2024 (1) TMI 1324 - AT - Income Tax

Denial of Tax Deducted at Source (TDS) credit - TDS credit available as per Form 26AS - restricting the TDS credit to a proportion of the royalty income offered to tax HELD THAT - Assessee has received contractual royalty payment from the Indian entity. Assessee would raise invoices on the payer entity who would deduct TDS and remit the remaining amount to the assessee. At year-end, payment of royalty would be re-computed as per the terms of the agreement. Pursuant to the same, the assessee has issued credit notes to the payer entity. The income thus accrued to the assessee is gross invoices less the credit notes issued by the assessee. The same amount, on net basis, would be reflected by the assessee in the financial statements. This figure tallies with the financial statement of the payer entity. Assessee has duly reconciled the amounts reflected in financial statement vis- -vis amount reflected in Form 26AS. Though income to the extent of credit notes issued by the assessee would never accrue to the assessee, nevertheless, TDS as been deducted against these payments and the same has been deducted against the assessee. Therefore, the assessee would be entitled for the credit of the same. The amount of credit notes could not be held to be the income of the assessee. Therefore, lower authorities are not justified in denying the credit of the same. The provisions of Sec. 155(14) would not apply since these provisions would apply only in cases where the TDS certificate is furnished later and where the income has not been disclosed in the return of income. In the present case, the income to the extent of credit notes would never accrue to the assessee and hence, there is no question of offering the same to tax. CIT-DR has submitted that the assessee could have insisted deductor to file revise TDS return and claim the excess TDS amount from the deductor. Once TDS is deducted and deposited with the Central government, the only mechanism with the assessee to claim the refund of the same would be through filing of Income Tax Return which is the correct way of claiming the TDS credit. Therefore, we direct AO to allow full TDS credit to the assessee which is otherwise available as per Form 26AS. Appeal of allowed.

Summary

Issues:
Denial of Tax Deducted at Source (TDS) credit by lower authorities.

Detailed Analysis:

Issue 1: Denial of TDS credit
The appeal by the assessee for Assessment Year (AY) 2020-21 arose from the final assessment order passed by the Deputy Commissioner of Income Tax, International Taxation-1(1), Chennai, pursuant to the directions of the Dispute Resolution Panel-2, Bengaluru. The primary grievance of the assessee was the denial of Tax Deducted at Source (TDS) credit by the lower authorities. The grounds raised by the assessee included contentions that the orders were contrary to equity and natural justice, not based on facts, and contrary to mandatory provisions of the Income tax Act, 1961. The assessee argued that TDS credit available as per Form 26AS was not granted, and the authorities erred in restricting the TDS credit to a proportion of the royalty income offered to tax. The appellant also highlighted that credit for TDS should be given in the assessment year for which the income is assessable and that certain provisions were not applicable in this case. Each ground raised by the appellant was considered independently.

Issue 2: Arguments and Submissions
Both sides presented arguments and filed written submissions. The assessee, a non-resident company incorporated in the USA, returned income of Rs. 37.95 Crores and claimed a refund of Rs. 3.51 Crores. The assessee earned contractual royalty income from a specific entity and offered it for taxation. Discrepancies arose concerning the amount reported in Form 26AS and the actual income received after TDS deduction. The appellant explained that the variance was due to credit notes issued subsequent to raising invoices, which were not reflected in Form 26AS. The appellant reconciled the amounts in financial statements and Form 26AS, emphasizing that the credit notes should not be considered as income. The authorities had restricted TDS credit based on the income reflected in financial statements, which the appellant contested.

Issue 3: Decision and Rationale
The Tribunal analyzed the situation where the assessee received contractual royalty payments subject to TDS deductions. It was noted that the income accrued to the assessee was the gross invoices less the credit notes issued, as reflected in the financial statements. The Tribunal concluded that the credit notes should not be treated as income, and the assessee was entitled to TDS credit for the deducted amounts. The provisions of Sec. 155(14) were deemed inapplicable in this context. The Tribunal directed the Assessing Officer to allow full TDS credit to the assessee as per Form 26AS. It was clarified that the correct method for claiming TDS credit was through filing the Income Tax Return, and the appellant was justified in seeking the credit for the TDS deducted.

In conclusion, the appeal was allowed, and the Tribunal directed the Assessing Officer to grant the full TDS credit to the assessee in accordance with the Form 26AS.