2014 (1) TMI 865 - AT - Income Tax

Liability to deduct TDS u/s 194J of the Act Payment made to Managing Director of the Company Held that - There was an oral agreement as on 01.02.2006 whereby the assessee agreed to pay Rs.5 crores to Shri G.N. Mohan Raju, for Shri G.N. Mohan Raju agreeing to offer 74% of economic interest in any new business initiative in the field of telecommunication, digital media and convergence that may be undertaken by digital media and convergence that may be undertaken by Shri G.N. Mohan Raju during his lifetime - the payments made by the assessee go to show that the oral agreement pleaded by the assessee is true - The assessee has credited Shri G.N. Mohan Raju in its books of accounts with regard to the liability of Rs.5 crores as on the date of oral agreement. The liability to deduct tax at source u/s. 194J of the Act will have to be tested as on the date of credit of the amount to the account of the payee and not on the date of payment because the date of credit in the books of accounts of the Assessee is earlier in point of time - the law as on 01.02.2006 as contained in section 194J of the Act has to be seen - prior to 13.07.2006, neither royalty or non-compete fee u/s. 28(va) of the Act was covered by the provisions of section 194J of the Act - there was no obligation to deduct tax at source u/s. 194J of the Act on the part of the assessee - payments made by the assessee were after 13.07.2006 cannot fasten any obligation on the part of the assessee u/s. 194J of the Act because the obligation arises only at the time of credit of sum to the account of the payee or at the time of payment, whichever is earlier - the provisions of section 194J were not applicable to the payment of Rs.5 crores made by the assessee the orders passed by the revenue authorities treating the assessee as assessee in default and also levying interest u/s. 201(1A) of the Act are found to be unsustainable and are cancelled Decided in favour of Assessee.

Summary

Issues Involved:
1. Obligation to deduct tax at source on payment made to the Managing Director.
2. Nature of the payment - whether it constitutes royalty or non-compete fee.
3. Applicability of Section 194J of the Income Tax Act prior to its amendment on 13.07.2006.

Detailed Analysis:

1. Obligation to Deduct Tax at Source:
The primary issue in these appeals was whether the assessee had an obligation to deduct tax at source under Section 194J of the Income Tax Act when it made a payment of Rs. 5 crores to its Managing Director, Shri G.N. Mohan Raju. The payment was made in consideration for granting the first right of refusal to the assessee and WHPL to participate up to 74% economic interest in any future business ventures of Shri G.N. Mohan Raju.

2. Nature of the Payment:
The Assessing Officer (AO) contended that the payment was in the nature of royalty as per Explanation 2(v) to clause (vi) of section 9(1) of the Act. The AO issued a show cause notice under sections 201(1) and 201(1A) of the Act, treating the assessee as an 'assessee in default' for not deducting tax at source. The AO's stance was that the payment was for the transfer of rights related to knowledge of the process, thus falling under clause (i) or (iv) of Explanation 2 to section 9(1)(vi) of the Act.

The assessee argued that the payment was not royalty but a one-time payment for the first right of refusal to participate in future business ventures, thus constituting an outright purchase of a capital asset. The assessee further contended that none of the clauses in Explanation 2 to section 9(1)(vi) of the Act, which defines 'royalty,' applied to this case.

3. Applicability of Section 194J:
The Tribunal examined the relevant provisions of Section 194J and the statutory amendments thereto. Section 194J, as introduced by the Finance Act, 1995, did not include royalty or non-compete fee under section 28(va) of the Act until the amendment by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13.07.2006. The Tribunal noted that the liability to deduct tax at source arises at the time of credit to the account of the payee or at the time of actual payment, whichever is earlier.

The Tribunal found that the oral agreement dated 01.02.2006, whereby the assessee agreed to pay Rs. 5 crores to Shri G.N. Mohan Raju, was credible. The assessee had credited the amount payable to Shri G.N. Mohan Raju in its books of accounts as on the date of the oral agreement. Since the provisions of Section 194J, prior to its amendment on 13.07.2006, did not include royalty or non-compete fee, there was no obligation on the part of the assessee to deduct tax at source at the time of credit.

Conclusion:
The Tribunal concluded that there was no obligation for the assessee to deduct tax at source under Section 194J of the Act for the payment of Rs. 5 crores made to Shri G.N. Mohan Raju. Consequently, the orders passed by the revenue authorities treating the assessee as 'assessee in default' and levying interest under section 201(1A) of the Act were found to be unsustainable and were cancelled. The appeals by the assessee were allowed.