TaxTMI 
TaxTMI 
TaxTMI 
References and links:
Income-tax Officer - 12(3)(3) Versus Kirtilal Kalidas Diamond Exports 2008 -TMI – 205813
Section 40 and 195 of Income-tax Act, 1961.
Tax Deduction at Source (TDS)
TDS (or withholding tax) is required to be made with a view to collect tax on income simultaneously earning of taxable income. When income earned by the payee is not taxable, there is no purpose of deduction of tax at source. Making deduction and compliance of procedures by the tax deductor and claim of refund by the payee in such circumstances is an avoidable administrative burden on assessee and tax department both.
Furthermore, even if tax is not deducted, a person who is liable to pay tax, will continue to be so liable. If tax is deducted, he will get credit for the same and if there is no deduction he will pay his tax including by way of installments of advance tax.
Provisions of disallowance are not justified:
Disallowance of expenses due to non deduction of tax can be regarded an unjustified provision. When TDS is for and on account of payee and payee continue to be liable to pay his tax, then there is no justification to provide for disallowance of expenditure from which tax is required to be deducted but has not been deducted or deducted but not paid within stipulated time etc. For nonpayment of TDS there are provisions for interest and penalty, for this reason also disallowance is more unjustified. The provisions for such disallowances should therefore be omitted.
Specific provision for exemption from TDS when income is not taxable:
Alternatively specific provision can be made for non deduction of tax where payment made will not be taxable in hands of the payee.
Commission paid to nonresident for services rendered outside India is not taxable in India, hence disallowance was not called for- ITAT:
In the case
Income-tax Officer - 12(3)(3) Versus Kirtilal Kalidas Diamond Exports 2008 -TMI – 205813 decided by ITAT MUMBAI
Facts:
matter for disallowance of commission came for reason of non deduction of tax from commission.
The assessee is in the business of export of cut & polished diamonds.
The assessee had imported rough diamonds from Diamond Trading Company Ltd., U.K .
Assessee availed services of non-resident M/s. Bonas & Co., U.K. and paid commission of Rs. 1,47,37,806 for services availed in respect of the purchases of rough diamonds made through them.
No tax was deducted against such payments of commission for reasons that :
a) services were rendered outside India
b) payment was also made outside India
c) the said non-resident company had no establishment in India.
d) the income of non-resident was not chargeable to tax
The Assessing Order:
The Assessing Officer took view that the assessee was required to deduct the tax at source under section 195 of the Act. Since the assessee failed to deduct such tax, the provisions of section 40(a)(i) were attracted. Hence he disallowed said commission while assessing income of the assessee.
The First appeal:
The assessee preferred an appeal before the learned CIT(A) and took the same contentions as assessee took before the AO. Assessee also referred to the Indo-UK Treaty.
Accepting the contention of the assessee CIT(A) deleted the disallowancemade by the Assessing Officer.
Second appeal by revenue:
The revenue preferred appeal before the Tribunal. Tribunal provided opportunity of hearing to both parties (the AO and the Assessee) and heard them.
The learned D.R. who appeared before the Tribunal could not controvert the factual finding given by the learned CIT(A) and therefore, Tribunal found the following facts as final:
(i) services were rendered outside India;
(ii) payment was made outside; India; and
(iii) there was no establishment of non-resident in India.
(iv) On the facts stated in (i) to (iii) Tribunal took view that no income accrued to the assessee in India.
(v) Having recorded such finding that no income accrued in India Tribunal also considered that even if it be assumed that income accrued, it was to be considered as 'Business Profits' under the Indo-UK Treaty and could not be charged to tax in India in the absence of any permanent establishment in India.
(vi) Therefore, Tribunal agreeing with the legal finding given by the learned CIT(A) , upheld the order of the learned CIT(A).
(vii) The appeal filed by the revenue was dismissed.
Facts found by Tribunal are final:
The facts found concurrently by CIT(A) and then considered and approved by the Tribunal are facts found concurrently. These facts cannot be doubted or alleged to be perverse. Therefore, the decision of Tribunal deserves to be accepted.
What if tax was deducted:
Suppose assessee had deducted tax, then assessee would have to deposit the same, file TDS returns, issue TDS certificate etc. Payee could get credit for tax deducted in India against tax payable by him in his home country – however, this may be a time consuming and tedious task and credit may not be allowed, even in home country of nonresident, due to several reasons.. In any case revenue in India will not be benefited in any manner.
The most likely and practical solution for payee would be that the payee would have to file a return of income claiming that commission was not taxable in India. In fact the payer would act as an agent of inn-resident, and claim refund. The revenue would have to assessee the income as nil and refund tax collected by way of TDS with interest. In that case interest earned on refund of TDS would be taxable, and the nonresident payee will have to again file a return of income, pay tax in respect of that income and get assessed.
Therefore, we find that there is no purpose served by way of TDS in such cases except increasing work load and litigation. Therefore, specific provision should be made to provide the cases where tax is not required to be deducted. Though there are provisions for obtaining certificate for no deduction, however due to complexity of law authorities are generally hesitant to issue such certificates. The provision of disallowance has draconian effect of increasing tax liability. Cases have come where for non deduction or deduction but nonpayment of very small amount of TDS very substantial disallowances have been attracted.
For example suppose a Contractor has obtained certificate for TDS at lower rate of say 0.25% on a payment of Rs. one crore TDS will be Rs.25000/- and if the payer fails to deduct tax or deposit tax, he will face disallowance of Rs. one crore and for which his additional liability can be say around Rs.40 lakh on account of tax, surcharge, eduction cess and interest etc. If the AO is unjustified, he can also levy penalty for concealment of income up to three times of tax on disallowance of Rs. one crore and that will work out to say about Rs. one crore.
This shows that the provision of disallowance for non deduction of tax is very harsh and unjust. Such provisions can also be reason of harassment of tax payer without ultimate gain to the revenue.