2024 (12) TMI 990 - HC - Income Tax

TDS u/s 195 - Addition u/s 40(a)(ia) - commission paid outside India or not? - HELD THAT - From a reading of Section 9(1)(i) Explanation (1)(a), it is clear that if the business activity of which all operations are not carried out in India, the income of business deemed under this Clause to accrue or arise in India shall be only such a part of Income as is reasonably attributable to the operations carried out in India. This means, if the part of the operations are carried out in India and any income derived therefrom shall be deemed to accrue or arise in India. This implies that when the business operations were done outside India, such income shall not be deemed to accrue or arise in India. The commission if any paid for the services rendered by a person outside India is not chargeable under the Income Tax Act. Admittedly, in the present case as accepted by the regular Assessment Officer, the commissions paid by the petitioner were for the services rendered outside India. This factual position is also not denied by the Assessment Officer even in the present proceedings and in fact, show-cause notice was not issued on the ground that such commission was wrongly paid and such services were not outside India. Thus, the provision of Section 195 would not apply and therefore, we are of the opinion that the present proceedings are without any jurisdiction. In the circumstances, the other judgments relied upon by the learned counsel for the parties are not required to be dealt with. The argument that Writ petition is not maintainable against the show-cause notice has no merit to stand. The reason is that there is no law that there is an absolute prohibition with regard to maintainability of writ against a show-cause notice. There are exceptions, under which a writ petition can also be entertained. The present petition is falling under the said exception. Therefore, such contention is rejected. Rectification of mistake - In the present impugned proceedings, allowance of deduction for the commission paid to the services rendered outside India to the non-resident cannot be said to be an act of mistake and in fact, it was result of adjudication and decision making. Therefore, the contention of the Department that they sought to invoke the proceedings to rectify the mistake, has no merit. On the above two grounds, the impugned notice and rejection of preliminary objections are liable to be set aside; and any consequential proceedings taken up is also liable to be quashed. Continuation of re-assessment proceedings is also quashed. Assessee appeal allowed.

Issues Involved:

1. Legality and jurisdiction of the notice issued under Section 148 of the Income Tax Act.
2. Validity of the re-assessment proceedings initiated based on the alleged escaped income.
3. Obligation to deduct tax at source under Section 195 of the Income Tax Act.
4. Maintainability of the writ petition against a show-cause notice.

Issue-wise Detailed Analysis:

1. Legality and Jurisdiction of the Notice under Section 148:

The petitioner challenged the notice issued under Section 148 of the Income Tax Act, claiming it was illegal, arbitrary, and without jurisdiction. The petitioner argued that the assessment for the Assessment Year 2009-10 had already been completed after a thorough scrutiny, where the Assessing Officer had accepted the deduction for commission paid to a non-resident for services rendered outside India. The petitioner contended that the re-assessment proceedings were a colorable exercise of power amounting to a review or change of opinion, which is impermissible without any fresh material.

The court found that the original assessment proceedings were result of a detailed scrutiny, and the deduction was allowed based on the facts and materials presented. The court held that the issuance of the notice under Section 148 was without jurisdiction as it was not based on any new material but was an attempt to review the earlier decision.

2. Validity of the Re-assessment Proceedings:

The petitioner argued that the re-assessment proceedings were initiated without valid reasons and the sanction for such proceedings was granted without a speaking order. The Department contended that the re-assessment was necessary due to the non-deduction of tax at source on the commission paid, which was mistakenly overlooked in the original assessment.

The court examined the provisions of Section 195 and Section 40(a)(i) of the Income Tax Act and concluded that the commission paid for services rendered outside India was not chargeable under the Act. Therefore, the obligation to deduct tax at source did not arise. The court held that the re-assessment proceedings were not justified as there was no mistake in the original assessment that warranted rectification.

3. Obligation to Deduct Tax at Source under Section 195:

The petitioner contended that the obligation to deduct tax at source under Section 195 arises only if the income is chargeable under the Income Tax Act. The commission paid to the non-resident for services outside India was not chargeable, and thus, no deduction was required.

The court referred to Section 9(1)(i) Explanation (1)(a) and the precedent set by the Supreme Court in Commissioner of Income Tax Vs. Toshoku Ltd., which clarified that income from operations carried out outside India is not deemed to accrue or arise in India. Consequently, the court held that the commission paid was not subject to tax deduction at source under Section 195, and the re-assessment proceedings were without jurisdiction.

4. Maintainability of the Writ Petition Against a Show-Cause Notice:

The Department argued that the writ petition was not maintainable against a show-cause notice. However, the court noted that there are exceptions where a writ petition can be entertained against a show-cause notice, particularly when the notice is without jurisdiction or authority.

The court concluded that the present case fell within such exceptions, as the notice and subsequent proceedings were without jurisdiction. Therefore, the writ petition was maintainable, and the court quashed the impugned notice and the order rejecting the preliminary objections.

Conclusion:

The court allowed the writ petition, quashing the impugned notice dated 17.09.2013 and the order dated 21.11.2014 rejecting the preliminary objections. Consequently, the re-assessment proceedings were also quashed. The court found no costs applicable and disposed of any pending interlocutory applications.

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