Learned CIT(A) erred in not directing the AO to unconditionally grant full tax credit to the appellant f or the taxes deducted at source by Reliance Infocomm Limited of Rs 24,41,58,046 and, consequently, grant refund of the said amount as the entire addition made by the AO was deleted by the CIT(A). – learned CIT(A) erred in not directing the AO to unconditionally grant credit, and, consequently, refund for a sum of Rs. 21,26,74,006, being the TDS deducted by the payer, in respect of which the original TDS certificates were submitted by your appellant with the AO during the course of assessment proceedings.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI L BENCH, MUMBAI
[Coram : N V Vasudevan JM, and Pramod Kumar AM]
ITA No. : 6353/Mum/09
Assessment year: 2002-03
Lucent Technologies GRL LLC …………………………Appellant
Deputy Director of Income Tax -(International Taxation)
Circle 4 (1), Mumbai 400 020 …………………. …Respondent
P J Pardiwala and Madhur Agarwal, for the appellant Narendra Singh, for the respondent
O R D E R
Per Pramod Kumar:
1. By way of this appeal, the assessee has challenged correctness of CIT(A)’s order dated 7th October 2009, for the assessment year 2006-07, on the following grounds :
1. On the facts and in the circumstances of the case and in law, learned CIT(A) erred in not directing the Assessing Officer to unconditionally grant full tax credit to the appellant for the taxes deducted at source by Reliance Infocomm Limited of Rs 24,41,58,046 and, consequently, grant refund of the said amount as the entire addition made by the AO was deleted by the CIT(A).
2. On the facts and in the circumstances of the case and in law, learned CIT(A) erred in not directing the AO to unconditionally grant credit, and, consequently, refund for a sum of Rs. 2 1,26,74,006, being the TDS deducted by the payer, in respect of which the original TDS certificates were submitted by your appellant with the AO during the course of assessment proceedings.
3. On the facts and in the circumstances of the case and in law, learned CIT(A), without appreciating the provisions of the Income Tax Act, 1961, and the fact that, as admitted by the AO, the payee had confirmed, vide letter dated 24th December 2008, that whatever taxes were refunded to it would be paid back to the government as per the indemnity bond dated 18th December 2008, erred in directing the AO to restrict the credit the TDS to your appellant to the extent of TDS not claimed/ obtained by the payer, or amounts which have been deposited by the payer with the Government Treasury, out of the TDS refunded to the payer.
2. The issue in appeal lies in a very narrow compass of material facts. The assessee (Lucent, in short), a company with fiscal domicile in the United States of America, is engaged, inter alia, in the business of supply of copy righted software in connection with telecommunications project. During the relevant previous year, the assessee received gross amount of Rs 162,77,19,401, towards supply of software, from Reliance Infocomm Limited (Reliance Info, in short) out of which withholding tax under Section 195 of the Income Tax Act, computed @ 15% under Article 12 of India US Double Taxation Avoidance Agreement, amounting to Rs 24,41,58,046 was said to have been deducted by the Reliance. The payer also issued certificates evidencing these tax withholdings, i.e. TDS certificates, after depositing the taxes so deducted by the Reliance and in the prescribed manner, for a sum of Rs 21,26,74,006. As on the time of filing the income tax return, the remaining TDS certificates were said to be in the process of being issued. On the strength of TDS certificates so issued by the payer, Lucent claimed credits for taxes deducted at source. In the meantime, however, there were some noteworthy developments, which have material bearing on the issue in appeal before us, at the end of the payer also. It appears that the payer’s stand was that no taxes are deductible from payments made for supply of copyrighted software, in as much the payments were only for the use of copyrighted article and not the copyright itself. Accordingly, Reliance Info moved an application to his Assessing Officer requesting permission to make the remittance to this assessee without any deduction of tax at source. This application was turned down by the Assessing Officer. Aggrieved, Reliance Info carried the matter in appeal before the CIT(A), but, at the same time, Reliance Info as well deducted tax at source from the payments made to the assessee. On being successful in appeal, Reliance Info was also refunded the amount that it had deducted at source from payments made to Lucent and deposited in the Government treasury
3. It was in this background that the claim for credit of TDS certificates, in assessment of Lucent, was declined by the Assessing Officer, and, while doing so, the Assessing Officer, inter alia, observed as follows:
The contention and the detailed legal submission of the assessee has been duly considered but the same is not found to be acceptable. Verification of the authenticity and genuineness of the TDS certificates are always within the rights of the department. Moreover, this verification is a factual matter, and hence legal submissions are not required. The credit of the TDS has to be given if the certificates are genuine. In the instant case, the fact that tax deposited by Reliance has been refunded to it is known, and hence certificates issued by it no longer remain valid as no tax remains deposited with the Government. In view of the above, an enquiry was conducted from Reliance Infocomm Limited, vide letter dated 24th December 2008, giving them the details of the TDS certificates on which credit was claimed by the assessee, and they were required to confirm that the taxes as mentioned in those certificates have been actually deposited. In response, Reliance Infocomm Limited filed a letter on 29.12.2008 stating that whatever taxes have been refunded to them, shall be paid back to the Government as per their indemnity bond dated 18.12.2006. However, till that time, no confirmation of the certificate was done. In view of the above, credit for TDS was not given to the ass essee as no taxes have remained to be deposited.
4. The Assessing Officer further added that “the contention of the assessee that the recipient cannot be penalized for an invalid TDS certificate is also not acceptable, in view of the fact that this is an arrangement between the two parties and if credit is given to the certificates, it would amount to a payment by the department for software supplied by Lucent Technologies GRL LLC to Reliance Infocomm Limited”. With these observations, the assessee was declined any credit for the taxes which were withheld by Reliance Info from payments made to Lucent, and in respect of which Lucent has furnished the TDS certificates. Aggrieved, inter alia, by the TDS credit so declined by the Assessing Officer, assessee carried the matter in appeal, but the CIT(A) also confirmed the stand so taken by the Assessing Officer. In her brief operative portion of the order, the CIT(A) held as follows :
I have considered the submissions made by the appellant. The AO is directed to verify whether the TDS refunded to Reliance has been re-deposited by Reliance with the Government, 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. In respect of TDS, which has not been claimed as refund by Reliance, the credit of the same shall be granted to the appellant as per law based on original TDS certificates produced by the appellant. Where no TDS certificates are produced by the appellant, credit be granted on the basis of indemnity being obtained by the appellant as provided in the procedure of law.
5. The assessee is aggrieved and is in appeal before us.
6. We have heard the rival contentions, perused the material on record and duly considered the applicable legal position. The short question that we need to answer is whether lawful implications of a valid tax deduction certificate can be declined on the ground that the person who has issued the tax deduction certificates has been refunded the taxes which he had deposited with the Government. We may also point out that the legislature has now taken note of an anomalous situation like the one that we are in seisin of this appeal, by ensuring that, with effect from 1st July 2007, an appeal under section 248 can only be filed by the tax deductor when tax deductible under section 195 is to be borne by the tax deductor. However, right now, we are dealing with a situation in which appeal under section 248 was filed by the tax deductor much before 1st July 2007.
7. There is no dispute that in terms of the provisions of Section 199 of the Income Tax Act, 1961, “(a)ny deduction made in accordance with the foregoing provisions of this Chapter (chapter XVII) and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made,……………. and credit shall be given to him for the amount so deducted on the production of the certificate furnished under section 203 in the assessment made under this Act for the assessment year for which such income is assessable”. There is also no dispute that the taxes have been deducted in accordance with the provisions of Section 195, the tax deduction has fulfilled his obligations under section 200 and that tax deduction certificates have been issued under section 203 – at least to the extent of tax deductions amounting to Rs 21,26,74,006.All these requirements have been duly complied with, and, in all fairness to the Assessing Officer, the compliance in respect of these provisions has not even been questioned. The only reason that has prompted the Assessing Officer to decline the credit in respect of the above TDS certificates is that Reliance Infocomm Limited has been refunded taxes which were deducted by Reliance Infocomm Limited and which were deposited with the Government of India.
8. It is also an undisputed position that such a refund to tax deductor, as has been granted in the present case, is not prescribed under the scheme of the Act but appears to be an administrative exercise. Learned Departmental Representative could not point out any provisions of law under which such a refund can be made – particularly as TDS certificates are already issued by the tax deductor, and no fault is found in the certificates so issued.
9. Our attention has been invited to circular no. 769 dated 6th August 1998 and circular no. 770 dated 20th April 2000, issued by the Central Board of Direct Taxes, which lay down the guidelines about circumstances under which taxes can be refunded to the tax deductor. We are, however, not inclined to go into the question whether the refund has been rightly made or not, or whether or not the interests of revenue authorities have been adequately protected by indemnity bond executed by the Reliance Info. All that concerns is in this appeal is that the legal implications of this refund vis-à-vis the person from whose income the taxes were deducted at source and who has already been issued, in the prescribed manner, appropriate tax deduction certificate. We find none. It is only elementary that when a tax deductor is granted refund of taxes deducted by him, which have already been paid over to the Government, such a refund is outside the scheme of the Act, and when it is done without the approval of the person from whose income the taxes are so deducted and in respect of which certificate under section 203 is already issued, or without his being a party to the entire exercise of grant of refund, 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. The rights are granted to the person, from whose income taxes are so deducted and who is issued the tax deduction certificate in the prescribed manner, by the statute, i.e. the Income Tax Act, 1961, and these rights cannot be abridged by an administrative action on the part of the revenue authorities – and particularly when the person, whose rights are being sought to be abridged, was not even a party to the administrative exercise or was in known of refund being granted to Reliance Info. In our considered view, refund granted to Reliance Info by revenue authorities cannot have adverse impact on the rights of the assessee before us, i.e. Lucent. That is a matter between the tax authorities and Reliance Info; we are sure that revenue authorities, while granting the refund, must have safeguarded their interests effectively, and perhaps by now Reliance Info may have even returned the monies, but assessee cannot be expected to get into these aspects of the matter. In this appeal, our concern is confined to the issue that the assessee, from whose payments taxes have been deducted at source and who is also in receipt of the appropriate certificates in accordance with the scheme of the Act, must get credit admissible under Section 199 of the Act – and that such a credit is not declined on the basis of an action which is neither contemplated by the provisions of the Act, nor even in the control of the assessee.
10. In view of the above discussions, we direct the Assessing Officer to grant due credit to the assessee, on the basis of original tax deduction at source certificates produced by the assessee, in accordance with the law and as long as taxes so deducted have been paid over to the Government and certificates in respect of the same have been issued by the tax deductor – uninfluenced by any refunds subsequently granted to the tax deductor. The refund made to the tax deductor, even if wrongful, has no adverse impact on the rights of the assessee. These observations, however, should not be construed, in any way, affecting the remedies that the revenue authorities may pursue qua the tax deductor, if necessary. With these observations, we direct the Assessing Officer to grant credit for tax deducted at source, in accordance with the law and in the light of our observations above.
11. In the result, the appeal is allowed in the terms indicted above.
Pronounced in the open court today on 31st December, 2010.
(N V Vasudevan)
Mumbai; 31st day of December, 2010.