By TIOL News Service

KOLKATA, AUG 11, 2016: THE issue is - Whether mere failure to obtain section 197(1) certificate by the payee would automatically cast a TDS obligation on the payer and make the payer 'assessee in default', even if it is certain from the assessment order of payee that there is no resultant tax liability. NO is the answer.

Facts of the case

The assessee is a domestic company. It had a petrochemicals plant at Haldia District, Midnapore, West Bengal for the manufacture and sale of petrochemical products. Assessee entered into an agreement with its subsidiary company M/s. Haldia Riverside Estates Limited for the purpose of residential accommodation of the employees of the assessee. Under the aforesaid agreement, the assessee paid a sum of Rs.8,89,74,146/- during the AY year to HREL under various heads. Assessee deducted tax of Rs. 4,06,982/- @ 1.025% (including surcharge) on the rent element at a lower rate, on the basis of a certificate issued u/s 197 authorizing HPCL, the deductor to deduct tax at a lower rate of 1%. It was submitted that HREL, the Deductee, was assessed to NIL tax for the year in question by the ACIT on a total loss of Rs. 2,82,83,400/-. According to the deductor, following the principle laid down in the case of Hindusthan Coca Cola Beverage (P) Ltd., Vs. CIT 2007-TIOL-144-SC-IT, where the payee is not liable to Income Tax, the payer cannot be liable to pay TDS. Regarding the payments made under the heads other than rent, it was stated that the license fee was for right to use roads and other space within the complex and the other amounts were expenses reimbursed on actual basis to HREL, which do not fall under the purview of TDS provisions. AO observed that the assessee had obtained certificate u/s 197(1) only with effect from 1.7.2003 and the same was also restricted to the payments not exceeding Rs. 409.34 lakhs. Hence, the assessee should have deducted tax at source @ 20% on the payments made in excess of Rs. 409.34 lakhs and also should have deducted tax at source u/s 194I in respect of payments made for the period 1.4.03 to 30.6.03.

AO observed that it was claimed by the deductor that HREL, the deductee, was assessed to NIL tax for the year in question and as the payee was not liable to Income Tax, the payer could not be made liable for TDS. On verification of records, AO observed that HREL, the deductee company filed its return for the A.Y. 04-05 on 28.10.2004 declaring a loss of Rs.6,57,05,480/-. The issue regarding non-liability of deductor to deduct tax when the payee was not liable to Income Tax was clarified by CBDT in its circular No. 275 dt. 29.01.1997 which stated that no demand visualized u/s 201(1) should be enforced after the tax depositor satisfied the Officer-in-Charge of the TDS that taxes due have been paid by the deductee assessee. It further clarified that it would not alter the liability to charge interest u/s 201(1A) till the date of payment of taxes by the deductee assessee or the liability for penalty u/s 271C. Deductee had not paid any tax as it filed a loss return and there was no tax liability. But the fact remains that the assessee deductor, could not have any prior knowledge about such loss return to be filed by the deductee, and as such it was liable to deduct tax at source while making payment to HREL. In reality also HPCL, the deductor, deducted TDS on the purported rent payment to HREL as per its own statement and deposited the same with the Government. Accordingly it was liable to deduct TDS from the total payment made to HREL amounting to Rs.8,89,74,146/- at the applicable rates. However, by applying CBDT Circular No.275 dt. 29.01.1997, demand visualized u/s 201 (1) was not enforceable, as the deductor had proved at this stage that there was no tax due to be paid by the deductee for the relevant year. HPCL will, however, be liable to pay interest to be charged u/s 201(1A) till the date of filing the Income Tax Return by HREL, as prior to that date, it was not possible to know that HREL had no liability to tax. On appeal, CIT(A) further observed that the claim of the assessee that the deductee was not liable to pay any tax was only an afterthought since the assessee had deducted tax at source on the amount it considered as rent u/s 194I. Based on these observations, he upheld the order of the AO.

Having heard the matter, the Tribunal held that,

++ in the instant case, there is no resultant tax liability in the hands of the payee due to huge losses. In such circumstances, normally it is expected that the payee should approach the TDS officer by preferring an application in Form No. 13 seeking for lower / nil deduction certificate u/s 197(1). In the instant case, section 197(1) certificate has been obtained by the payee only from 1.7.2003 wherein the deductors have been directed to deduct 1% TDS on payments made to payees in respect of payments not exceeding Rs. 409.34 lakhs and hence AO held that the assessee had violated the TDS provisions in respect of payments made upto 30.6.03 and for payments made in excess of Rs. 409.34 lakhs, tax at the rate of 20% should have been deducted. We hold that mere failure to obtain section 197(1) certificate by the payee for the entire payments and for the entire period would not automatically cast a TDS obligation on the payer and make the payer 'assessee in default' when it is certain from the records in the form of assessment order of the payee that there is no resultant tax liability for the payee;

++ it is not in dispute that the payee (subsidiary company) had duly reflected the payments made by the payer (assessee) in its returns and even after that inclusion, the net result is only a loss resulting in nil tax liability. Hence it could be safely concluded that there is no tax that is effectively due to be paid to the Government. Hence the assessee could not be treated as 'assessee in default' in the facts and circumstances of the case. We find that the interest charged in terms of section 201(1A) is only compensatory in nature and is collected from the payer by treating the payer assessee as 'assessee in default' for depriving the Government of its legitimate dues. We find that this interest is to be calculated from the due date of deduction / payment of expenses warranting TDS till the date of deduction / payment, as the case may be, at the respective interest rates. Admittedly, this interest is calculated on the tax that is due to be paid. When there is no tax due to be paid, then there cannot be any charging of interest u/s 201(1A). We find that section 201(1A) specifies interest has to be paid "on the amount of such tax" as per section 201(1). Such tax specified in section 201(1) should admittedly be 'tax due to the Government'. As already held that there is no tax due to the Government from the side of the payee (subsidiary company) in view of subsisting losses, the existence of a primary liability of tax payments from the side of the payee is conspicuously absent in the instant case. The revenue had not controverted the fact that the subsidiary company does not have any tax liability pursuant to the assessment framed on it by the income tax department u/s 143(3) which is also part of the paper book filed by the assessee;

++ in the instant case, where there was no tax at all payable at any point in time, then the assessee deductor cannot be treated as 'assessee in default' for any period whatsoever and consequently interest u/s 201(1A) cannot be computed on the assessee. The computation mechanism itself fails in the instant case. In the instant case, it is proved beyond doubt that the deductee does not have any liability to pay tax as could be evident from the scrutiny assessment order u/s 143(3) for AY 2004-05 enclosed in pages 50 to 52 of the paper book. This fact was also placed by the assessee before the AO and he had also noted the same in the assessment order. We hold in the instant case, there is no tax due to the exchequer and accordingly there is no question of compensating the same by way of interest. We find that this aspect is also dealt by the SC in the case of CIT s Eli Lilly & Company (India) (P) Ltd & Ors 2009-TIOL-45-SC-IT, wherein it was held that it cannot be stated as a broad proposition that the TDS provisions which are in the nature of machinery provisions to enable collection and recovery of tax are independent of the charging provisions which determine the assessability in the hands of the employee-assessee. Secondly, whether the home salary payment made by the foreign company in foreign currency abroad can be held to be "deemed to accrue or arise in India" would depend upon the indepth examination of the facts in each case. If the home salary/special allowance payment made by the foreign company abroad is for rendition of services in India and if as in the present case of M/s. Eli Lilly and Company (India) Pvt. Ltd. no work was found to have been performed for M/s. Eli Lilly Inc., Netherlands, then such payment would certainly come u/s 192(1) read with section 9(1)(ii). As stated above, the post survey operations revealed that no work stood performed for the foreign company by the four expatriates to the joint venture company in India and that the total remuneration paid was only for services rendered in India. In such a case the tax-deductor-assessee was statutorily obliged to deduct tax u/s 192(1). In view of the aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we allow the grounds raised by the assessee. In the result, the appeal of the assessee is allowed.

(See 2016-TIOL-1425-ITAT-KOL)