DCIT Vs WNS Capital Investment Ltd. (ITAT Mumbai)
In the case of Engineering Analysis Centre of Excellence Vs CIT [(2021) 125 taxmann.com 42 (SC)], Hon’ble Supreme Court has, dealing with a materially similar situation i.e. with respect to the obligations of a person under tax withholding requirements, observed that “It is thus clear that the “person” mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply (the law as it did not exist as the point of time when the obligations in question were being performed) the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute.” It is in this context that Their Lordships also observed that “This question is answered by two latin maxims, lex non cogit ad impossibilia, i.e., the law does not demand the impossible and impotentia excusat legem, i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused”. For a person to perform the tax withholding obligations on the basis of an amendment in law which was enacted on a date later than the date on which tax withholding obligations were required to be performed, is expecting that person to do the impossible. When a law is nowhere even on the horizon, leave aside the statute, it is wholly impossible for any person to perform the obligations imposed by such a law. The assessee, therefore, cannot be faulted for not deducting tax at source from payments made to Aviva International Holding Ltd UK in respect of purchase of shares in Aviva Global Services, Singapore, which, in turn, are said to derive substantial value from underlying assets in India. Once we come to this conclusion to the effect that there were no lapses on the part of the assessee inasmuch as the related legal provisions were not even in existence at the point of time when the sale of shares took place, i.e., 11th July 2008, we need not deal with the question as to whether the income embedded in the payments in question was at all taxable in India. Quite clearly, therefore, as is held by Hon’ble Supreme Court in the case of Engineering Analysis (supra), persons responsible for deducting tax at source cannot be expected to act on the basis of an Explanation when such an “explanation was not actually and factually in the statute”. It cannot thus be said that, on the facts of this case, tax was deductible under section 195 at the time of making the said payment. We hold so. Once we hold so, the very foundation of impugned demands under section 201 r.w.s. 195 ceases to be sustainable in law, as the entire case of the revenue authorities hinges on Explanation 2 to Section 195, and it’s retrospective application. Having said that, we must add that, in any event, this issue is entirely tax neutral inasmuch as it is a case in which the person selling the shares, i.e. Aviva International Holdings Ltd UK, is said to have already paid taxes on the capital gains, and independent proceedings in the said matter are in progress, and the matter is said to be pending for adjudication, on merits, before a coordinate bench. In case the taxability of the said income in the hands of the seller is to be upheld, the upholding of levy of interest under section 234B, on the given facts, will only be a natural corollary. Whether interest is charged under section 201(1A) or under section 234B, it is to be charged @ 1% p.m, and levy of interest under one of these provisions is to the exclusion of levy of interest under the other provision. Let’s not lose sight of the fact that the period before us is the period prior to insertion of Proviso to Section 209(1), with effect from 1st April 2012, which means that, as the law stood at that point of time, it could be argued that irrespective of the actual deduction of tax at source, as long as the tax is deductible at source, the tax deductible will be reduced from the advance tax liability. Therefore, our upholding the liability under section 201(1A), which could only proceed on the foundational assumption that tax was deductible at source by the person making payment in question, will end up exonerating the person, in whose hands the income is taxable, of liability under section 234B. The levy of interest to compensate for the delay in realization of taxes, in the event of the taxability of subject income being upheld, is reasonably protected. In a situation in which, however, no income is held to be taxable in India, no demands under section 201 r.w.s. 195- including demand under section 201(1A) r.w.s. 195., which are inherently in the nature of vicarious liability, survive. Viewed thus, the present dispute is wholly tax neutral. In view of these discussions, as also bearing in mind the entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
FULL TEXT OF THE ITAT JUDGEMENT
This set of appeal and cross objection is directed against the order dated 20th March, 2018 passed by the learned CIT(A) in the manner of tax withholding, and consequent interest, demands raised under section 201 r.w.s. 195 of the Income Tax Act, 1961, for the assessment year 2009-10.
2. Grievances raised by the appellant Assessing Officer, as set out in the memorandum of appeal, are as follows:
1. On the facts and M the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s. 201(IA) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s. 195(1) of the Act on payments made to Aviva International Holdings Ltd, UK in July, 2008 for acquiring from it 100% of equity shares in Aviva Global Services Singapore Pvt Ltd, Singapore which derived value substantially from assets situate in India?
2. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s. 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s. 195(1) of the Act on payments made to Aviva International Holdings Ltd. UK in July, 2008 for acquiring from it 100% of equity shares in Aviva Global Services Singapore Pvt. Ltd, Singapore which derived value substantially from assets situate in India when Aviva International Holdings Ltd, UK has accepted the taxability of the capital gains in its hands and the assessment has reached finality?
3. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s. 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(1) of the All on payments made to Aviva International Holdings Ltd UK in July, 2008 on the premise that the law at that time did not have a charge on taxation of capital gains arising from indirect transfer of capital assets deriving their value substantially from assets situate in India prior to retrospective amendments made to section 9(1)(i) and section 195(1) of the Act by the Finance Act, 2012, thereby meaning that these amendments were not declaratory and clarificatory in nature and do not explain and clarify the existing law?
4. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201 (1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(I) of the Act on payments made to Aviva International Holdings Ltd UK in July,2008 under the existing law prior to retrospective amendments made to section 9(1)(i) and section 195(1) of the Act by the Finance Act, 2012, whereas these amendments fulfil the tests laid down by a Constitution Bench of Hon’ble Supreme Court in their decision in the case of CIT (Central)-I, New Delhi vs Vatika Township Pvt Ltd, 2015 (1) SCC 1, for being declaratory and clarificatory in nature and hence explain and clarify the existing law?
5. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(1) of the Act on payments made to Aviva International Holdings Ltd UK in July,2008 under the existing law prior to retrospective amendments made to section 9(1)(i) and section I95(1) of the Act by the Finance Act, 2012, whereas the Notes on Clauses to Finance Bill, 2012 categorically mention these amendments as being clarificatory and thus fulfil the test laid down by a Constitution Bench of Hon’ble Supreme Court in their decision in the case of C1T (Central)-1, New Delhi vs Vatika Township Pvt Ltd, 2015 (1) SCC I, for being declaratory and clarificatory in nature and hence explain the existing law?
6. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(1) of the Act on payments made to Aviva International Holdings Ltd UK in July,2008 under the existing law prior to retrospective amendments made to section 9(1)(i) and section I95(1) of the Act by the Finance Act, 2012, whereas the Memorandum to Finance Bill, 2012 categorically mention these amendments as being clarificatory and thus fulfil the test laid down by a Constitution Bench of Hon’ble Supreme Court in their decision in the case of C1T (Central)-1, New Delhi vs Vatika Township Pvt Ltd, 2015 (1) SCC I, for being declaratory and clarificatory in nature and hence explain the existing law?
7. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(1) of the Act on payments made to Aviva International Holdings Ltd UK in July,2008 under the existing law at that time relying on the decision of Hon’ble Supreme Court of India in the case of GE Technology Centre (P) Ltd vs CIT & Anr., (2010) 327 ITR 456 (SC), without considering that this decision is not applicable as the retrospective amendments made to section 9(1)(i) and section I95(1) of the Act by the Finance Act, 2012, are declaratory and clarificatory in nature and explain the existing law regarding chargeability of capital gains arising from indirect of assets situate in India and liability to deduct tax at source on payments made to effect such transfers?
8. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding in paragraph 24 of his order that “section 195(2) is not applicable as even before retrospective amendment to Income Tax Act 1961” whereas in paragraph 14 of his order he had held that “it is made clear that merits are not examined considering the submission of the Appellant regarding liability towards deduction of tax at source on the payment to Aviva International Holdings Ltd, UK”?
9. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(1) of the Act on payments made to Aviva International Holdings Ltd UK in July,2008 under the existing law by construing that the principal sum became liable to tax only on account of retrospective amendments to section 9(1)(i) and section I95(1) of the Act and applying the ratio of Hon’ble Bombay High Court’s decision in the case of CIT vs NGC Network (India) Pvt Ltd. (In ITA no 397 of 2015) without considering that these amendments fulfil the tests laid down by a Constitution Bench of Hon’ble Supreme Court in their decision in the case of CIT (Central)-1, New Delhi vs Vatika Township Pvt. Ltd, 2015 SCC 1, for being declaratory and clarificatory in nature and hence explain and clarify the existing law?
10. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source u/s 195(1) of the Act on payments made to Aviva International Holdings Ltd UK in July,2008 under these existing law by drawing partial inference from the decision of Ld. ITAT ‘D’ Bench in the case of Cairn UK Holdings Ltd. Vs DCIT (IT) -1(2)(1), New Delhi (ITA No. 1669/Del/2016 for AY 2007-08) without considering that amendment to section 9(1)(i) and section 195 (1) fulfil the tests laid down by a Constitution Bench of Hon’ble Supreme Court in their decision in the case of CIT (Central)-1, New Delhi vs Vatika Township Pvt. Ltd, 2015 SCC 1, for being declaratory and clarificatory in nature and hence explain and clarify the existing law?
11. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) has erred in holding that interest u/s 201(1A) of the Act is not required to be levied in the case of the assessee on account of special circumstance of Aviva International Holdings Ltd UK having paid the taxes, without considering that there is no provision in law regarding existence of such special circumstance and its treatment in this regard?
3. Verbosity of these grounds of appeal apart, as learned representatives fairly agree, the short grievance raised in these grounds of appeal is that on the facts and in the circumstances of this case, learned CIT(A) erred in deleting the impugned demand, on account of interest for delay in realization of taxes which ought to have been upheld by the assessee before us, under section 201(1A) read with Section 195- particularly in the light of Explanation 2 to Section 195. What are termed as grounds of appeal are arguments in support of this core grievance.
4. The issue in appeal lies in a very narrow compass of facts. On 11th July 2008, WNS Capital Investments Ltd Mauritius- the assessee before us and a company which is owned by WNS Mauritius which, in turn, is owned by the ultimate holding company situated in Jersey, purchased 100% equity shares in Aviva Global Services Singapore Pte Ltd (AGSPL, in short) from Aviva International Holdings Ltd UK (AIH-UK, in short) for a consideration of £ 3,23,76,435. AGSPL, in turn, was holding company of three subsidiaries- namely Aviva Global Services (Bangalore) Pvt Ltd India (AGSBPL- I, in short), Aviva Global Shared Services Pvt Ltd India (AGSSPL-I, in short), and Aviva Global Services Lanka Pvt Ltd Srilanka. The parent company of assessee company, i.e. WNS- M, also has a fully owned Indian subsidiary by the name of WNS Global Services Pvt Ltd (WGSPL- India, in short). Subsequently, with effect from 1st July 2007 and vide amalgamation approved by Hon’ble Bombay High Court vide order dated 11th August 2009, the two Indian subsidiaries of AGSPL, namely AGSBLP-India and AGSPPL-India, were amalgamated with WGSPL- India. In terms of diagrams this series of transactions could be, as is the case of the AO, described as follows:
5. What this, according to the Assessing Officer, clearly shows is that the predominant purpose of the assessee’s purchasing shares of Aviva Singapore was the underlying assets, by way of shareholdings in Aviva Bangalore and Aviva India, and that is what attracts taxability of gains on sale of these shares in the hands of the seller of these shares. This income was embedded in the payment for the shares as made by the assessee, and, therefore, the assessee had, according to the Assessing Officer, the obligation to withhold taxes from taxes on such income. It was thus in the backdrop of the above information, which was received from the Transfer Pricing Officer II(6) Mumbai, that the Assessing Officer probed the matter further. He formed the view that in the present case, even though the transfer is of the shares of a foreign company, by one non-resident to another non-resident, since these shares “derive, directly or indirectly, its value substantially from the assets located in India”, in view of Explanation 5 to 9(1)(i), the income on transfer of these shares is taxable in India. The Assessing Officer further noted that in the light of insertion of Explanation 2 to Section 195 inserted by the Finance Act 2012, with retrospective effect from 1st April 1962, even a non-resident is under obligation to withhold taxes, under section 195, from any payments by such non-resident to another nonresident, when income embedded in such payments is taxable in India. It was thus concluded that the assessee has defaulted in not withholding taxes from payments made to AIH-UK. Accordingly, demands were raised under section 201(1) and 201(1A), read with Section 195(2), in respect of the tax on income, taxable in India, embedded in such sale consideration, and also for interest on account of delay in realization of these withholding taxes, i.e. from the date on which the taxes ought to have been withheld till the date on which taxes are actually realized. The demands Rs 92.59 crores thus were raised. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Learned CIT(A) noted that AIH-UK, in whose hands capital gains on the sale of shares in question is taxable, claims to have paid the tax to the extent of Rs 47,72,84,284, representing tax on the capital gains in question. To that extent, subject to necessary verification of facts, the demand under section 201(1) was deleted. As regards the levy of interest under section 201(1A) is concerned, learned CIT(A) deleted the same on the basis of the following reasoning:
20. There is a timeline in the case. It starts with no explicit provision in law and ended with retrospective amendments in Income Tax Act 1961 vide Finance Act 2012. The timeline is as under:
