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2020 (12) TMI 1192 - AT - Income TaxTDS u/s 195 - interest income accrued in the hands of the foreign entity - Interest was waived later - Liability to deduct TDS on accrual basis - demand u/s. 201(1) and 201(1A) - HELD THAT - Section 195 specifies that taxes will have to be deducted either at the time of credit of such income in the account of the payee or at the time of payment thereof in cash or any other mode. In the case of the assessee there is no interest credited to the payee's account and there was no payment made as per books of account. No expenditure was claimed towards interest payable. In the light of these facts, we find that the provisions of section 195 is not applicable. As per the terms of agreement, the interest for the F.Y. 2010-11 was required to be credited on 30.04.2011 and during this period, there was no interest required to be credited also. There was no expenditure accrued during the previous year and also claimed and hence, the provisions of section 195 of the Act has no application. The interest payable was eventually waived, therefore, the assessee had not paid any interest. Since no interest was paid or claimed as expenditure, the provisions of section 195 of the Act cannot be applied. As decided in the case of CIT vs. Kalyani Steels Ltd 2018 (5) TMI 152 - KARNATAKA HIGH COURT wherein it was held that if there is no income embedded in a payment there is no tax deductible at source. In the case of the assessee neither any interest is paid nor provided for in the books as payable. Further, an amount which will not be included in the total income of a person cannot be considered as income for the purpose of deduction of tax at source at all. The purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act, it is to facilitate the collection of tax lawfully leviable under the Act. For the aforesaid reasons, we hold that the liability to deduct tax did not arise in the year under consideration. Whether the order passed u/s. 201(1) and 201(1A) of the Act for the assessment year 2011-12, was barred by limitation? - In the instant case, the financial year concerned is 2010-11 and notice for initiating proceedings u/s. 201(1)/201(1A) was issued on 19.03.2018. The orders u/s. 201(1)/201(1A) of the I.T. Act was finally passed on 31.03.2018, which is seven years from the end of the financial year. Therefore, it cannot be stated in facts of this case, the order u/s. 201(1)/201(1A) was passed within a reasonable time, going by the dictum laid down by the judicial pronouncement mentioned supra and the prescription of limitation mentioned u/s. 201(3) and (4) of the I.T. Act. Similar view was taken in the case of M/s. U.S. Technology Resources (P) Ltd. 2018 (4) TMI 991 - ITAT COCHIN wherein the present Accountant Member was the co-author of the said order. In view of the aforesaid reasoning, we hold that the order passed u/s. 201(1)/201(1A) of the I.T. Act was barred by limitation in the facts and circumstances of the case.
Issues Involved:
1. Accrual and payment of interest liability. 2. Applicability of Section 195 of the I.T. Act for withholding tax. 3. Claim of interest expenditure by the assessee. 4. Indirect discharge of interest liability through discounted equity shares. 5. Transfer of CCDs and its implications. 6. Voluntary offer of benefit by the assessee. 7. Limitation period for passing orders under Section 201(1) and 201(1A). Detailed Analysis: 1. Accrual and Payment of Interest Liability: The Revenue argued that the interest liability arose in FY 2010-11 as per the agreement dated 27/03/2010, which specified interest payment at 7% per annum for two years from the date of issue of CCDs. The CIT(A) erred in holding that the liability arose in FY 2011-12. The Tribunal noted that the payment/credit was not made till 31.03.2010 and interest was due on 30.04.2011, i.e., in FY 2011-12. No interest expenditure was claimed by the assessee for FY 2010-11. 2. Applicability of Section 195 of the I.T. Act for Withholding Tax: The Revenue contended that the liability to withhold tax arises at the time of credit of interest income or payment, whichever is earlier. The Tribunal found that since no interest was credited or paid, and no expenditure was claimed, the provisions of Section 195 were not applicable. 3. Claim of Interest Expenditure by the Assessee: The CIT(A) observed that the assessee did not claim any interest expenditure related to the transaction with M/s. Arduino Holdings Limited in FY 2010-11. The Tribunal upheld this observation, noting that the total finance charges claimed were unrelated to the interest in question. 4. Indirect Discharge of Interest Liability Through Discounted Equity Shares: The Revenue argued that the assessee indirectly discharged the interest liability by giving equity shares at a discounted price. The Tribunal found that the interest was waived, and no payment was made. The differential price of shares allotted was comparable to the interest that should have been paid, but since no interest was paid or claimed, the provisions of Section 195 did not apply. 5. Transfer of CCDs and Its Implications: The Revenue highlighted the transfer of CCDs by M/s. Arduino Holdings Limited to M/s. NLS Mauritius LLC for a high value, suggesting it included accrued interest. The Tribunal noted that the transfer occurred in FY 2015-16, which was not relevant to the assessment year 2011-12. The assessee was not a party to this transfer, and the value at which the debentures were transferred was of no consequence to the issue at hand. 6. Voluntary Offer of Benefit by the Assessee: The CIT(A) observed that the assessee voluntarily agreed to offer the benefit accrued (i.e., 7% of the investment amount), implying that the amount was not treated as chargeable to tax in the hands of the non-resident entity. The Tribunal upheld this observation, noting that the liability to deduct tax did not arise in the year under consideration. 7. Limitation Period for Passing Orders Under Section 201(1) and 201(1A): The assessee argued that the order passed by the Assessing Officer was barred by limitation. The Tribunal noted that the time limit for passing the order under Section 201(1) and 201(1A) was not applicable to non-residents as per the CIT(A). The Tribunal referred to various judicial pronouncements, including the Supreme Court and High Courts, which held that action must be initiated within a reasonable period, typically four years. The Tribunal concluded that the order passed on 31.03.2018 for FY 2010-11 was beyond the reasonable period and thus barred by limitation. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, holding that the order under Section 201(1) and 201(1A) was barred by limitation and that the liability to deduct tax did not arise in the year under consideration.
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