9911796707
TMI Blog2015 (6) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the revenue in levying interest on tax not paid u/s.201(1A) of the Act. Hence the Assessee has filed appeals being ITA Nos.1588 to 1591/Bang/2012 which relate to challenge to levy of interest u/s.201(1A) of the Act. ITA Nos. 749 to 752/Bang/2012 are treated as appeals filed challenging the order passed u/s.201(1) of the Act. 2. The Assessee is a wholly owned subsidiary of IBM World Trade Corporation, US ("IBM WTC"). The Assessee follows the mercantile system of Accounting. The Assessee makes provision for certain expenses in its books of accounts. As per the global group accounting policy, each of the entity of IBM group worldwide has to quantify its expenses every quarter, within 3 days of the end of every quarter. In respect of expenses for which invoices have been submitted or the payments have become due in respect of the expenses, the same are accounted for and if Tax Deduction at source (TDS) is found to be applicable on these expenses, the same is accounted for. However, in respect of expenses in respect of which only service/work has been provided/performed by the vendors, but for which the invoices have not been furnished or in respect of which the payments have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracting 1334844862 194C 1.13% 15083746 10860297 Professional & Consultancy 71477952 194J 5.65% 4038504 2907723 Advt & Marketing 21641814 194C 1.13% 244552 176077 Recruitment 46079329 194C 2.26% 1041392 749802 Repair & Maintenance 4420775 194C 2.26% 99909 71934 General Exp. - Education Exp. 92581732 194C 2.26% 2092347 1506489 Rent 174993369 194I 22.66% 39653497 28550518 Other Expenses 16154003 194C 2.26% 365080 262857 Foreign payments 1134433077 195 10% 1344330 967917 TOTAL 2905450542 64461892 46412559 FY 2007-08 Particulars Amount Section Percentage Amt to be deducted Interest Commission 233671617 194H 5.65% 13202446 7921467 Subcontracting 479760513 194C 1.13% 5421293 3252776 Professional & Consultancy 127571394 194J 5.65% 7207783 4324670 Advt & Marketing 213424632 194C 1.13% 2411698 1447019 Recruitment 237073540 194C 2.26% 5357862 3214717 Repair & Maintenance - 194C 2.26% - General Exp. - Education Exp. - 194C 2.26% - Rent 331697952 194I 22.66% 75162755 45097653 Other Expenses 469931105 194C 2.26% 10620442 6372265 TOTAL 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under subsection (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.-For the purposes of this sub-clause,- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi ) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been paid till the time it is actually paid to the credit of the Government. According to the AO, the Assessee was therefore liable to treated as Assessee in default and was also liable to pay interest on tax payable. "Consequences of failure to deduct or pay. 201. (1) If any such person referred to in section 200] and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct the whole or any part of the tax] or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax : Provided that no penalty shall be charged under section 221 from such person, principal officer or company unless the Assessing Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Circular No.3/2010 dated 2.3.2010. The above circular was issued in the context of the provisions of Sec.194A of the Act dealing with TDS obligation at the time of credit of interest income to the account of the payee and in response to representations received from Indian Banks Association (IBA) seeking clarification regarding deduction of tax at source from payment of interest on time deposits by banks using Core-Branch Banking Solutions (CBS) Software. In case of banks using CBS software, interest payable on time deposit is calculated generally on daily basis or monthly basis and is swept and parked accounting in the provisioning account for the purposes of macromonitoring only. However, constructive credit is given to the depositors/payees account either at the end of the financial year or at periodic intervals as per practice of the bank or as per the depositors'/payees requirement or on maturity or on encashment of time deposits, whichever is earlier. The CBDT clarified the TDS obligations in such cases as follows: "............ As per provisions of section 194A of the Income Tax Act 1961, income tax has to be deducted at source at the time of credit of interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... macro monitoring only. In such cases, tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals as per practice of the bank or as per the depositor's / payee's requirement or on maturity or on encashment of time deposits; whichever event takes place earlier; whenever the aggregate of amounts of interest income credited or paid or likely to be credited or paid during the financial year by the banks exceeds the limits specified in section 194A. (emphasis supplied) 12. The Assessee therefore submitted that withholding tax provisions of the Act would not apply automatically on any expense being accounted. The obligation to withhold taxes arises only on the amount payable is exactly identified along with the payee to whom such amount is payable. 13. The AO did not accept the above submission of the Assessee for the following reasons:- 1. The AO called upon the Assessee to explain the basis on which the provision was quantified. According to the AO the Assessee did not explain as to how the expenses have been quantified. 2. According to the AO the explanation of the Assessee was that it recognises the expenses in the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produce the same. In the circumstances, the AO treated the Assessee as an Assessee in default in respect of taxes not deducted at source in respect of Provision for expenses made in the books of accounts and also levied consequent interest on taxes not paid to the credit of the Central Government. 16. Before CIT(A), the Assessee explained the manner in which Provision was created in the books and how the same was reversed and actual expenses booked in the profit and loss account and the point of time at which TDS is made and paid to the Government. Before CIT(A), the Assessee provided a summary of the year-end provision for the FY relevant for AY 2007-08 amounting to Rs, 209,31,30,953/-. Scrutiny of the same revealed that the provision constituted expenses such as commission to selling agents/ORC commission, sub-contracting charges, professional & consultancy fee, rent, etc. The Assessee provided a note on trail of events between booking of year-end provisions, subsequent reversals and effecting TDS on vendor payments. The Assessee clarified that in order to comprehend the entire mechanism, it was pertinent to note that the following events took place chronologically:- * Booking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e. the vendor liability), the same was debited to the P & L A/c, it was pointed out that any short/excess provisions would therefore automatically get adjusted in the P&L A/c. In the Return of Income, the disallowance (made in the earlier year) was claimed as an allowance separately owing to the TDS having been done in that year and consequently there was no double deduction claimed in the above process. According to the Assessee, if the actual expenses booked were not allowed as a deduction in the subsequent year, it would result in double taxation of the same amount, once in the year when the provision was made and also in the year of reversal. The Assessee opined that it was a fundamental rule of law that the same income could not be taxed twice. Reliance was placed on Supreme Court ruling in the case of ITO, "A" Ward, Lucknow Vs Bachu Lal Kapoor [60 ITR 74] wherein this principle was considered that the provisions of the Income Tax Act did not envisage double taxation of same income. 19. The basis of quantification of the provision for expenses was explained by the Assessee as follows:- "3.3 As regards the basis for quantification of the provisions for expenses in r/o whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax deduction at source ("TDS") were not applicable. In this context, the appellant was directed to furnish instances of expenses incurred on a recurring basis, instances of past years data relied upon as well as a write-up on constant expenses suitably backed by corroborative evidence. None of the above particulars were provided at any point of time during appellate proceedings. 3.3.2 As for the consolidated Provision A/c called for in r/o of all 4 AYs with opening balances, entries made relating to transactions made during the year and closing balances, vide its submissions dt. 30-12-2011, the appellant provided an illustration for sub-contracting expense provision created for AY 2007-08 to the tune of Rs. 87.03 crores comprising of the following 4 amounts:- * Sub-contracting - SO Accrual Rs. 39,52,94,762/- * Sub-contracting - ITS Accrual Rs. 7,03,51,510/- * Sub-contracting - ITS Accrual Rs. 2,48,70,918/- * Sub-contracting - Exports Accrual Rs. 37.98.73.472/- Total Rs. 87,03,90.662/- At the time of accounting the vendor invoice, in so far as TDS was concerned it was pointed out that broadly there could be four possibilities: - TDS applies on the amount ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst these provisions. The matching exercise was done based on certain factors such as description and period of services mentioned in the vendor invoices. In the second step, all the payments for the services pertaining to prior year (indentified in Step 1 above) were traced into the electronically filed Tax Deduction at Source ("TDS") statements, to identify and establish the TDS done on these payments. It findings were reported in the Annexure to its Report which is reproduced below:- Table - 5(a) Commission FY of 40a disallowance Amount as per Tax Audit Report Subsequent payments reconciled Reversal of provision Total Coverage 2005-06 88,23,629 89,97,179 - 89,977,179 102.0% 2006-07 23,36,17,817 12,55,32,537 10,95,39,468 23,50,72,005 100.6% 2007-08 23,44,63,891 14,24,40,793 9,91,47,524 24,15,88,31 103.0% 2008-09 9,92,92,523 9,66,74,505 4,23,65,028 13,90,39,533 140.0% Table - 5(a) Subcontracting FY of 40a disallowance Amount as per Tax Audit Report Subsequent payments reconciled Reversal of provision Total Coverage 2005-06 133,48,44,862 134,00,22,479 - 134,00,22,479 100.4% 2006-07 87,03,90,662 88,26,06,149 - 88,26,06,149 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent year on all the amounts that was disallowed u/s. 40a(i) and 40a(ia) as and when these amounts were paid. The Hon'ble ITAT therefore directed that such details be produced before the Income Tax Officer (TDS) for verification. 4. At the remand stage the assessee company has now submitted year wise details of rental charges paid, professional charges paid, contract amounts paid and details of other payments. The details of year end provisions as per tax audit report (disallowed u/s. 40a(i) and 40a(ia)), payments made in subsequent year in respect of these provisions and details of tax deducted at source on such payments along with proof of deposit of such TDS into Govt. account were called for and systematically verified. Since, the transactions were enormous in respect of these four assessment years, verifications were carried out randomly for different months for these assessment years. After thorough verification of the transactions in respect of the months selected randomly and after analysis of consolidated annual figures separately for each sections of TDS, it is seen that the amounts which were shown as provisions as on 31 March of a particular year, whether eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no income chargeable to tax in the hands of the payee, there can be no TDS obligation. TDS obligations arise only when there is "Income". TDS obligations do not arise on the basis of mere payment, without there being income and corresponding liability of the person receiving payment from the Assessee to pay tax. 26. The learned DR submitted as follows:- (1) The Assessee on his own had disallowed the expenditure in question u/s.40(a)(i) & 40(a)(ia) of the Act. The disallowance u/s.40(a)(i) & 40(a)(ia) of the Act arise only when there exists a liability to deduct tax at source in terms of Chapter-XVII-B of the Act. The Assessee having on his own disallowed expenditure u/s.40(a)(i) & 40(a)(ia) of the Act cannot now turn around and say that there was no obligation to deduct tax at source. (2) The Assessee does not account for expenditure on accrual basis but on receipt of invoice. This cannot be the point of time at which accrual of expenditure can be said to happen. In other words the system of accounting followed by the Assessee is not in tune with the mercantile system of accounting. (3) When the Assessee credits suspense account for payments due to various persons, such cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the foregoing provisions of this Chapter i.e., Chapter XVII-B shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Sec.201(1) of the Act is triggered when if any such person referred to in section 200 does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. The contention of the learned DR that the Assessee having admitted its default u/s.40(a)(i) & 40(a)(ia) of the Act, cannot in proceedings u/s.201(1) of the Act, be heard to say that there was no default under chapter XVII-B of the Act is therefore correct. The disability u/s.40(a)(i) & 40(a)(ia) of the Act, and the liability and Sec.201(1) of the Act cannot be different and they arise out of the same default. Once there is a disallowance u/s.40(a)(i) & 40(a)(ia) of the Act, it is not possible to argue that there was no liability under chapter XVII-B of the Act and therefore the provisions of Sec.201(1) of the Act will not be attra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome to the account of the payee." (emphasis supplied) 30. It is thus clear from the statutory provisions that the liability to tax at source exists when the amount in question is credited to a "suspense Account" or any other account by whatever name called, which will also include a "Provision" created in the books of accounts. Therefore it is not possible for the Assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered. 31. With regard to the argument of the learned counsel for the Assessee that there is no accrual of expenditure as per the mercantile system of accounting and that the payee is not identified, we agree with the conclusions of the CIT(A) on this aspect. The CIT(A) has rightly held that under the mercantile system of accounting accrual of liability for any expenditure is not dependent of receipt of invoice from the person to whom payment for expenditure has to be made and that accounting practice followed by the Assessee was contrary to the mercantile system of accounting. The claim of the Assessee that it creates provision in the books of account on an est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen Sec.194C, 194J and 195, which are the sections applicable in the present case, does not use the expression, "Income". The above sections use the expression "Sum" and tax deduction has to be on the "sum so paid". Sec.194H and Sec.194-I deal with TDS obligation on payment of commission and rental income. These payments by its nature are specific and the entire payment is attributable to commission or rent and therefore the commission and rent paid is treated as "income" and therefore the expression income by way of commission or rent is found in these sections. Moreover as person responsible for making payment, it is the duty of the Assessee to deduct tax at source. Sec.194C, 194-J, 194-H and 194-I do not use the expression "Chargeable to tax". As we have already seen, it is not the case of the Assessee that the payments are not chargeable to tax in the hands of the payee. As we have already seen, the Assessee deducted tax on the provision made for various expenses in the subsequent financial years when the provision entries were reversed. The Assessee therefore cannot take a plea that the payments in question are not chargeable to tax and therefore there was no obligation on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve already seen, there is nothing to show that there was no accrual of liability nor was there any statutory liability that existed. 37. The next decision on which the learned counsel for the Assessee placed reliance was the decision of ITAT Bangalore in the case of Bovis Lend Lease (I) Pvt.Ltd. Vs. ITO ITA Nos. 636/Bang/2008 for AY 2003-04 to 2005-06, order dated 28.8.2009. The facts of the case were that the Assessee engaged a non-resident for rendering management services. The Assessee credited the sum payable to non-resident to an Outstanding Expenses Account. As per the agreement with the nonresident had to submit a statement of service charges along with invoice and 30 days from receipt of invoice the Assessee had to pay the sums to the non-resident. The services were rendered by the non-resident and sums due to the non-resident were credit in an outstanding expenses account. The account of the non-resident was however credited after receipt of invoice which was in a later financial year. The Assessee had obtained order u/s.197 of the Act for non-deduction of tax at source and remitted the amount to the non-resident without deduction of tax at source. The revenue initiated p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The Hon'ble Court held that Registrar General was neither the payee nor recipient of income and that the funds kept in deposit are funds which are "custodia legis". The Hon'ble Court observed that if TDS is deducted that would amount to recovery of tax without the corresponding income being assessed in the hands of any assessee. In the absence of an ascertainable assessee the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax u/s.4 of the Act but takes a form of a separate levy, independent of other provisions of the Act which is not permissible. In our view the aforesaid observations are not applicable to the present case. As we have already seen, the Assessee is fully aware of the payee but postpones credit to the account of the payee for want of receipt of invoice. We are, therefore, of the view that the ratio laid down in the aforesaid decision will not be any assistance to the plea of the Assessee before us. 40. The learned counsel for Assessee relied on some decisions of ITAT benches where in the case of Banks, TDS obligation was held to be not applicable based on Circular No.30/2010. We have already hel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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