2017 (4) TMI 60 - AT - Income Tax

TDS u/s 195 - non deducted tax at source on the remittances to its AE - default under section 201(1) - whether amounts remitted by the assessee to its Associated Enterprises (AE) in this period was exigible to tax as royalty under section 9(1)(vi) of the Act as well as Article 12(3)(a) of the India-Singapore DTAA - Held that - Special Bench of ITAT, Mumbai in the case of Mahindra & Mahindra Ltd. (2009 (4) TMI 207 - ITAT BOMBAY-H ) we hold that in order to treat the assessee/payee as an assessee in default it is required that the income so paid or credited to the account of the payee/recipient is capable of being brought within the tax net and such assessments should be lawfully made by the AO on the payee/recipient. Since these two conditions as required by Explanation to section 191 of the Act have not been satisfied, the orders of the AO under section 201(1) r.w.s. 201(1A) of the Act for assessment year 2007-08 and 2008-09 treating the assessee as an assessee in default under section 201(1) of the Act and thereby raising tax liability and charging interest thereon under section 201(1A) are unsustainable in law and are accordingly cancelled. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of treating the appellant as an assessee in default under Section 201(1) of the Income Tax Act.
2. Classification of subscription fees as 'Fees for Technical Services' under the India-Singapore Double Taxation Avoidance Agreement (DTAA).
3. Determination of tax liability on payments made to Red Hat Singapore.
4. Levy of interest under Section 201(1A) of the Income Tax Act.
5. Initiation of penalty proceedings under Section 271C of the Income Tax Act.

Detailed Analysis:

1. Validity of Treating the Appellant as an Assessee in Default:
The appellant contended that the orders passed under Section 201(1) r.w.s. 201(1A) for assessment years 2007-08 and 2008-09 would not survive if no action was taken by the Revenue against the recipient, Red Hat Asia Pacific Pte Ltd., Singapore, or if the possibility of such action was barred by limitation. The appellant relied on the Special Bench decision in Mahindra & Mahindra vs. DCIT, which held that both the failure to deduct tax and non-payment of tax by the recipient must be satisfied to treat a person as an assessee in default. The Revenue admitted that no assessment orders were passed against the recipient for the relevant years. Consequently, the tribunal held that the conditions of Explanation to Section 191 were not met, and the orders treating the appellant as an assessee in default were unsustainable and thus cancelled.

2. Classification of Subscription Fees as 'Fees for Technical Services':
Given the tribunal's decision to cancel the orders under Section 201(1) r.w.s. 201(1A), the grounds related to the classification of subscription fees as 'Fees for Technical Services' under the India-Singapore DTAA were deemed academic and were not adjudicated.

3. Determination of Tax Liability:
The appellant argued that the tax liability, if any, arising from payments to Red Hat Singapore should be borne by Red Hat Singapore. However, the tribunal's decision to cancel the orders under Section 201(1) r.w.s. 201(1A) rendered this issue moot.

4. Levy of Interest under Section 201(1A):
The appellant had filed a rectification application regarding the interest charged under Section 201(1A). The tribunal held that since the primary orders under Section 201(1) r.w.s. 201(1A) were cancelled, the interest charged under Section 201(1A) should also be deleted.

5. Initiation of Penalty Proceedings under Section 271C:
The tribunal dismissed this ground as 'not maintainable' since no cause of grievance arises from the mere initiation of penalty proceedings under Section 271C.

Conclusion:
The tribunal allowed the appeals for assessment years 2007-08 and 2008-09, cancelling the orders under Section 201(1) r.w.s. 201(1A) and directing the deletion of interest charged under Section 201(1A). The issues regarding the classification of subscription fees and tax liability were not adjudicated due to the primary decision. The initiation of penalty proceedings was dismissed as not maintainable.