2023 (9) TMI 495 - HC - Income Tax

Technical Services by DAVY Outside India Not Taxable; Refund of Withholding Tax Ordered with Interest

Grasim Industries Ltd., Versus Assistant Commissioner of Income Tax, 6 (3), Mumbai, Additional Commissioner of Income-tax, Mumbai, Commissioner of Income-tax-6, Mumbai, Assistant Commissioner of Income-tax, Circle – 12 (2), Mumbai., Commissioner of Income-tax-12,

The HC ruled in favor of the petitioner, determining that the technical services rendered by DAVY outside India were not taxable in India. Consequently, ... Refund of amount wrongly deducted or paid to the Revenue Authorities - withholding of tax - Petitioner had set up a Gas-based Sponge Iron Plant in India for which it entered into a Foreign Technical Collaboration Agreement with one company DAVY [as agreed to render to Petitioner outside India certain engineering and other related services in relation to the project] - petitioner as requested for issuance of a ‘No Objection’ Certificate it was the ACIT, Central Circle-I, who insisted that no objection would be issued only if Petitioner deposited 30% of the amount to be remitted to DAVY - as argued Technically, even though the amount deposited by Petitioner would be called as ‘tax deductible at source’, what Petitioner paid was ‘an ad hoc amount not technically a TDS amount’. Moreover, since it is also confirmed by this Court that the amount paid to DAVY was not chargeable to tax in India, Respondents’ insistence on Petitioner paying that amount was not in accordance with law and the amount so paid over must be refunded to Petitioner. HELD THAT:- Once the appellant succeeds in the Appeal, the Revenue Authorities must proceed on the basis that the Appellant did not have any obligation to make the payment. Thus the amount wrongly deducted or paid to the Revenue Authorities where it was not required to be paid would become refundable to Appellant. Of course, that is subject to the condition that the person receiving the payment has not claimed credit for the same or is not claiming credit for the same. It is indisputable that for the past over 13 years neither Kvaerner nor DAVY has claimed any amount from the Revenue Authorities under the issue at hand. Moreover, Kvaerner, who is the successor-in-interest of DAVY has also addressed its ‘no objection’ to Respondent No. 1 conveying that the amount can be returned or refunded to Petitioner. As in appropriate cases Revenue Authorities must grant refund and/or return the sums collected without lawful authority, independent of the provisions of the Act. The Central Board of Direct Taxes (“CBDT”) issued a Circular No. 7 of 2007 dated 23rd October 2007 highlighting further problems regarding procedure for refund of tax deducted at source. Based on representation received from tax payers to take into account situations where genuine claim for refund arises to the person deducting tax at source from payment to the non-resident, the CBDT amended Circular No. 709 dated 20th April 2000. The Circular states that where no income has accrued to the non-resident due to cancellation of contract or where income has accrued but no tax is due on that income or tax is due at a lesser rate the amount deposited to the credit of government to that extent under Section 195 cannot be said to be “tax”. The Circular further states that this amount can be refunded with prior approval of the Chief Commissioner of Income Tax or the Director General of Income Tax concerned, to the persons who deducted it from the payment to the non-resident under Section 195 of the Act. In our view, the refusal of the Department to return the amount and retaining the same is unauthorized by law and would only amount to unjust enrichment by the Department on technical grounds. The amounts having been deposited with Prothonotary and Senior Master, High Court, Bombay, the Prothonotary and Senior Master shall foreclose the fixed deposit and pay over the amount including interest to Petitioner. The statement of Mr. Mistri on instructions that Petitioner shall pay the entire income tax on the interest earned in the Financial Year in which the amount is received is accepted as an undertaking to this Court. Petitioner will, of course, be entitled to credit of any TDS that the bank would have deducted and also to the TDS that Respondents had deducted while depositing the amounts with the Prothonotary and Senior Master, High Court, Bombay as per the figures mentioned above in the same financial year when the tax is being paid. Petitioner statement on instructions that if there is any claim made by DAVY or Kvaerner, its successor-in-interest, Petitioner will indemnify and keep indemnified the Department harmless including legal fees, if any, is accepted as an undertaking to this Court. Issues Involved:1. Taxability of technical services rendered outside India.2. Entitlement to refund of withholding tax deposited.3. Compliance with High Court's previous order.4. Legal provisions and amendments relevant to refund claims.Summary:Issue 1: Taxability of Technical Services Rendered Outside IndiaThe petitioner entered into a Foreign Technical Collaboration Agreement with DAVY to set up a Gas-based Sponge Iron Plant in India. DAVY agreed to render engineering and other related services outside India, providing necessary design, drawing, data, and training to the petitioner's employees outside India. The petitioner paid DAVY a sum of US $16,231,000 net of Indian Income-tax, if any, leviable. The Assistant Commissioner of Income Tax (ACIT) initially held that the amount payable to DAVY was taxable as income in India, requiring the petitioner to deduct tax at source. However, DAVY declared nil income for the consideration received, arguing that the income neither accrues nor is received in India and hence is not chargeable to tax in India. The High Court eventually held that the income received by DAVY from the petitioner under the agreement was not correct and directed fresh assessment orders excluding the income received by DAVY by way of fees for technical services from the petitioner.Issue 2: Entitlement to Refund of Withholding Tax DepositedThe petitioner sought a refund of the withholding tax deposited under protest, arguing that since the payment made to DAVY was held non-chargeable to tax, the petitioner was entitled to the refund. Despite DAVY's successor-in-interest, Kvaerner U.S. Inc., giving a 'no objection' to the petitioner receiving the refund, the ACIT refused to give effect to the High Court's order, holding that the petitioner was not entitled to the refund as the tax was deposited on behalf of DAVY.Issue 3: Compliance with High Court's Previous OrderThe High Court directed the Income Tax Department to pass fresh assessment orders excluding the income received by DAVY for providing technical services to the petitioner and to refund the amounts deducted at source if required. The Department complied by depositing the refundable amounts with the Prothonotary and Senior Master, High Court, Bombay.Issue 4: Legal Provisions and Amendments Relevant to Refund ClaimsSection 248 of the Income Tax Act was amended by the Finance Bill 2007 to provide that where the tax deductible on any income is to be borne by the person by whom the income is payable, and such person claims that no tax was required to be deducted, he may appeal for a declaration that no tax was deductible. The High Court recognized that the petitioner had always maintained that the technical services were rendered outside India and the fees paid outside India, thus not taxable in India. The refusal of the Department to return the amount was deemed unauthorized by law, amounting to unjust enrichment. The Court directed the Prothonotary and Senior Master to foreclose the fixed deposit and pay over the amount including interest to the petitioner, with the petitioner undertaking to pay the entire income tax on the interest earned in the financial year in which the amount is received and to indemnify the Department against any claims by DAVY or Kvaerner.Conclusion:The High Court ruled in favor of the petitioner, directing the refund of the withholding tax deposited under protest, recognizing the petitioner's entitlement based on the non-taxability of the technical services rendered outside India. The Court emphasized compliance with legal provisions and amendments, ensuring that only legitimate taxes are collected.