The Delhi High Court reiterates that tax is not required to be deducted if the payment made to non-resident is not chargeable to tax in India

Recently, the Delhi High Court in the case of Maharishi Housing Development Finance Corporation Ltd. Vs ACIT (ITA No. 222 of 2009) (Delhi) after following its own decision in the case of Van Oord ACZ India (P) Ltd v. CIT [2010-TIOL-1 87-HC-DEL-IT] held that the question of tax withholding in case of payment made to non-resident would arise only if the said payment is chargeable to tax in India.

Facts of the case:- The taxpayer made certain payments to non-resident without deducting tax on the same. The Assessing Officer (AO) disallowed such expenditure under section 40(a)(ia) of the Income-tax Act, 1961 (the Act) on account of failure to deduct tax on the payments made to non-resident. The Income-tax Appellate Tribunal (the Tribunal) upheld the order of the AO.

Taxpayer’s contentions

• The taxpayer contended that since the payment made to non-resident was not liable to tax in India, tax was not required to be deducted. Accordingly, the question of dis allowance of such expenditure does not arise.
• Further, in view of recent decision of the Delhi High Court in the case of Van Oord ACZ India (P) Ltd the matter should be remanded to the Tribunal.

High Court’s ruling

• The High Court relying on the decision in the case of Van Oord ACZ India (P) Ltd. held that the question of tax withholding in case of payment made to non-resident would arise only if the said payment was chargeable to tax in the hands of the non-resident under the provisions of the Act.
• If the payment made to the non-resident was not chargeable to tax in India then the taxpayer will not be under an obligation to deduct tax. Accordingly, such expenditure cannot be disallowed under section 40(a)(ia) of the Act.
• However, since it was not clear whether the payment made by the taxpayer was taxable in India in the hands of non-resident or not, the High Court remanded back the matter to the Tribunal.

Our Comments

In the present case the Delhi High Court after following recent decision of its own in the case of Van Oord ACZ India (P) Ltd. reaffirmed that the question of withholding of tax will arise only if the payment made to non-resident is chargeable to tax in India.

Recently, Special Bench (SB) of the Chennai Tribunal in the case of TO v. Prasad Production Ltd. (ITA No. 663/ Mds/2003) has held that withholding tax obligation on payer applies only if the payments to non-residents are chargeable to tax in India. Further, the payer has a first right to decide whether a particular payment bears any income character or not.

The SB chose not to follow the Karnataka High Court decision in the case of CIT Vs. Samsung Electronics Co. Ltd. and others [2009] 185 Taxman 313 (KAR) and followed various decisions of Supreme Court, High Courts and Mumbai SB decision in the case of Mahindra and Mahindra Ltd. Vs. DCIT [2009] 313 ITR 263 (Mum) (SB). The SB clarified that the Supreme Court in Transmission Corporation of A.P. Ltd. and Ors. Vs CIT [1999] 239 ITR 587 (SC) dealt with tax deduction in a case where fraction of income stood embedded in the payments to nonresident and thereby it did not apply to cases where no part of payment has any character of income.

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