2013 (10) TMI 17 - HC - Income Tax

Disallowance u/s 40(a)(i) for Non TDS method of accounting - validity of circular - whether circular issued u/s 119 is contrary to section 145 - under the circulars, payments made in form of a commission or discount to the foreign party was not chargeable to tax in India under Section 9(1)(vii) - Held that - Circular aided in uniform and proper administration and application of the provisions of the Act - The respondent-assessee was entitled to rely upon the circulars. In light of the judgments of the Supreme Court in CIT versus Eli Lilly Company (India) Private Limited, 2009 (3) TMI 33 - SUPREME COURT and G.E India Technologies Centre Private Limited versus CIT, 2010 (9) TMI 7 - SUPREME COURT OF INDIA , once the income was not exigible or chargeable to tax, TDS was not required to be deducted. Money paid to the third parties, who did not have any office or permanent establishment in India, was exempt and not chargeable to tax. Thus on payments or income, TDS was not required to be deducted - Payments in question were made prior to circular No. 7/2009. On this aspect, there is no dispute Deleted the addition made by the Assessing Officer under Section 40(a)(i) of the Act. The appeal, being devoid of merit, is dismissed Decided against the Revenue. Mandatory nature of Circular Held that - No any inconsistency or contradiction between the circular issued and Section 145 of the Income Tax Act - In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to Section 145 of the Income Tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income Tax Authorities in a specific situation and, therefore, validly issued under Section 119 of the Income Tax Act. As such, the circular would be binding on the Department. Relying upon the decision in the case of Catholic Syrian Bank Limited versus Commissioner of Income Tax, 2012 (2) TMI 262 - SUPREME COURT OF INDIA , it has been observed that the Central Board of Direct Taxes has statutory right to issue circulars under Section 119 of the Act to explain or tone down the rigours of law and to ensure fair enforcement of the provisions. Circulars issued have force of law and are binding of the Income Tax authorities though they cannot be enforced adversely against the assessee - Normally these circulars cannot be ignored. Thus a circular may not override or detract from the provisions of the Act but can seek to mitigate the rigour of a particular provision for the benefit of an assessee in specified circumstances

Summary

Issues:
1. Failure to deduct tax at source on commission/discount paid to non-residents outside India.
2. Interpretation of Circulars 23 dated 1969, 163 dated 1975, and 786 dated 2000.
3. Withdrawal of circulars by Circular No. 7/2009 and its retrospective effect.
4. Applicability of TDS provisions when income is not chargeable to tax.

Issue 1: Failure to deduct tax at source on commission/discount paid to non-residents outside India:
The appellant claimed that the assessee failed to deduct tax at source on commission/discount paid to non-residents outside India, resulting in disallowance under Section 40(a)(i) of the Income Tax Act. The payments made were genuine and within limits prescribed by the Reserve Bank of India. The appellant argued that the circulars in force exempted such payments from tax liability in India under Section 9(1)(vii) of the Act.

Issue 2: Interpretation of Circulars 23 dated 1969, 163 dated 1975, and 786 dated 2000:
The respondent assessee relied on Circular Nos. 23 dated 1969, 163 dated 1975, and 786 dated 2000 to support their position that payments to foreign parties for services rendered outside India were not taxable in India. The circulars clarified that income of non-resident agents operating outside India was not taxable in India, and payments made to them were not subject to tax deduction at source under Section 195.

Issue 3: Withdrawal of circulars by Circular No. 7/2009 and its retrospective effect:
Circular No. 7/2009 withdrew the earlier circulars, but the High Court held that the withdrawal could not have a retrospective effect. The court emphasized that circulars in force during the relevant assessment year should be considered, and the withdrawal did not clarify the earlier circulars but simply revoked them. Therefore, the respondent-assessee was entitled to rely on the circulars in force at the time of the transactions.

Issue 4: Applicability of TDS provisions when income is not chargeable to tax:
The court referred to Supreme Court judgments to establish that if income is not chargeable to tax, Tax Deducted at Source (TDS) is not required. In this case, since the payments made to non-residents were not chargeable to tax in India, TDS was not mandatory. The court noted that the payments were made before the withdrawal of the circulars, and therefore, upheld the tribunal's decision to delete the addition made by the Assessing Officer under Section 40(a)(i) of the Act.

In conclusion, the High Court dismissed the appeal, ruling in favor of the respondent-assessee based on the interpretation of relevant circulars, non-applicability of TDS when income is not chargeable to tax, and the lack of retrospective effect of circular withdrawal.