2016 (9) TMI 1508 - HC - Income Tax

TDS u/s 195 - disallowance u/s 40(a)(ia) - while making payment of foreign commission, the assessee did not deduct tax at source - HELD THAT - The contention of the assessee that the payee was not liable to any tax in India on such receipts was overcome by the Assessing Officer on the ground that this would be of no consequence. The Tribunal relying on the decision of Supreme Court in case of GE India Technologe Centre P. Ltd. vs. Commissioner of Income Tax and anr 2010 (9) TMI 7 - SUPREME COURT overruled this view on the ground that when the receipt in hand of the recipient was not taxable, liability to deduct tax at source would not arise. When there is no dispute that the non-resident payee was not liable to pay any tax in India on the amounts received by the assessee, the act of the assessee of not deducting tax at source would not invite the disallowance envisaged under Section 40(a)(ia) of the Act. - Decided against revenue.

Summary

Issues:
- Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of tax at source under Section 195 of the Act.

Analysis:
1. The appeals involved identical issues for three separate assessment years concerning the same assessee. The Revenue challenged the judgment of the Income Tax Appellate Tribunal concerning the assessment year 2009-10, specifically regarding the disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of tax at source under Section 195 of the Act. The Assessing Officer disallowed the expenditure incurred by the assessee due to non-deduction of tax at source while making payments of foreign commission. The assessee argued that the payee was not liable to any tax in India on such receipts. However, the Assessing Officer disregarded this argument. The Tribunal, citing the Supreme Court decision in the case of GE India Technologe Centre P. Ltd. vs. Commissioner of Income Tax, held that if the receipt in the hands of the recipient was not taxable in India, the liability to deduct tax at source would not arise. Therefore, since the non-resident payee was not liable to pay any tax in India on the amounts received, the act of not deducting tax at source would not lead to the disallowance under Section 40(a)(ia) of the Act.

2. The High Court, after considering the arguments and the precedent set by the Supreme Court, dismissed the tax appeals. The decision was based on the understanding that if the payee was not liable to pay tax in India on the received amounts, the assessee's failure to deduct tax at source would not attract the disallowance provision under Section 40(a)(ia) of the Income Tax Act.