2024 (12) TMI 717 - HC - Income Tax

Maintainability of appeal on low tax effect - submission of the assessee as appeals would have to be withdrawn as admittedly the tax effect is less than the revised monetary limits specified in the Circular 9/2024 which revision of limits has a retrospective effect - HELD THAT - As noted earlier, initially the exceptions were only of three categories but subsequently increased to five and, thereafter, the present Circular increased the same to thirteen. Whether an appeal should be filed irrespective of the monetary limits involved has to be made when the appeal is filed and it is only the exceptions that are then prevalent that would be applicable - Any exception introduced thereafter would have no application whatsoever in determining whether an appeal should be filed. This would be a normal way of construing the circular and, in any event, the language of Para 10 makes it abundantly clear that such was the intention. In fact whenever the Board has enhanced the scope of the exception, it has always made it prospective. However, when it comes to increasing the monetary limits, the Board, having regard to the avowed objects of reducing litigation, has made it explicitly clear both in Circular No. 9 of 2024 as well as in Circular No. 3 of 2018 that the enhanced monetary limits will apply even in respect of all pending appeals. We are therefore of the view that having regard to the Circulars, the present appeals must be dismissed as withdrawn and the Revenue cannot prosecute the appeals by relying upon any exception created in para 3.1(l) of the Circular dated 15.03.2024 which by virtue of para 10 is to be applied only to appeals to be filed henceforth. The argument of the Revenue that both the Circulars dated 15.03.2024 and 17.09.2024 have to be read in a holistic manner and both must be given retrospective effect is contrary to the plain terms of the said Circulars. Payments made by the assessee for sales and marketing services rendered outside India are not liable for Tax Deducted at Source (TDS) - Revenue s case does not fall in the exception carved out in para 3.1(l) of the Circular dated 15.03.2024 for the following reasons. According to us, Clause 3.1 (l) excludes appeals arising out of proceedings taken against a deductor for failure to deduct tax at source and recovery of the tax from the payer that was omitted to be deducted. If there is an obligation to deduct tax at source on a payer in terms of the provisions contained in Chapter XVII-B of the Act and the payer fails to discharge such obligation, it is liable for several consequences. The first and the foremost being that it could be treated as a Respondent in default for failing to deduct taxes and, accordingly, the tax which ought to have been deducted could be recovered from it by passing an order under section 201. Consequently, there would be a levy of interest in terms of section 201(1A) as well as a levy of penalty under section 271C, if such failure was without reasonable cause. The amount of tax that could have been recovered from the payer would be equivalent to the amount that he would have had to deduct. Another collateral consequence that would flow is that the payer would suffer a disallowance of the expenditure that he had claimed as a deduction having regard to the provisions of section 40 (a) (i) or section 40 (a) (ia). In such circumstances for the assessment years that one is concerned with in the present appeals, the consequence would be that the expense that was claimed as a deduction on which tax was not deducted would be disallowed. Whether the respondent is entitled to a deduction of the expenses incurred by it by way of making a payment to Marriott International Inc. because it had not deducted tax at source under section 195 on such payment? - In our opinion, this issue would not fall within the scope and ambit of clause (l). This is brought out by the manner in which the tax effect has to be determined. The appeals arising from regular assessments where an expense is disallowed or a claim for an allowance is disallowed or an amount is sought to be assessed as income is dealt with in para 5.1. In these circumstances, the tax effect is calculated by taking the difference of tax on the total income assessed and the tax would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which the appeal is intended to be filed. The following example relied upon by the learned Senior Advocate for the assessee appealed to us. In the present appeals, the original order which was passed arises from an assessment framed under section 143 (3) and, therefore, the exclusion contemplated in para 3.1. l would not apply and, accordingly, the appeals must be dismissed as withdrawn. Litigation that commences from orders passed u/s143 (3) and orders passed under section 201 is also under different provisions. Section 246A (1) gives a right to an assessee to file an appeal if it is aggrieved by any of the orders specified therein. Clause (a) of the said provision refers to inter alia an order of assessment under section 143 (3). The right to file an appeal from an order passed under Section 201 (1) is to be found in clause (ha). This again is indicative of the fact that the Act treats litigation commencing from disallowance in an assessment under section 143 (3) and failure to deduct tax at source separately and, accordingly, the exception carved out in the instruction dated 15.03.2024 have to be construed accordingly. No hesitation in dismissing the appeals as withdrawn.

Summary

Issues Involved:

1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that the Assessing Officer (AO) should pass a speaking order regarding the deduction of stock value returned as per family settlement.
2. Whether the ITAT was right in holding that payments made by the assessee for sales and marketing services rendered outside India are not liable for Tax Deducted at Source (TDS).
3. Applicability of monetary limits and exceptions for filing appeals as per CBDT Circulars.
4. Interpretation of the exceptions in CBDT Circulars concerning pending appeals and their retrospective application.

Issue-wise Analysis:

1. Speaking Order for Stock Value Deduction:

The appeals questioned whether the ITAT was correct in directing the AO to pass a speaking order on the deduction of stock value returned as per a family settlement. The court examined the necessity for a speaking order, which requires the AO to provide detailed findings and reasons for allowing or disallowing such deductions. The court's analysis focused on ensuring transparency and accountability in tax assessments, emphasizing the need for clear documentation and justification when dealing with deductions related to family settlements.

2. TDS on Payments for Services Rendered Outside India:

The second issue involved the ITAT's decision that payments made by the assessee for sales and marketing services rendered outside India were not subject to TDS. The court evaluated the applicability of TDS provisions under the Income Tax Act and relevant Double Taxation Avoidance Agreements (DTAAs). The interpretation of contracts between the parties and the provisions of the Income Tax Act, along with DTAAs between India and the USA, played a crucial role in determining the taxability of such payments. The court upheld the ITAT's decision, highlighting the importance of understanding the nature of transactions and the jurisdictional scope of tax liabilities.

3. Monetary Limits and Exceptions for Filing Appeals:

The appeals also addressed the monetary limits set by the Central Board of Direct Taxes (CBDT) for filing appeals and the exceptions to these limits. The court reviewed the evolution of these limits through various circulars, noting that the tax effect involved in the appeals was below the revised monetary limits specified in Circular 9/2024. The court emphasized that the monetary limits aim to reduce litigation and provide certainty to taxpayers. It was clarified that the exceptions to monetary limits should be applied prospectively, as specified in the circulars, and not retrospectively to pending appeals.

4. Interpretation of Exceptions in CBDT Circulars:

A significant aspect of the judgment was the interpretation of exceptions in CBDT Circulars, particularly concerning pending appeals. The court analyzed Circulars 5/2024 and 9/2024, which introduced revised monetary limits and exceptions. The court concluded that the exceptions introduced in these circulars are applicable only to appeals filed after the issuance of the circulars, not to pending appeals. The court rejected the Revenue's argument that the exceptions should be applied retrospectively, emphasizing that the language of the circulars clearly indicates their prospective application.

The court also addressed the distinction between appeals arising from regular assessments and those related to TDS litigation. It clarified that the exceptions in the circulars pertain specifically to TDS/TCS matters and do not extend to regular assessment appeals involving disallowance of expenses due to non-deduction of TDS.

Conclusion:

The court dismissed the appeals as withdrawn, concluding that they did not meet the monetary threshold for filing and did not fall within the exceptions outlined in the relevant circulars. The judgment underscored the importance of adhering to the specified monetary limits and the prospective application of exceptions, thereby reinforcing the objective of reducing unnecessary litigation and ensuring clarity in tax administration.