2001 (12) TMI 201 - AT - Income Tax

Summary

Issues Involved:

1. Confirmation of the action of the Assessing Officer under section 201(1) of the Income-tax Act, 1961, demanding tax which ought to have been deducted at source under section 195.
2. Confirmation of the levy of interest under section 201(1A) of the Act.

Detailed Analysis:

Issue 1: Confirmation of Action under Section 201(1)

The primary issue is whether the assessee was liable to deduct tax at source under section 195 for the royalty payment to its non-resident parent company, LME, and consequently, whether the assessee could be deemed as an assessee in default under section 201(1).

The assessee contended that no income accrued to LME because the agreement for royalty payment was void under the Industrial Policy of the Government of India, which prohibited such payments by 100% subsidiary companies to their non-resident parent companies. The assessee argued that the agreement was void under the Contract Act, 1872, as it was opposed to public policy and, therefore, no enforceable right or liability arose from it.

The Assessing Officer rejected this contention, stating that the payment of royalty was clearly income chargeable to tax under the Act and that there was no restriction in the approval granted by the Foreign Investment Promotion Board (FIPB). The CIT(A) upheld this view, stating that the income from royalty accrued to the foreign company by virtue of the Corporate Visual Identity Agreement, and the liability to deduct tax at source arose at the time of crediting the income.

The Tribunal, after considering the submissions and the material on record, held that the agreement between the assessee and LME was void ab initio as it was opposed to the Industrial Policy declared by the Government of India, which prohibited the payment of royalty by 100% subsidiaries to their non-resident parent companies. The Tribunal noted that the policy had the backing of Article 73 of the Constitution of India and was enforceable at law. Consequently, no enforceable debt was created in favor of LME, and no income accrued under the Act. Therefore, the assessee was under no obligation to deduct tax at source under section 195, and could not be deemed as an assessee in default under section 201(1).

Issue 2: Confirmation of Levy of Interest under Section 201(1A)

As a result of the finding that the assessee was not liable to deduct tax at source under section 195, the Tribunal held that no interest under section 201(1A) could be charged. The CIT(A)'s order confirming the levy of interest was set aside.

Conclusion:

Both the appeals were allowed, and the orders of the CIT(A) were set aside. The demand of tax under section 201(1) and the levy of interest under section 201(1A) were deleted.

Judgment:

In the result, both the appeals are allowed.