Tribunal quashes tax demand citing advance tax payment discharge. Section 201 compensatory, not penal. No revenue loss.

The tribunal allowed the appeal, quashing the tax withholding demand under section 201 r.w.s. 195 and the consequential interest under section 201(1A). The decision was based on the recognition that BNY Mellon's advance tax payment discharged the primary tax liability, negating the appellant's vicarious liability for TDS. The tribunal emphasized that the provisions of section 201 are compensatory and not penal, and since no revenue loss occurred, the demands under section 201 were unjustified.

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Issues Involved:
1. Jurisdiction and procedural errors by the CIT(A).
2. Whether the appellant is an "assessee in default" under section 201(1) for not deducting tax at source.
3. Impact of advance tax payment by BNY Mellon on the appellant's tax deduction at source (TDS) liability.
4. Applicability of grossing up provisions under section 195A.
5. Levy of interest under section 201(1A).

Issue-wise Detailed Analysis:

1. Jurisdiction and Procedural Errors by the CIT(A):
The appellant contended that the CIT(A) failed to follow due process under the Faceless Appeal Scheme 2021, including not granting a personal hearing. Additionally, the appellant argued that the CIT(A) lacked jurisdiction as the appeal arose from an order under international tax jurisdiction. The tribunal noted these procedural lapses but focused on the substantive issues of the appeal.

2. Whether the Appellant is an "Assessee in Default" under Section 201(1):
The core issue was whether the appellant, an Indian custodian of shares, failed to deduct tax at source from the sale consideration of shares held for an overseas depository, despite the overseas depository having paid advance tax on the capital gains. The tribunal observed that the appellant acted as a broker executing the sale of shares and remitting the proceeds to BNY Mellon, which had paid advance tax on the gains.

3. Impact of Advance Tax Payment by BNY Mellon on the Appellant's TDS Liability:
The tribunal found that both the Assessing Officer and CIT(A) acknowledged BNY Mellon's advance tax payment. It was emphasized that TDS liability under section 201 is vicarious and does not arise if the primary tax liability of the recipient (BNY Mellon) is discharged. The tribunal cited the Supreme Court's ruling in CIT Vs Eily Lilly & Co Pvt Ltd, which states that vicarious liability for TDS does not survive if the primary liability is settled. The tribunal concluded that since BNY Mellon paid the taxes, invoking section 201 was unwarranted, and the appellant's TDS liability should be quashed.

4. Applicability of Grossing Up Provisions under Section 195A:
The appellant argued against the application of grossing up provisions under section 195A, as there was no agreement that the appellant would bear the tax liability. The tribunal noted that the taxes were paid by BNY Mellon directly, further supporting the appellant's position that no additional TDS was required.

5. Levy of Interest under Section 201(1A):
The tribunal noted that the interest under section 201(1A) is compensatory and arises only if there is a delay in tax payment. Since BNY Mellon had paid the advance tax within the permissible time, there was no delay, and consequently, no interest liability should arise. The tribunal quashed the interest demand, aligning it with the quashing of the primary tax withholding demand.

Conclusion:
The tribunal allowed the appeal, quashing the tax withholding demand under section 201 r.w.s. 195 and the consequential interest under section 201(1A). The decision was based on the recognition that BNY Mellon's advance tax payment discharged the primary tax liability, negating the appellant's vicarious liability for TDS. The tribunal emphasized that the provisions of section 201 are compensatory and not penal, and since no revenue loss occurred, the demands under section 201 were unjustified.

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