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2021 (5) TMI 150 - AT - Income TaxTDS u/s 195 - interest u/s. 201(IA) - payments made to Aviva International Holdings Ltd, UK in July, 2008 for acquiring from it 100% of equity shares - HELD THAT - For a person to perform the tax withholding obligations on the basis of an amendment in law which was enacted on a date later than the date on which tax withholding obligations were required to be performed, is expecting that person to do the impossible. When a law is nowhere even on the horizon, leave aside the statute, it is wholly impossible for any person to perform the obligations imposed by such a law. The assessee, therefore, cannot be faulted for not deducting tax at source from payments made to Aviva International Holding Ltd UK in respect of purchase of shares in Aviva Global Services, Singapore, which, in turn, are said to derive substantial value from underlying assets in India. Once we come to this conclusion to the effect that there were no lapses on the part of the assessee inasmuch as the related legal provisions were not even in existence at the point of time when the sale of shares took place, i.e., 11th July 2008, we need not deal with the question as to whether the income embedded in the payments in question was at all taxable in India. Quite clearly, therefore, as is held by Hon ble Supreme Court in the case of Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT persons responsible for deducting tax at source cannot be expected to act on the basis of an Explanation when such an explanation was not actually and factually in the statute . It cannot thus be said that, on the facts of this case, tax was deductible under section 195 at the time of making the said payment. We hold so. Once we hold so, the very foundation of impugned demands under section 201 r.w.s. 195 ceases to be sustainable in law, as the entire case of the revenue authorities hinges on Explanation 2 to Section 195, and it's retrospective application. In any event, this issue is entirely tax neutral inasmuch as it is a case in which the person selling the shares, i.e. Aviva International Holdings Ltd UK, is said to have already paid taxes on the capital gains, and independent proceedings in the said matter are in progress, and the matter is said to be pending for adjudication, on merits, before a coordinate bench. In case the taxability of the said income in the hands of the seller is to be upheld, the upholding of levy of interest under section 234B, on the given facts, will only be a natural corollary. Therefore, our upholding the liability under section 201(1A), which could only proceed on the foundational assumption that tax was deductible at source by the person making payment in question, will end up exonerating the person, in whose hands the income is taxable, of liability under section 234B. The levy of interest to compensate for the delay in realization of taxes, in the event of the taxability of subject income being upheld, is reasonably protected. In a situation in which, however, no income is held to be taxable in India, no demands under section 201 r.w.s. 195- including demand under section 201(1A) r.w.s. 195., which are inherently in the nature of vicarious liability, survive. Viewed thus, the present dispute is wholly tax neutral. In view of these discussions, as also bearing in mind the entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
Issues Involved:
1. Liability to deduct tax at source under Section 195(1) of the Income Tax Act, 1961. 2. Chargeability of interest under Section 201(1A) of the Income Tax Act, 1961. 3. Impact of retrospective amendments made by the Finance Act, 2012, to Section 9(1)(i) and Section 195(1) of the Income Tax Act, 1961. 4. Applicability of the Supreme Court decision in CIT vs. Vatika Township Pvt. Ltd. 5. Special circumstances involving tax payment by the recipient. Detailed Analysis: 1. Liability to Deduct Tax at Source under Section 195(1): The core issue revolves around whether the assessee had a liability to deduct tax at source under Section 195(1) on payments made to Aviva International Holdings Ltd, UK, for acquiring equity shares in Aviva Global Services Singapore Pvt Ltd. The Assessing Officer argued that the shares derived substantial value from assets situated in India, making the capital gains taxable in India. Consequently, the assessee was obligated to withhold taxes from the payment. However, the CIT(A) held that there was no such liability, considering that the law at the time did not explicitly impose such a requirement, and the retrospective amendments introduced by the Finance Act, 2012, could not impose this obligation retroactively. 2. Chargeability of Interest under Section 201(1A): The Assessing Officer raised demands for interest under Section 201(1A) due to the delay in realizing taxes that should have been withheld. The CIT(A) deleted this interest, reasoning that the assessee could not be expected to comply with a law that was not in force at the time of the transaction. This decision was supported by the principle that the law does not compel a person to perform an impossible act (lex non cogit ad impossibilia). 3. Impact of Retrospective Amendments: The retrospective amendments to Section 9(1)(i) and Section 195(1) by the Finance Act, 2012, were central to the dispute. The CIT(A) concluded that these amendments, although clarificatory, could not retrospectively impose a tax withholding obligation on the assessee. This view was supported by the Supreme Court's decision in CIT vs. Vatika Township Pvt. Ltd., which established that retrospective amendments should not create new obligations or liabilities. 4. Applicability of Supreme Court Decision in CIT vs. Vatika Township Pvt. Ltd.: The CIT(A) relied on the Supreme Court's decision in CIT vs. Vatika Township Pvt. Ltd., which held that retrospective amendments should not impose new obligations. The Tribunal agreed, noting that the assessee could not be expected to comply with a law that did not exist at the time of the transaction. 5. Special Circumstances Involving Tax Payment by the Recipient: The CIT(A) also considered the fact that Aviva International Holdings Ltd, UK, had already paid taxes on the capital gains. This special circumstance was deemed sufficient to negate the need for the assessee to deduct tax at source. The Tribunal upheld this view, noting that the purpose of TDS (Tax Deducted at Source) had been fulfilled since the recipient had paid the taxes. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the demand for interest under Section 201(1A), agreeing that the assessee could not be expected to comply with a law that was not in force at the time of the transaction. The retrospective amendments could not impose a new obligation on the assessee. Additionally, since the recipient had paid the taxes, the purpose of TDS was fulfilled. Consequently, the appeal by the Assessing Officer was dismissed, and the cross-objection by the assessee was rendered infructuous.
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