2017 (3) TMI 674 - AT - Income Tax

TDS u/s 195 - Assessee in default as per the provisions of section 201(1) - non TDS on interest payments - India - Mauritius DTAA - Held that - While remitting the interest payments to SCB (Mauritius) Limited in the financial years 2005-06, 2006-07 and 2007-08, the assessee did not withhold tax by relying on the provisions of Article 11(3) of the India Mauritius tax treaty which provide that where the interest income is derived and beneficially owned by a bank (which is a resident of Mauritius) carrying on a bonafide banking business, such interest income is exempt from tax in India. Ballarpur Industries Ltd (B-lLT) also a company incorporated in India, engaged in manufacturing and export of paper for the payment of interests and principal amount to Standard Chartered Bank, Mauritius, the assessee did not deducted at source relying upon the Certificate of their Chartered Accountant Certificate. The stated reason in support of the Certificate was stated to be Article 11 of DTAA between India and Mauritius. The AO apart from other reasons was of the view that there was no transaction of the assessee with Standard Chartered Bank, Mauritius as the said bank according to the AO was neither recipient of the beneficial owner of the interest. It was held that the interest is taxable as per the provisions of section 115A(1)(a)(ii) of the Act in the case of the payee. The assessee was deemed to have been assessee in default as per the provisions of section 201(1) of the Act with regard, tax was not deducted. Interest under section 201(1A) was also charged raising a total demand of ₹ 7,57,32,656. The assessee challenged the order before the CIT(A) both on merits as well as on jurisdiction and the limitation grounds. However, the Ld. CIT(A) while deciding the appeal on merits and failed to address the jurisdictional issue and on the limitation issue, he failed to give any finding. Thus we find that the impugned order cannot be upheld. As per settled legal precedents the Ld. CIT(A) ought to have first decided the jurisdictional issue and only thereafter should have proceeded to decide the issue on merits if so warranted in law. It is only when the jurisdiction of the AO is held to be established that the CIT(A) was required to decide the issue on merits. Without having addressed the jurisdictional issue the decision on merits has to be set aside back to the CIT(A) with a direction to decide the issues denovo after giving the assessee a reasonable opportunity of being heard.

Summary

Issues:
Appeals assailing correctness of consolidated order, additional ground sought to be raised on Limitation and Jurisdiction, factual discrepancies in CIT(A)'s order, jurisdiction of Assessing Officer, limitation issue, amalgamation of companies affecting contractual obligations, withholding tax on interest payments, applicability of tax treaties, jurisdictional issue not addressed by CIT(A).

Analysis:

1. Additional Ground on Limitation and Jurisdiction:
The assessee sought to raise an additional ground on limitation and jurisdiction before the ITAT, citing the decision of the Apex Court in the case of NTPC. The grounds raised before the CIT(A) challenged the jurisdiction of the Assessing Officer and the order passed under section 201(1)/201(1A) on the grounds of limitation. The ITAT found that the CIT(A) had not addressed these jurisdictional and limitation issues in the consolidated order, leading to a request for setting aside the order for a de novo consideration after addressing these issues.

2. Factual Discrepancies and Jurisdictional Issues:
The ITAT noted discrepancies in the factual observations made by the CIT(A) which were contrary to the facts accepted by the Assessing Officer. The consolidated order failed to address the jurisdictional issue and the limitation issue raised by the assessee. It was argued that the Assessing Officer's conclusions did not align with the factual notings, and the CIT(A) did not consider the implications of amalgamation on contractual obligations. The ITAT directed the CIT(A) to decide the issues afresh after addressing the jurisdictional issue.

3. Tax Treatment on Interest Payments and Applicability of Tax Treaties:
The case involved the withholding tax on interest payments made by the assessee to Standard Chartered Bank (Mauritius) post-amalgamation. The assessee relied on tax treaties between India and Mauritius to justify non-withholding of taxes. However, the Assessing Officer deemed the interest taxable under the Act, leading to a demand against the assessee. The ITAT found that the CIT(A) should have first decided the jurisdictional issue before proceeding to decide on the merits, as per established legal precedents.

4. Conclusion:
The ITAT allowed the appeals of the assessee, setting aside the consolidated order and directing the CIT(A) to decide the issues afresh after addressing the jurisdictional and limitation issues. The decision emphasized the importance of addressing jurisdictional matters before proceeding to decide on the merits. The order was pronounced on 10th March 2017.