2015 (8) TMI 987 - HC - Income Tax

Liability for deduction of TDS u/s 195 r/w S.197 - assessee did not have a permanent establishing in India as per S.9 r/w its explanation - Held that - Revenue itself had given No Objection Certificates consistently for several years and allowed the respondent assessee to make payment to Sheraton without deducting tax at source and it was only after the decision of the Assessing Officer at Delhi in the case of Sheraton 2009 (1) TMI 27 - DELHI HIGH COURT holding that payment made to it would be liable for payment of income tax in India, the proceedings in question had been initiated against the respondent assessee herein. However, once the said order of the Assessing Officer itself has been set aside by the Delhi High Court, the very foundation of initiating proceedings against the respondent asses see disappears and once the foundation goes, the structure cannot remain, i.e., proceedings against the respondent assessee cannot go on. Tribunal was correct in holding that the income earned by M/s Sheraton International, USA in India was not liable for deduction of TDS u/s 195 r/w S.197 of the Act, in respect of payments made by the assessee as they did not have a permanent establishing in India as per S.9 r/w its explanation and consequently provisions of Ss.201(1) and 201(1A) of the Act was not attracted - Decided in favour of assessee.

Summary

Issues:
1. Whether the income earned by a US company in India was liable for tax deduction at source under Section 195 of the Income Tax Act.
2. Whether the principles laid down by the Apex Court in a specific case regarding taxability of the income of the US company were correctly applied.

Analysis:
1. The respondent, a hotel company, had remitted amounts to a US company for services without deducting tax at source. The Income Tax Department initiated proceedings against the respondent for non-deduction of tax after the US company was assessed to tax in Delhi. The Assessing Officer held the respondent as an 'assessee in default' for not deducting tax. However, subsequent appeals to the Commissioner of Income Tax and the Tribunal favored the respondent. The main issue was whether the payments made by the respondent to the US company constituted 'business income,' 'royalty,' or 'fee for technical service.' The Delhi High Court had previously held that the income of the US company was 'business income' not liable for tax under the Double Taxation Avoidance Agreement.

2. The appellant argued that the payments should be considered 'royalty' under the Income Tax Act. However, the court emphasized that the liability to pay tax lies with the recipient, and since the US company was not liable for tax, the respondent was not required to deduct tax at source. The court referred to a previous judgment that stated a person paying to a non-resident is not liable to deduct tax if the sum is not chargeable to tax. The court also highlighted that the Revenue had previously issued No Objection Certificates to the respondent for making payments without deduction. The Delhi High Court's decision on the taxability of the US company's income governed the tax deduction issue, leading to the dismissal of the appeals in favor of the respondent.

In conclusion, the court ruled in favor of the respondent, stating that the US company's income was not liable for tax in India, hence no tax deduction at source was required. The court dismissed the appeals, emphasizing that once the foundation for the proceedings against the respondent disappeared, the proceedings could not continue.