2014 (10) TMI 32 - AT - Income Tax

Assessee in default u/s 201(1)/201(1A) r.w.s. 195 Failure of TDS Period of limitation - Payment made to Lead Managers/Managers with the services rendered for GDR issue Held that - Following the decision in Mahindra And Mahindra Limited. Versus Deputy Commissioner Of Income-Tax 2009 (4) TMI 207 - ITAT BOMBAY-H - The liability of the person responsible is dependent upon the deductee failing or otherwise to pay such tax directly - Thus the action u/s 201(1) is dependent on the outcome of the assessment of the payee and the time-limit for passing order u/s 201(1) - the person responsible for paying sum chargeable to tax can be treated as assessee in default at any time prior to the assessment of the payee or the time available for the making of the assessment of the payee - If the persons responsible is deemed to be an assessee in default after the assessment of the payee or the time available for making assessment has expired then such amount of tax will be incapable of adjustment against tax liability of the payee and would require return to such person who has been treated as assessee in default - Thus both the initiation of proceedings u/s 201(1) as well as the completion of such proceedings by passing order have to be prior to the time-limit within which the tax can be determined in the hands of the payee - It cannot be beyond such period - If the payee has included the amount received from payer in his total income but the tax has not been paid in full or part then the payer can be treated as assessee in default to the extent of the non-payment of tax on the sum paid to him provided the tax is not recovered from the payee. Thus, there remains no difficulty in answering the question that how much time is available with the revenue for treating the payer as assessee in default u/s 201(1) - The obvious answer is that the maximum time-limit available for assessment of the payee is the maximum time-limit within which the payer can be treated as assessee in default - With the expansion of the scope of section 147, also roping in the cases of assessment apart from reassessment, it is clear that the assessment of payee shall also include assessment made under section 147 - Thus the maximum time-limit for initiating and completing the proceedings under section 201(1) has to be at par with the time-limit available for initiating and completing the reassessment. Logically the person responsible for paying sum chargeable to tax can be treated as assessee in default at any time prior to the assessment of the payee or the time available for making of the assessment of the payee - both the initiation of proceedings u/s 201(1) of the Act as well as the completion of such proceedings by passing order have to be prior to the time limit within which the tax can be determined in the hands of the payee and accordingly the order passed by the A.O. u/s 201(1)/201(1A) of the Act within a period of six years was held to be not barred by time by the Tribunal - the order passed by the AO u/s 201(1)/201(1A) of the Act treating the assessee as in default cannot be sustained as there is no assessment which has been made in the hands of the payee in respect of the amount paid by the assessee and even the time limit for issuing notice u/s 148 for making such assessment has already come to an end Decided in favour of assesse.

Issues Involved:
1. Whether the services rendered by non-resident Lead Managers constitute technical, managerial, and/or consultancy services under Section 9(1)(vii) of the Income Tax Act and relevant DTAA.
2. Taxability of such services under Section 9(1)(vii) and the relevant DTAA.
3. Whether some services connected with managing and underwriting the issue are rendered in India.
4. Relevance of services being rendered in India for determining taxability.
5. Classification of consideration as 'sales commission' versus 'managing fee.'
6. Applicability of Section 9(1)(vii) versus Section 9(1)(i).
7. Validity of the order passed under Section 201(1)/201(1A) in light of non-assessment of payees.

Detailed Analysis:

1. Whether the services rendered by non-resident Lead Managers constitute technical, managerial, and/or consultancy services under Section 9(1)(vii) of the Income Tax Act and relevant DTAA:
The Assessing Officer (A.O.) determined that the services provided by the non-resident Lead Managers, including underwriting, managing the issue, and other financial services, constituted technical and consultancy services under Section 9(1)(vii) of the Income Tax Act. This determination was based on the dictionary meaning of 'technical and consultancy' and relevant judicial precedents.

2. Taxability of such services under Section 9(1)(vii) and the relevant DTAA:
The A.O. concluded that the services did not fall under the exceptions provided in Section 9(1)(vii) and were taxable under Article 13 of the India-UK DTAA. The CIT(A) agreed that underwriting commission was not covered under Section 9(1)(vii), but management and selling commissions were taxable. However, under the India-UK DTAA, the concept of "make available" was not satisfied, thus exempting the management and selling commissions paid to UK residents from tax.

3. Whether some services connected with managing and underwriting the issue are rendered in India:
The A.O. held that it was not necessary for the services to be rendered in India for them to be taxable. However, it was noted that some services had indeed been rendered in India.

4. Relevance of services being rendered in India for determining taxability:
The A.O. concluded that the location of service delivery was irrelevant for determining taxability under Section 9(1)(vii).

5. Classification of consideration as 'sales commission' versus 'managing fee':
The A.O. rejected the classification of the consideration as 'sales commission,' maintaining that the services rendered were technical, managerial, and consultancy in nature, and thus, the payments were not for trading in GDRs.

6. Applicability of Section 9(1)(vii) versus Section 9(1)(i):
The A.O. held that Section 9(1)(vii) overrides Section 9(1)(i) as it specifically deals with technical and managerial consultancy services, which were the nature of services rendered by the Lead Managers.

7. Validity of the order passed under Section 201(1)/201(1A) in light of non-assessment of payees:
The Tribunal, relying on the Special Bench decision in Mahindra & Mahindra Ltd., held that the order under Section 201(1) treating the assessee as in default could not be sustained as no assessments were made in the hands of the payees, and the time limit for issuing notices under Section 148 had expired. This principle was upheld despite the Revenue's argument that the order under Section 201(1) should remain valid irrespective of subsequent events.

Conclusion:
The Tribunal allowed the assessee's appeals, holding that the order under Section 201(1)/201(1A) was unsustainable due to the non-assessment of payees and the expiration of the time limit for such assessments. Consequently, the penalty imposed under Section 271(1)(c) was also canceled. The Revenue's appeals were dismissed, affirming that the services rendered did not constitute taxable technical services under the DTAA provisions.

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