2017 (4) TMI 242 - AT - Income Tax

Withholding Tax - TDS u/s 195 - Assessee in default - Held that - When the royalty so credited by the assessee is not taxable at the time of credit of such amount to the account of payee in the light of law laid down by Hon ble Supreme Court in the case of GE Information Technology (2010 (9) TMI 7 - SUPREME COURT OF INDIA ) it does not give rise to any tax withholding obligations under section 195 (1) either. As regards the point of time when the payment is actually made i.e. the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode the taxability in the hands of the recipient arises by @ 20% in terms of the provisions of article 13(2) above. However even though the assessee is covered by the Indo Italian DTAA the provisions of the Income Tax Act continue to apply to the extent such domestic law provisions are more beneficial to the assessee as even in the cases covered by the DTAAs and in terms of the provisions of Section 90(2) the provisions of this (Income Tax) Act shall apply to the extent they are more beneficial to that assessee . However the provisions of Section 115A prescribed taxability of royalty in the hands of the non-resident @ 10% and therefore adopting the more beneficial rate of 10% the payer was required to deduct tax at source from the royalty payment so made by the assessee. That is precisely what the assessee has done. The payment was made by the assessee on 12.5.2011 and the tax so deducted was payable within 7 days from the end of May 2011 i.e. by 7th June 2011. The assessee has however deposited the said tax deducted at source on 20th June 2011. The delay in depositing the tax deducted at source was thus only for 12 days. To this limited extent the Assessing Officer could have levied interest under section 201(1A) of the Act. However the authorities below have upheld the tax liability under section 20(1A) by computing the period of delay with reference to the date on which the amount was credited to payee s account. That is where the authorities below were in error and we vacate the action of the authorities below to that extent. It is only at the point of time when payment takes place that the income embedded in payment becomes taxable under the DTAA as also under the domestic law but then rate of tax prescribed in domestic law being lower vis- -vis the rate prescribed in the domestic law the assessee has the option of adopting the lower rate under the domestic law. The adoption of lower rate under the domestic law in our humble understanding does not imply that nonresident recipient could have been saddled with tax liability at the point of accrual when under the DTAAA provisions the non-resident could not have been taxed in respect of accrual of the said income in India. In view of these discussions as also for the detailed reasons set out above and to the extent indicated above we uphold the grievance of the assessee and direct the Assessing Officer to grant resultant relief.

Summary

Issues Involved:
1. Whether the assessee was liable to deduct tax at source at the time of crediting the sum to the account of Saira Europe S.P.A. Italy or at the time of payment thereof.
2. Whether the provisions of the India-Italy Double Taxation Avoidance Agreement (DTAA) affect the timing and amount of tax withholding.
3. Whether the interest under Section 201(1A) was correctly levied by the authorities.

Issue-wise Detailed Analysis:

1. Timing of Tax Deduction at Source (TDS):
The primary issue was whether the assessee was required to deduct tax at the time of crediting the amount in the books or at the time of actual payment. The CIT(A) held that under Section 195 of the Income-tax Act, 1961, tax must be deducted at the time of credit or payment, whichever is earlier. The CIT(A) rejected the assessee's argument that taxability under Article 12(3) of the India-Italy DTAA arises only at the time of actual payment. The CIT(A) emphasized that the liability to deduct tax at source is determined by the provisions of the Income Tax Act, not the DTAA.

2. Impact of India-Italy DTAA:
The Tribunal noted that the tax deduction at source liability under Section 195 is vicarious and depends on the tax liability of the recipient. According to the Tribunal, if the income is not taxable in the hands of the recipient at the time of credit, the TDS liability does not arise. The Tribunal referred to the Supreme Court's decision in G E Technology Centre Pvt Ltd Vs CIT, which stated that TDS is required only if the income is chargeable to tax in India. The Tribunal observed that under Article 13 of the India-Italy DTAA, royalty payments are taxable in the recipient's state only when actual payment is made. Therefore, the mere crediting of the amount does not trigger taxability under the DTAA.

3. Interest under Section 201(1A):
The Tribunal found that the authorities erred in computing the interest under Section 201(1A) from the date of credit. The Tribunal held that since the tax liability arises only at the time of actual payment, the interest should be computed from the due date of depositing the tax after the payment is made. The Tribunal noted that the payment was made on 12.05.2011, and the tax was deposited on 20.06.2011, resulting in a delay of 12 days. The Tribunal directed the Assessing Officer to compute the interest accordingly.

Conclusion:
The Tribunal concluded that the assessee's liability to deduct tax at source arose only at the time of actual payment and not at the time of crediting the amount. Consequently, the interest under Section 201(1A) should be computed from the due date of depositing the tax after the payment is made. The appeal was partly allowed, granting relief to the assessee to the extent indicated.