2018 (9) TMI 81 - HC - Income Tax

Principle of grossing up u/s 195A - TDS u/s 195 - tax deduction on the amount payable to University of Warwick UK - Whether the grossing up has to be done to arrive at the tax to be deducted at source? - interest under Section 201(1A) levied - Held that - Section 195A provision provides for the manner of grossing up of income for computing the tax deductible at source in a case where the tax is to be borne by the payer. This Section provides for grossing up of the tax only if it forms part of the income. As pointed out in Tata Ceramics 2011 (7) TMI 644 - KERALA HIGH COURT if the tax is exempted under Section 10(6A) it will not form part of the total income and there would be no grossing up of such tax for the purpose of tax deduction at source. Section 2(24) of the Act defines income and it is an inclusive definition and includes such net of tax payments also Section 2(24)(iva) . Thus in the absence of the definition of income and definition of gross amount under the treaty the assessee has to necessarily compute the income in terms of Section 195A of the Act. Admittedly in the instant case there is no exemption granted under Section 10(6A) of the Act for the assessee to contend that the said payment does not form part of total income. In the light of the above legal and factual position for the purpose of deduction of tax at source on the payment made by the assessee to the University of Warwick the income should be computed in terms of the provisions of the Act and in so doing it shall be increased by taking into consideration the amount of tax liability undertaken to be borne by the assessee. In other words the obligation to pay the tax is on the University of Warwick and since the assessee in terms of the agreement agreed to pay the taxes the same has to be necessarily added to the income of the University of Warwick and therefore the principle of grossing up has to be applied. No hesitation to hold that the Assessing Officer the CIT(A) and the Tribunal rightly held that the principles of grossing up would apply to the assessee s case. - Decided against the assessee

Issues Involved:
1. Applicability of grossing up principle under Section 195A of the Income Tax Act, 1961.
2. Levy of interest under Section 201(1A) of the Income Tax Act, 1961.
3. The impact of Double Taxation Avoidance Agreement (DTAA) between India and the UK.
4. The admissibility of additional substantial questions of law raised after the appeals were admitted.

Detailed Analysis:

1. Applicability of Grossing Up Principle under Section 195A:
The primary issue was whether the grossing up principle should be applied to the payments made by the assessee to the University of Warwick, UK, for technical services. The assessee argued that the tax borne by it should not be included in the income of the recipient (University of Warwick) and that the DTAA between India and the UK, which prescribes a maximum tax rate of 15%, should override the provisions of the Income Tax Act.

The court held that the DTAA does not define "gross amount" or provide a mechanism for computing income. Therefore, the income must be computed under the provisions of the Income Tax Act, specifically Section 195A, which mandates grossing up of income when the tax is borne by the payer. The court rejected the assessee's contention that the DTAA overrides the grossing up principle and upheld the decisions of the Assessing Officer, CIT(A), and the Tribunal, which applied the grossing up principle.

2. Levy of Interest under Section 201(1A):
The CIT(A) and the Tribunal upheld the levy of interest under Section 201(1A) of the Act, which mandates the payment of simple interest on the amount of tax not deducted or not paid. The court agreed with this interpretation, stating that the levy of interest is mandatory and justified in cases of short deduction of tax.

3. Impact of DTAA between India and the UK:
The assessee contended that the DTAA between India and the UK should limit the tax liability to 15% of the gross amount of fees for technical services. However, the court clarified that while the DTAA prescribes the rate of tax, it does not provide a mechanism for computing the gross amount. Therefore, the computation must be done under the Income Tax Act, and the grossing up principle under Section 195A applies.

The court also noted that the DTAA is intended to reduce the scope of tax or the rate of tax but does not compel the assessee to apply its provisions. The assessee can choose to apply the provisions of the DTAA or the Income Tax Act, whichever is more beneficial, as per Section 90(2) of the Act.

4. Admissibility of Additional Substantial Questions of Law:
The assessee sought to raise additional substantial questions of law regarding the applicability of Explanation 2 to Section 9(2) of the Finance Act, 2010, which was introduced after the relevant assessment years. The court rejected this request, noting that the assessee had not raised these issues before the lower authorities or the Tribunal and had accepted its liability for deduction of tax at source. The court held that it would not entertain new questions that were not previously adjudicated.

Conclusion:
The court dismissed the appeals and upheld the decisions of the lower authorities, confirming the applicability of the grossing up principle under Section 195A and the levy of interest under Section 201(1A). The court also clarified that the DTAA between India and the UK does not override the computation mechanism under the Income Tax Act and rejected the assessee's attempt to raise new substantial questions of law at a late stage.

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