2023 (1) TMI 778 - HC - Income Tax

TDS obligation on year end provision - disallowance of the provision for legal and professional charges - identity of payee was not certain as the actual recipient of professional charges was not identified at the stage when the provision was made - HELD THAT - It is not in dispute that the provisions made at the end of the accounting year were reversed in the beginning of the next year and no payees were identified nor the exact amount payable. In Karnataka Power Transmission Corporation Ltd. 2016 (2) TMI 412 - KARNATAKA HIGH COURT relied upon by the assessee, this Court has held that if no income is attributable to the payee there is no liability to deduct tax at source in the hands of the tax deductor. After quoting a passage from Kedarnath Jute Mfg. Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT this Court has held that the existence or absence of entries in the books of accounts is not decisive or conclusive factor in deciding the right of the assessee claiming deduction. So far as the authority in Palam Gas Service 2017 (5) TMI 242 - SUPREME COURT it is relevant to note that the payees were identified in that case as recorded in para 5 of that judgment. In contradistinction, in the case on hand the payees were not identified. Therefore, the said authority does not lend any support in the contentions urged on behalf of the Revenue. In view of the law laid down in Karnataka Power Transmission Corporation Ltd. Volvo India Pvt. Ltd. 2016 (2) TMI 412 - KARNATAKA HIGH COURT we are of the considered opinion that the ITAT s order reversing DRP s Order and issuing further direction to AO is perverse - Decided in favour of assessee.

Summary

Issues:
1. TDS obligation on year-end provision made on ad hoc basis and reversed immediately thereafter.
2. Applicability of DTAA while upholding TDS in relation to services from non-residents.

Analysis:

Issue 1: TDS obligation on year-end provision:
The appellant, a Public Limited Company providing software services, challenged the order sustaining TDS obligation on year-end provisions made and reversed immediately. The appellant argued that the provisions were not identifiable with respect to parties, as they were made on an estimate basis due to delayed invoices. The appellant contended that TDS is not required for provisions subsequently reversed, citing legal precedents. The appellant emphasized that TDS is a vicarious liability and should only apply when there is income in the payee's hands. The appellant highlighted that the liability to pay tax is not crystallized without definite credit to the payee's account, hence TDS provision should not apply.

Issue 2: Applicability of DTAA:
Regarding the second issue, the appellant argued that TDS liability for payments to non-residents should consider the applicable Double Taxation Avoidance Agreement (DTAA). The appellant contended that TDS should not apply without definite credit to the payee's account, especially when the actual recipient of professional charges was not identified at the provision stage.

The Revenue, opposing the appeal, argued that TDS should apply when amounts are credited in the books, even if not paid, as per Section 40(a)(ia) read with Section 194J Explanation(C). The Revenue emphasized that failure to deduct tax could lead to disallowance under the Act. The Revenue cited legal precedents to support the applicability of TDS provisions to gross sums, irrespective of whether the entire amount constitutes income.

Upon deliberation, the Court noted that the provisions made were reversed in the subsequent year without identifying payees or exact amounts payable. Referring to legal precedents, the Court held that without income attributable to the payee, there is no TDS liability. The Court also distinguished a previous case where payees were identified, emphasizing the importance of payee identification in TDS obligations.

In conclusion, the Court allowed the appeal, answering the first question in favor of the assessee. The Court found the ITAT's order reversing the DRP's decision and issuing further directions as perverse, based on legal principles established in relevant cases. As the first question was decided in favor of the assessee, the second question regarding DTAA applicability did not require consideration.

This comprehensive analysis highlights the legal arguments, precedents cited, and the Court's reasoning in deciding the issues raised in the judgment.