2023 (9) TMI 555 - HC - Income Tax

TDS u/s 201(1) - TDS u/s 195 - assessment order in the hands of the non-resident payee - payment for purchase of subscription as taxable as per the provisions of Article 7 read with Article 5 of the India Singapore Double Taxation Avoidance Agreement ( DTAA ) - AO held that the impugned subscription fees liable to be taxed as royalty within the meaning of Section 9(1)(vi) of the Act as well as Article 12(3) under the DTAA - ITAT held that the order passed under Section 201(1) within time in case of resident prayer had become invalid just because subsequently there was no assessment made in the hands of the non-resident payee within 6 years - HELD THAT - Considering the provisions of Section 201 of the Act, one thing, therefore, is certain, in order to treat the payer as an assessee-in-default, it is of utmost importance that income so paid or credited to the account of payee is capable of being brought within the purview of tax net and such assessment can be lawfully made on the payee. The ITAT also came to the conclusion that assessment should be lawfully made by AO on the payee/recipient. Since that has not been done, the order of AO under Section 201(1) read with Section 201(1A) of the Act was unsustainable. We are unable to fault this conclusion arrived at by the ITAT.

Summary

Issues involved:
The issues in this case involve the interpretation of tax liability under Section 201 of the Income Tax Act, 1961, specifically regarding the obligation to deduct tax at the source and the consequences of non-compliance. The key questions revolve around the validity of an order passed under Section 201(1) in the absence of assessment on the non-resident payee within a specified time frame, as well as the reliance on a special bench decision in a similar case.

Summary:
1. The appellant raised substantial questions of law, focusing on whether the ITAT was correct in holding that the order under Section 201(1) became invalid due to the lack of assessment on the non-resident payee within 6 years. The appellant contested the reliance on a special bench decision without considering the specific issue of assessment in the payee's hands.

2. The case involved M/s. Red Hat India Pvt. Ltd. making foreign remittance without deducting tax at source, citing provisions of the India Singapore Double Taxation Avoidance Agreement. The Assessing Officer deemed the payment as taxable royalty/technical services, leading to the appellant being treated as an 'assessee-in-default' under Section 201(1).

3. The appellant argued before the ITAT that they were not liable as an 'assessee-in-default' since the payee had no tax liability in India, meeting only one of the two conditions required for such classification.

4. The ITAT referenced a special bench decision emphasizing the importance of establishing the payee's tax liability before treating the payer as an 'assessee-in-default'. As the assessment on the payee was not lawfully conducted, the order under Section 201(1) was deemed unsustainable.

5. The High Court upheld the ITAT's decision, emphasizing the necessity for the payee's assessment to lawfully establish tax liability. Since this had not occurred, the order under Section 201(1) was considered invalid, leading to the dismissal of the appeal.