International airline wins tax appeal over lounge payments; ITAT rules in favor

The ITAT ruled in favor of the appellant, an international airline, in an appeal against a tax withholding demand under section 201 r.w.s. 194I of the Income Tax Act, 1961 for the assessment year 2012-13. The dispute arose from payments made for lounge facilities, initially treated as rent by the Assessing Officer demanding tax withholding at 10%. The ITAT held that the payments were for services, not rent, in line with section 194C. The ITAT emphasized adherence to higher court decisions, criticized the authorities for technicalities with minimal revenue implications, and granted relief by deleting the tax demands.

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Issues Involved:
Appeal against tax withholding demand under section 201 r.w.s. 194I of the Income Tax Act, 1961 for the assessment year 2012-13.

Analysis:
1. The appellant, an international airline, deducted tax at 2% under section 194C for payments made to Oberoi Airport Services for lounge facilities. The Assessing Officer demanded tax withholding at 10% under section 194I, treating the payments as rent. The CIT(A) upheld the demand. The ITAT found the payments were for services, not rent, and upheld the appellant's position, citing section 194C.

2. The Delhi High Court judgment in CIT Vs Japan Airlines Limited was relied upon by the Assessing Officer. However, the Supreme Court overruled this decision. The CIT(A) used selective observations to justify his decision, ignoring binding precedents. The ITAT emphasized the need to follow higher court decisions and criticized the CIT(A)'s approach. The ITAT ruled in favor of the appellant, deleting the tax demands under section 201 r.w.s. 194I.

3. The ITAT highlighted that tax deduction at source is a vicarious liability, and when the primary liability is discharged, a collection demand cannot be raised. The recipient had declared and paid taxes on the income. The ITAT criticized the authorities for wasting resources on technicalities with minimal revenue implications. Despite the small amount in dispute, the ITAT upheld the appellant's plea and granted relief by deleting the demands.

4. The ITAT allowed the appeal, emphasizing adherence to higher court decisions and the need for a pragmatic approach. The judgment was pronounced on 5th July 2021, granting relief to the appellant.

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