TDS default requires taxable income in payee's hands; section 201 demand and interest were set aside.

A payer cannot be treated as an assessee in default for failure to deduct tax at source where the corresponding income cannot lawfully be assessed in the payee's hands within the time permitted by law. On that basis, the ITAT Mumbai held that the conditions for invoking the TDS default machinery were not satisfied because no assessment had been made in the foreign associated enterprise's case and further assessment was time-barred. The order under section 201(1) was therefore unsustainable, and the related interest under section 201(1A) also could not survive.

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Issues: Whether the assessee could be treated as an assessee in default under section 201(1) for failure to deduct tax at source on payments made to its foreign associated enterprise, and whether interest under section 201(1A) could survive.

Analysis: The liability to proceed against the payer under the TDS provisions was held to be interlinked with the taxability of the payee in whose hands the amount is received. Since no assessment had been made in the payee's case for the relevant years and the possibility of such action was barred by limitation, the requisite conditions for treating the payer as an assessee in default were not satisfied. The prior decision relied upon was applied to hold that an order under section 201(1) is unsustainable where the income cannot lawfully be brought to tax in the hands of the payee.

Conclusion: The assessee could not be treated as an assessee in default, and the demand raised under section 201(1) together with interest under section 201(1A) was set aside.

Ratio Decidendi: A payer cannot be treated as an assessee in default for non-deduction of tax unless the corresponding income is capable of lawful assessment in the hands of the payee within the time permitted by law.

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