Accordingly, the Tribunal directed the AO to grant credit to the taxpayer on the basis of original TDS certificates produced by the taxpayer and in accordance with the provisions of the Act uninfluenced by any refunds subsequently granted to the tax deductor.
The Tribunal also made an observation that the above observations should not be construed, in any way, affecting the remedies that the tax department may pursue qua the tax deductor, if necessary.
This is an interesting decision which is one of its kind wherein the Mumbai Tribunal has rejected tax department’s action to deny the tax credit for the taxes withheld by the tax deductor when all the obligations under the provisions of the Income-tax Act, 1961 (the Act) relating to tax deduction are duly complied with.
It is pertinent to note that the Central Board of Direct Taxes had issued Circular No. 7/2007 dated 23 July 2007 which provides the procedure and circumstances for refund of tax deducted at source under section 195 of the Act to the tax deductor. However, the present case was not covered by the circumstances covered under the circular. Incidentally, the said circular also mentions that a refund to the deductor should be granted only after obtaining an undertaking that no TDS certificate under Section 203 of the Act has been issued to the non-resident. In cases where such a certificate has been issued, the person making the claim for refund should either obtain it or should indemnify the tax department from any possible loss on account of any separate claim of refund for the same amount by the non-resident.