TDS liability on accrual: transferred jurisdiction, foreign exchange permission, and non-resident guarantee commission under section 195
An order transferring an assessee's case under section 127 has comprehensive effect and carries pending and future TDS matters with it, so the officer within the transferred jurisdiction may act on the TDS issue. Restriction under section 9 of the Foreign Exchange Regulation Act, 1973 does not by itself prevent accrual of liability where book entries create a definite liability, and later Reserve Bank permission does not nullify that accrued obligation. Section 195 of the Income-tax Act, 1961 applies to guarantee commission credited to a non-resident, so tax deduction at source is required on accrual or credit. The stated result is that TDS liability is triggered by credit or accrual in law, not by subsequent foreign exchange approval.
Issues: (i) whether the second respondent had jurisdiction to proceed in the matter of tax deducted at source after transfer of the assessee's case to the Central Circle; (ii) whether the restriction under section 9 of the Foreign Exchange Regulation Act, 1973 prevented accrual of liability so as to postpone tax deduction at source; and (iii) whether section 195 of the Income-tax Act, 1961 applied to guarantee commission credited to the account of a non-resident.
Issue (i): whether the second respondent had jurisdiction to proceed in the matter of tax deducted at source after transfer of the assessee's case to the Central Circle.
Analysis: An order of transfer of a "case" under section 127 of the Income-tax Act, 1961 has a comprehensive effect and carries with it all pending and future proceedings relating to the assessee. The assessee's file had already stood transferred to the Central Circle, and the officer dealing with the TDS matter was therefore within the transferred jurisdiction. The rules governing filing of TDS returns also had to be read in the light of the transferred assessment jurisdiction.
Conclusion: The jurisdictional objection was rejected and the second respondent was held competent to act.
Issue (ii): whether the restriction under section 9 of the Foreign Exchange Regulation Act, 1973 prevented accrual of liability so as to postpone tax deduction at source.
Analysis: Section 9 of the Foreign Exchange Regulation Act, 1973 prohibits payment or credit to a person resident outside India without Reserve Bank permission, but the statute does not insist on prior permission in the manner of provisions that expressly use that expression. Permission obtained subsequently was treated as effective, and the book entries created a definite liability on accrual basis. The mere fact that permission came later did not destroy the liability that had arisen when the entries were made.
Conclusion: The restriction under section 9 did not prevent accrual of liability, and the assessee's contention was rejected.
Issue (iii): whether section 195 of the Income-tax Act, 1961 applied to guarantee commission credited to the account of a non-resident.
Analysis: Chapter XVII and section 195 of the Income-tax Act, 1961 require deduction at source from payments or credits made to non-residents. Since the guarantee commission had been credited in the books and liability had arisen on accrual basis, the statutory obligation to deduct tax at source was attracted.
Conclusion: Section 195 applied to the guarantee commission and the assessee was liable to deduct tax at source.
Final Conclusion: The writ petitions failed on all substantial grounds, and the demand under the tax deduction at source provisions was upheld.
Ratio Decidendi: For tax deduction at source, liability arises when income is credited or accrues in law, and a subsequent regulatory permission under foreign exchange law does not nullify a liability already created by book entries.
TaxTMI 
AI Drafter ✕
TaxTMI 
