2020 (12) TMI 1192 - AT - Income Tax

Revenue's appeal dismissed; assessee's cross-objection allowed. Order under Section 201(1) and 201(1A) time-barred.

The Tribunal dismissed the Revenue's appeal, allowing the assessee's cross-objection. It held that the order under Section 201(1) and 201(1A) was barred ... Liability to deduct tax at source under section 195 - Accrual versus payment/credit basis for triggering TDS - Waiver of interest and its tax consequences - Order under section 201(1) and 201(1A) - Limitation for proceedings under section 201(3) where statute prescribes limitation and reasonable time where statute is silent - Reasonable time doctrine for initiation/completion of revenue proceedingsLiability to deduct tax at source under section 195 - Accrual versus payment/credit basis for triggering TDS - Waiver of interest and its tax consequences - Whether the assessee was liable to deduct tax at source in respect of coupon/interest under the debenture subscription agreement for F.Y. 2010-11 (relevant to A.Y. 2011-12). - HELD THAT: - The Tribunal examined the terms of the subscription and amendment agreements, the accounting treatment and the facts that no interest was credited to the payee's account nor paid or provided for in the assessee's books for F.Y. 2010-11. The agreement fixed the first coupon payment date as 30.04.2011 (falling in F.Y. 2011-12) and no interest expenditure was claimed in the financial statements for F.Y. 2010-11. The assessee also produced evidence of amendment/addendum and letters indicating waiver and the audit under section 142(2A) supported that no income accrued to the assessee on account of waiver. Relying on judicial authorities, including the Karnataka High Court and ITAT precedents on the effect of non-payment/non-provision and on interpretation of 'paid' under DTAAs, the Tribunal held that where no payment was made, no amount was credited or treated as income of the non-resident payee and no tax deduction obligation under section 195 arose in the year under consideration. Consequently, there was no default attracting deeming order under section 201(1). [Paras 9]Liability to deduct tax under section 195 did not arise for F.Y. 2010-11 (A.Y. 2011-12); revenue's appeal on merits dismissed.Limitation for proceedings under section 201(3) where statute prescribes limitation and reasonable time where statute is silent - Order under section 201(1) and 201(1A) - Reasonable time doctrine for initiation/completion of revenue proceedings - Whether the order passed under section 201(1) and 201(1A) for the year F.Y. 2010-11 (A.Y. 2011-12) was barred by limitation. - HELD THAT: - The Tribunal considered the statutory history of section 201(3) (as amended by the Finance Acts) and the line of judicial authorities holding that where a statute prescribes no time limit a reasonable time must be read in. Although the CIT(A) had relied on the view that the specific time limits in section 201(3) did not apply to payments to non-residents, the Tribunal analysed precedent (including Special Bench and High Court decisions) and the facts: notice was issued on 19.03.2018 and the order passed on 31.03.2018, which was seven years from the end of the financial year 2010-11. Applying the reasonable time doctrine and relevant judicial dicta, and having regard to the delay in initiating and completing proceedings, the Tribunal concluded that on the facts of this case the order under section 201(1)/201(1A) was not passed within a reasonable time and was therefore barred by limitation. [Paras 10, 11]Order under section 201(1)/201(1A) for A.Y. 2011-12 was barred by limitation; cross-objection of the assessee allowed.Final Conclusion: The Tribunal dismissed the revenue's appeal on merits (no obligation to deduct TDS under section 195 for the year under consideration) and, on limitation grounds, held that the order under section 201(1)/201(1A) was barred by limitation; accordingly the revenue's appeal is dismissed and the assessee's cross-objection is allowed. Issues Involved:1. Accrual and payment of interest liability.2. Applicability of Section 195 of the I.T. Act for withholding tax.3. Claim of interest expenditure by the assessee.4. Indirect discharge of interest liability through discounted equity shares.5. Transfer of CCDs and its implications.6. Voluntary offer of benefit by the assessee.7. Limitation period for passing orders under Section 201(1) and 201(1A).Detailed Analysis:1. Accrual and Payment of Interest Liability:The Revenue argued that the interest liability arose in FY 2010-11 as per the agreement dated 27/03/2010, which specified interest payment at 7% per annum for two years from the date of issue of CCDs. The CIT(A) erred in holding that the liability arose in FY 2011-12. The Tribunal noted that the payment/credit was not made till 31.03.2010 and interest was due on 30.04.2011, i.e., in FY 2011-12. No interest expenditure was claimed by the assessee for FY 2010-11.2. Applicability of Section 195 of the I.T. Act for Withholding Tax:The Revenue contended that the liability to withhold tax arises at the time of credit of interest income or payment, whichever is earlier. The Tribunal found that since no interest was credited or paid, and no expenditure was claimed, the provisions of Section 195 were not applicable.3. Claim of Interest Expenditure by the Assessee:The CIT(A) observed that the assessee did not claim any interest expenditure related to the transaction with M/s. Arduino Holdings Limited in FY 2010-11. The Tribunal upheld this observation, noting that the total finance charges claimed were unrelated to the interest in question.4. Indirect Discharge of Interest Liability Through Discounted Equity Shares:The Revenue argued that the assessee indirectly discharged the interest liability by giving equity shares at a discounted price. The Tribunal found that the interest was waived, and no payment was made. The differential price of shares allotted was comparable to the interest that should have been paid, but since no interest was paid or claimed, the provisions of Section 195 did not apply.5. Transfer of CCDs and Its Implications:The Revenue highlighted the transfer of CCDs by M/s. Arduino Holdings Limited to M/s. NLS Mauritius LLC for a high value, suggesting it included accrued interest. The Tribunal noted that the transfer occurred in FY 2015-16, which was not relevant to the assessment year 2011-12. The assessee was not a party to this transfer, and the value at which the debentures were transferred was of no consequence to the issue at hand.6. Voluntary Offer of Benefit by the Assessee:The CIT(A) observed that the assessee voluntarily agreed to offer the benefit accrued (i.e., 7% of the investment amount), implying that the amount was not treated as chargeable to tax in the hands of the non-resident entity. The Tribunal upheld this observation, noting that the liability to deduct tax did not arise in the year under consideration.7. Limitation Period for Passing Orders Under Section 201(1) and 201(1A):The assessee argued that the order passed by the Assessing Officer was barred by limitation. The Tribunal noted that the time limit for passing the order under Section 201(1) and 201(1A) was not applicable to non-residents as per the CIT(A). The Tribunal referred to various judicial pronouncements, including the Supreme Court and High Courts, which held that action must be initiated within a reasonable period, typically four years. The Tribunal concluded that the order passed on 31.03.2018 for FY 2010-11 was beyond the reasonable period and thus barred by limitation.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, holding that the order under Section 201(1) and 201(1A) was barred by limitation and that the liability to deduct tax did not arise in the year under consideration.