1. The summer of 2015 has witnessed some important decisions giving chilling effect to assessee and revenue.
2. As per official publication of Income Tax Department, 39% of total collection of direct taxes is by way of TDS. [Refer TDS on salaries – Tax Payers Information Series – 35 with preface by R M Garg dated 11-Oct-2013.
Decided in favour of revenue
3. Bangalore ITAT, A Bench [ITAT-Ban] has in the case of IBM India Private Ltd., v ITO (TDS) LTU dated 14-05-2015 TS-305-ITAT-2015(Bang)-IBM has held that Tax deduction at source / Tax collection at source [TAS] Provisions are attracted even if the provision is made in the books of account to measure the economic performance of the entity irrespective of whether the exact amount and the payee is determined or not.
Decided in favour of Assessee
4. Pune ITAT, B Bench in the case of DDIT -II), Pune v. Serum Institute of India Ltd  56 taxmann.com 1 dated MARCH 30, 2015 has decided that, TDS on payments made to non-residents who did not furnish their PAN can be deducted as per rate prescribed in DTAA and section 206AA cannot be invoked to insist on tax deduction at rate of 20 per cent.
5. At the outset, I would like to clarify that the above 2 decisions are completely different decisions answering different questions. Thus making a comparison of these 2 decisions does not arise. This may please be read as an article on two separate case laws.
Common points in both the decisions-:
6. They are first of their kind in recent past.
7. Both revolve around the TDS liability that is secondary and conditional i.e. emerging from specific sections vis-à-vis liability u/s 4(1) that is primary and absolute.
8. Both the decisions have taken into consideration the objectives of chapter XVII i.e. Tax deducted / collected at source [TAS] which inter-alia include
Characteristics of TAS
9. TAS is only a tentative liability and the assessee is eligible for refund in case the actual TAS is more than the liability.
10. In the case of Eli Lilly & Co. (India) (P.) Ltd, it was vehemently urged that TDS provisions being machinery provisions are independent of the charging provisions. In answer to this contention, the Honourable Supreme court held that section 4 is the charging section. Under section 4(1), total income for the previous year is chargeable to tax. Section 4(2),inter alia, provides that in respect of income chargeable under sub-section (1), income-tax shall be deducted at source where it is so deductible under any provisions of the Act. In fact, if a particular income falls outside section 4(1) then the TDS provisions cannot come in.
Why this article-:
11. An attempt is made to visualise the aftermath of these decisions and the practical problems arising therefrom.
Bangalore ITAT case
12. In the judgement itself, the honourable bench has considered this question in terms of timing of TAS and has ruled that the mechanism gets into motion when an entry is passed on accrual basis without waiting until the right to receive being crystalised.
13. Para 32 of the order reads section 190 and section 4(1). It further observes that “The statutory provisions therefore clearly envisage collection at source de hors the charge u/s. 4(1) of the Act. The sum collected by way of tax collection at source is appropriated as tax paid by the payee only on assessment in the hands of the payee.”
14. Now the assessee will have to deduct and pay the TAS. While filing the return of TDS, he cannot put this entry in original return. He will have to revise the same on identification of party.
15. In case, the contract stands cancelled or the estimate proves to be significantly over stated, it will amount to excess payment of TAS.
16. It is very difficult for the assessee firstly keep a track of the facts of the case. It is further difficult to prove the facts.
Pune ITAT Case
17. This is a good decision because it removes the excess TAS than the rate at which the actual Income Tax is payable. The relevant observations of in order are re-produced hereinbelow;
Notably, section 206AA of the Act which is the centre of controversy before us is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source.
The provisions of section 195 of the Act which casts a duty on the assessee to deduct tax at source on payments to a non-resident cannot be looked upon as a charging provision. In-fact, in the context of section 195 of the Act also, the Hon’ble Supreme Court in the case of CIT v. Eli Lily & Co.  312 ITR 225/178 Taxman 505observed that the provisions of tax withholding i.e. section 195 of the Act would apply only to sums which are otherwise chargeable to tax under the Act. The Hon’ble Supreme Court in the case ofGE India Technology Center (P.) Ltd. v. CIT  327 ITR 456/193 Taxman 234/7 taxmann.com 18 held that the provisions of DTAAs along with the sections 4, 5, 9, 90 & 91 of the Act are relevant while applying the provisions of tax deduction at source.
18. Another judicial precedent, which is worth noting in the present context, is the decision of the Bangalore Tribunal in Bosch Ltd. v. ITO, International Taxation, Bangalore Tribunal  28 taxmann.com 228/ 141 ITD 38. Bangalore Tribunal held in this case that provisions of section 206AA of the Act clearly override other provisions of the Act. Therefore, a non-resident, whose income is chargeable to tax in India has to obtain PAN and provide the same to the payer. In case of failure of recipient to do so, assessee is liable to withhold tax at higher rates prescribed under section 206AA. The only exemption given is that non-resident whose income is not chargeable to tax in India is not required to obtain PAN.
19. In Smt. A. Kowsalya Bai v. Union of India ,  208 Taxman 208/22 taxmann.com 157, the Karnataka High Court has held that section 206AA of the Act is contrary to section 139A of the Act and is discriminatory. In view of the specific provisions of section 139A of the Act, section 206AA of the Act is made inapplicable to the persons having income less than taxable limit and should be read down from the statute in such cases.
Conclusion in case of Bangalore ITAT-:
20. It is going to be extremely difficult for assessee to adhere to the requirements whereby the Income Tax Department will get revenue collection at much earlier date.
21. In my personal view, for TAS mechanism to come into motion, cumulative fulfillment of following 3 conditions is required;
a) Identification of Payee
b) Reasonably accurate estimate of the amount and
c) The payee should receive right to receive.
22. One will also have to read this decision carefully because, having regard to the peculiar facts of the case, the ITAT was of the view that, the contractor i.e. payee was identified though the Right to receive was not reached by the payee.
23. For example, typically, in case of information technology industry, the contract terms are in the nature that, the right to receive is established when a particular milestone is reached.
24. Thus, when the software work is complete say even 99% but the milestone is not reached, as per accrual system of accounting, the provision will have to be made of an amount of fair estimate, the payee is identified BUT because the right to receive is not received by payee, there is no need for TAS.
Conclusion in case of Pune ITAT-:
25. Section 90(4) reads as follows
An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.
26. Income Tax Department has sufficient armoury to trace the authenticity of payee etc.
27. Supreme Court in the case of Vegetable Products Ltd., 88 ITR 192, in which it was held that if in a case of taxing provision two reasonable constructions are possible, construction which favours the assessee must be adopted. Furthermore, in case of Poddar Cement, 226 ITR 225, the Hon‟ble Supreme Court held that where two views are possible, one favorable to assessee has to be preferred.
28. Thus this case will certainly bring relief to the assessees outside the jurisdiction of Bangalore ITAT.
Word of caution
29. This decision has been rendered in relation to payment for royalty. One must be careful while applying this decision in case of import of goods because, if the foreign party from whom goods are being imported has a PE in India, there is no alternative but to apply to AO u.s 195(2) for estimation of income therein.
30. In this aspect, it will be worthwhile to note section 195(6), rule 37BB which was was later amended twice in a span of a month by Central Board of Direct Tax (CBDT).The first Notification no. 58/2013 was issued on 5 August 2013. Thereafter, the later Notification no. 67/2013 was issued on 2 September 2013, which came into effect from 1 October 2013.
31. As per the first Notification No. 58/2013, Form 15CA and 15CB were not required for 39 items of payments. These items then reduced to 28 items in the later Notification No. 67/2013. The following 11 items of payments are therefore removed from the specified list:
1. Advance payment against imports
2. Payment towards imports-settlement of invoice
3. Imports by diplomatic missions
4. Payment for surplus freight or passenger fare by foreign shipping companies operating in India
5. Freight on imports-Shipping companies
6. Freight on exports-Shipping companies
7. Booking of passages abroad –Shipping companies
8. Freight on imports-Airlines companies
9. Payments on account of stevedoring, demurrage, port handling charges, etc.
10. Payments for life insurance premium
11. Other general insurance premium
32. From the above, it can be seen that as per Rule 37BB the specified information (i.e. Form 15CA and Form 15CB) is required to be furnished only in the case of payments made to a non-resident which are chargeable to tax in India. However, amongst others ‘Advance payment against imports’ and ‘Payment towards imports-settlement of invoice’ are not appearing in the final list of items of payments for which Form 15CA and 15CB are not required in the same Rule 37BB. Therefore, the issue that would arise is whether payment towards import of goods is liable tax in India and if yes, at which rate…and I am not sure, whether the Pune ITAT decision which speaks about rate to be applied in such case can be of use or not.
33. It will be great if legislature amends the law to postpone the TAS until the time of identification of party.
34. The intention of section 206AA is certainly welcome as far as domestic transactions and foreign transactions with countries not having DTAA. It is so because, for taking benefit of DTAA, Tax Residency Certificate is mandatory. Thus the concern of Income Tax Department for authentication of transaction and party is fulfilled.