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2015 (9) TMI 507 - HC - Income TaxTAS deduction - amount was credited on account of royalty payable to Telefonaktiebolaget L.M. Ericsson, Sweden (hereafter TLME ) - said entry was subsequently reversed, as according to the Assessee, the payment of royalty to TLME was not permissible as per the Industrial policy in force at the material time - accrual of income - Whether the Tribunal was right in law in holding that the assessee was not liable to deduct TDS under Section 195 ?- Held that - Indisputably, the Assessee neither paid royalty during the period nor reflected the same as payable. In such circumstances, it is difficult to accept that there was any income chargeable to tax which had accrued in favour of TLME. In any view, the Assessee cannot be held to have acknowledged the same by crediting the account of TLME, as admittedly, that entry had been reversed. In our view, mere passing of the book entries, which are reversed, would not give rise to an obligation to deduct TAS by the Assessee, as clearly, there is no debt that can be said to be acknowledged by the Assessee. Imposition of an obligation to deduct TAS in these circumstances would amount to enforcing payments from one person towards a tax liability of another, even where the person does not does not acknowledge that any sum is payable. This, in our view, is contrary to the scheme of provisions relating to collection of TAS under the Act. It is also not disputed that TLME had not claimed royalty payable from the Assessee and, concededly, no royalty for the period has been paid either. In the circumstances, we are unable to accept that any income had accrued or arisen or deemed to have accrued or arisen, which is chargeable to tax in the hands of TLME. It is not disputed that the agreement dated 1st January, 1997 was not acted upon at the material time. In the absence of any income chargeable to tax arising on account of royalty in the hands of TLME at the material time, the question of withholding TAS would not arise. - Decided in favour of assessee.
Issues Involved
1. Whether the agreement for payment of royalty was contrary to public policy and void under Section 23 of the Contract Act, 1972. 2. Whether the assessee was liable to deduct TDS under Section 195 of the Income Tax Act, 1961, when it credited a sum to the account of its holding company on account of royalty. Issue-wise Detailed Analysis 1. Agreement for Payment of Royalty and Public Policy The court noted that it was not necessary to decide whether the contract between the Assessee and its holding company was void under Section 23 of the Contract Act, 1882. The focus was instead on whether the Assessee was in default of its obligation to deduct TDS under Section 195 of the Income Tax Act, 1961. 2. Liability to Deduct TDS under Section 195 The primary controversy revolved around the Assessee's obligation to deduct tax at source (TDS) for an amount credited as royalty to its holding company, which was later reversed. The Revenue argued that the obligation to deduct TDS arises at the time of crediting the amount in the books, regardless of actual payment. The Assessee contended that no income chargeable to tax accrued in the hands of the holding company, and thus, no TDS was required. Facts and Background: - The Assessee, a wholly-owned subsidiary of a Swedish company, entered into an agreement to pay royalty for using the trademark 'Ericsson'. - The Assessee credited Rs. 2,24,96,669/- as royalty in its books but later reversed the entry due to industrial policy restrictions. - The AO held the Assessee in default for not deducting TDS and levied tax and interest. - The CIT(A) confirmed the AO's orders, but the Tribunal later ruled in favor of the Assessee, stating no income accrued to the holding company. Legal Provisions and Interpretation: - Section 195 of the Income Tax Act mandates TDS on any sum chargeable under the Act at the time of credit or payment, whichever is earlier. - The Supreme Court in GE India Technology Centre P. Ltd. v. CIT clarified that TDS obligations arise only when the sum is chargeable to tax under the Act. - The court emphasized that mere book entries do not necessarily reflect accrued income unless acknowledged as a debt payable. Court's Analysis: - The Assessee reversed the royalty entry, nullifying its effect, and did not charge it as an expense, aligning with its stance that no royalty was payable. - The industrial policy of the Government of India at the time did not permit royalty payments by wholly-owned subsidiaries to their holding companies. - The court found no bona fide dispute that the Assessee's reversal of entries was not a subterfuge to avoid TDS obligations. Conclusion: - The court held that the mere passing of book entries, which are subsequently reversed, does not give rise to an obligation to deduct TDS. - No income chargeable to tax accrued to the holding company, and thus, no TDS was required. - The appeal was dismissed, and the question of law was answered in favor of the Assessee. Summary The Delhi High Court dismissed the Revenue's appeal, ruling that the Assessee was not obligated to deduct TDS under Section 195 of the Income Tax Act, 1961, as no income chargeable to tax accrued to the holding company. The court emphasized that mere book entries, which are later reversed, do not necessitate TDS deduction, aligning with the Supreme Court's interpretation in GE India Technology Centre P. Ltd. v. CIT. The judgment underscored that TDS obligations are contingent on the actual accrual of income chargeable to tax.
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