2015 (12) TMI 838 - HC - Income Tax

TDS liability - tax liability in terms of Section 201 (1) - Held that - In the present transaction, admittedly there is no liability to tax. As a result, the question of deducting tax at source and the assessee violating the provisions of Section 195 does not arise and therefore, the assessee cannot be treated as an assessee in default. The Supreme Court has clearly held that the provisions relating to TDS would apply only to those sums which are chargeable to tax under the Income Tax Act and also has clearly held that in a transaction of this nature, the assessee was entitled to take a plea that there arises no tax liability and therefore, the provisions of Sec. 195 do not get attracted. Once we hold that there is no tax liability, the question of deduction of tax at source, terming the assessee as assessee in default will not also arise and the resultant question of levy of interest becomes purely academic and the demand unsustainable in law. In the instant case, we hold that the original authority having accepted Nil tax liability, the question of levy of interest would not arise. The C.I.T. (Appeals), in paragraph 24.1 of his order dated 30.01.2004, had held that there should be determination of interest under Section 201 (1A) contrary to his own findings in paragraph 24.2. The authority has accepted in the second limb that there exists no tax liability in terms of Section 201 (1) of the I.T.Act. By virtue of the ratio of the decision of the Supreme Court rendered in the case of GE India Technology Centre P. Ltd., 2010 (9) TMI 7 - SUPREME COURT OF INDIA the transaction in the present case will not fall within the para meters of Section 195 and 201 (1) of the I.T. Act. We, therefore, answer the questions of law raised in favour of the appellant and against the Department.

Summary

Issues Involved:
1. Applicability of Section 195 of the Income Tax Act.
2. Tax liability and deduction at source.
3. Applicability of Section 201 (1) and 201 (1A) of the Income Tax Act.
4. Computation and levy of interest under Section 201 (1A).

Issue-wise Detailed Analysis:

1. Applicability of Section 195 of the Income Tax Act:
The primary issue revolves around whether the transaction of purchasing shares by the assessee from a non-resident entity (M/s. Suzuki Motor Corporation, Japan) attracts the provisions of Section 195 of the Income Tax Act. Section 195 mandates that any person responsible for paying to a non-resident any sum chargeable under the Act must deduct income tax at the rates in force. The Supreme Court in GE India Technology Centre P. Ltd. vs. Commissioner of Income Tax clarified that the obligation to deduct tax arises only when the sum paid is chargeable to tax in India. In this case, since the transaction resulted in a capital loss for the non-resident seller, there was no income chargeable to tax in India, and hence, Section 195 was not applicable.

2. Tax Liability and Deduction at Source:
The Department initially contended that the assessee should have deducted tax at source under Section 195. However, the Commissioner of Income Tax (Appeals) found that there was no tax liability on the transaction as it resulted in a capital loss for the non-resident seller. Consequently, the question of deducting tax at source did not arise. The Tribunal, however, held that the assessee was liable to deduct tax irrespective of the capital loss, leading to the present appeal.

3. Applicability of Section 201 (1) and 201 (1A) of the Income Tax Act:
Section 201 (1) deems a person who fails to deduct tax as required under the Act as an "assessee in default." Section 201 (1A) imposes interest on the amount of tax not deducted. The Tribunal upheld the liability of the assessee under these sections. However, the High Court, referring to the Supreme Court's decision, held that since there was no tax liability in the first place, the provisions of Section 201 (1) and 201 (1A) were not applicable. The assessee could not be treated as an "assessee in default" when the sum paid was not chargeable to tax.

4. Computation and Levy of Interest under Section 201 (1A):
The Tribunal had confirmed the computation of interest under Section 201 (1A) based on a notional rate of tax. The High Court, however, found this to be erroneous. Since there was no tax liability, the question of computing and levying interest did not arise. The High Court emphasized that the original authority had accepted "Nil" tax liability, making the demand for interest unsustainable in law.

Conclusion:
The High Court concluded that the provisions of Section 195 were not attracted as the transaction did not result in any income chargeable to tax in India. Consequently, the assessee could not be deemed an "assessee in default" under Section 201 (1), and the levy of interest under Section 201 (1A) was not warranted. The appeal was allowed, and the questions of law were answered in favor of the appellant, with no costs imposed.