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TMI Blog2016 (6) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) This appeal is filed by revenue against the order of CIT (A) XXIX , New Delhi dated 26/03/2012 where Ld. CIT (A) appeal has held that interest under section 234B cannot be levied on the tax payable by the assessee. 2) The solitary ground of the appeal taken by the revenue is that on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the interest levied under section 234 B of the Income Tax Act. 3) The brief facts of the case are that appellant is a liaison office of the Hong Kong Company. It was found to be earning certain income in India and therefore it was chargeable to tax. However, the issue was that whether interest under section 234B of the income tax act can be levied on income tax of the assessee where tax under section 195 of the income tax act is deductible from whole of such income. The Learned assessing officers held that interest in the section 234B of the act is chargeable and therefore this ground was raised by assessee before the ld. CIT (A). However, the CIT (A) did not pass any order on applicability of the provisions of section 234B and consequent interest payable by the assessee in his order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax deductible, is remedied after the Finance Act, 2012. 19. Alcatel Lucent USA Inc (supra), in any event, can be distinguished on the ground that the Court was persuaded to confirm the levy of interest under Section 234B, only on account of the equities that needed to be balanced in those peculiar facts, in favour of taxability. This is evident from the following words of the Court: 26. It further seems to us inequitable that the assessee, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after leading them to believe that no tax was deductible. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided. After having accepted the liability to tax at the first appellate stage, it is unfair on the part of the assessee to invoke section 201 and point fingers at the Indian payers. The argument advanced by the learned counsel for the assessee that the Indian payers failed to deduct tax at their own risk seems to us to be only an argument of convenience or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An important decision is that of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. [2012] 345 ITR 494/[2011] 203 Taxman 477/16 taxmann.com 141, which also considered the same issue, i.e. the obligation under Section 195 (1). The High Court in the first instance had rejected the Revenue's appeal; the Supreme Court remitted the matter - for determination as to whether income by way of royalty had been made out in the facts of the case. The High Court decision first set out the order of the Supreme Court inter alia, as to the nature of obligation cast upon the payer under Section 195: 'While remanding the matter, Hon'ble Supreme Court has made certain observations while analysing the provisions of Section 195 of the Act as follows: 7. Under Section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the I.T. Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may disentitle the payer to any allowance apart from prosecution under Section 276B. Thus, Section 195 imposes a statutory oblig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act, In CIT v. Cooper Engineering [1968] 68 ITR 457 (Bom.) it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under Section 18(3B) (now Section 195(2) of the I. T. Act). The application of Section 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO (TDS) that the question of making an order under Section 195(2) will arise. In fact, at one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted as source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, ie., Sections 4, 5 and 9. This reasoning flows from the words sum chargeable under the provisions of the Act in Section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum changeable under the Act. The interpretation of the Department, therefore, not only requires the words chargeable under the provisions of the Act to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the appropriate proportion of such so chargeable where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage.' The Karnataka High Court first addressed this question and stated that: 17. It is clear from the scrutiny of the material on record and the contentions of the parties viz., revenue and the respective respondent in these cases that the fact that payments have been made by the respondent herein to non-resident for having imported shrink wrapped software/off-the-shelf software is not disputed. There is also no dispute that no tax was deducted at source by the respondent under Section 195(1) of the Act in respect of such payments on the ground that the same were made for the purpose of purchase of shrink wrapped software/off-the-shelf software. It is contended by the respondent that since there is no permanent establishment of the non-resident in India, the said payments have to be treated as income from business and is not taxable under the Income Tax Act in India and consequently, there is no obligation on the part of the respondent to deduct the advance tax under Section 195 of the Act and also consequential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable under Section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Therefore, if the amount is held to be royalty, the other consequences as referred to above would follow. After holding that the transaction in that case amounted to royalty and, therefore, taxable, the Court ruled that the obligation to deduct tax was with the payer: In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 of the Act and consequences would follow as held by the Hon'ble Supreme Court while remanding these appeals to this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 201 of the Act. 23. For the above reasons, this Court finds that no interest is leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under Section 201, and the consequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed without any order as to costs. 7) Therefore respectfully following the decision of Honourable Delhi high court in case of DIT V G E Packaged power ( Supra) we hold that on the payments received by the assessee the payer were required to deduct tax at sources u/s 195 of the act and as the tax was deductible u/s 195 of the act there is no failure on part of the assessee in payment of advance tax. Therefore, assessee cannot be saddled with the burden of interest u/s 234B of the act. Hence, we conf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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