2024 (3) TMI 712 - AT - Income Tax

Tribunal Orders Verification of Section 195(3) Certificate; Potential Tax Deduction Relief for Foreign Remittances.

FSL Projects Limited, (formerly Frontline Soft Limited) Hyderabad Versus DCIT, Circle-14 (3), TDS, Hyderabad

FSL Projects Limited, (formerly Frontline Soft Limited) Hyderabad Versus DCIT, Circle-14 (3), TDS, Hyderabad - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether a certificate issued under section 195(3) of the Income Tax Act, 1961, granting exemption in respect of remittances made to a non-resident, if found genuine on verification, relieves the payer (assessee) from liability to deduct tax at source in respect of those remittances. 2. Whether, where tax was not deducted at source and the Assessing Officer treated the payer as an assessee-in-default under section 201(1) and charged interest under section 201(1A), a subsequently-obtained or existing exemption certificate under section 195(3) can nullify the consequences of the section 201(1)/201(1A) order. 3. Whether the Assessing Officer is obliged to verify the genuineness and contents of a section 195(3) certificate produced in the record and, on verification, to give effect to the exemption so certified. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Effect of a genuine section 195(3) certificate on payer's TDS liability Legal framework: Section 195(3) permits issuance of a certificate by the appropriate income-tax authority exempting a recipient non-resident from deduction of tax at source in respect of specified remittances. Sections 195 and 9(1)(vi)/(vii) govern TDS obligations on payments to non-residents; section 201(1) makes the payer an assessee-in-default for failure to deduct. Precedent Treatment: The Tribunal followed the direction of the jurisdictional High Court which examined the paper book and identified a section 195(3) certificate; a Coordinate Bench of the Tribunal had earlier directed verification of the certificate and held that, if genuine, remittances would be non-taxable for TDS purposes. Interpretation and reasoning: The Court accepted that if the certificate issued under section 195(3) is genuine and its contents are correct, the legal consequence is that the remittances so covered are non-taxable insofar as TDS is concerned. The reasoning is that the statutory grant of exemption by the competent authority operates to remove the TDS obligation on the payer in respect of those remittances. Ratio vs. Obiter: Ratio - A genuine section 195(3) certificate, when verified and accepted, extinguishes the payer's obligation to deduct tax at source in respect of the remittances covered by the certificate. Conclusions: The Tribunal directed verification of the certificate and held that, upon a finding of genuineness, the remittances would be non-taxable for TDS purposes and the payer would not be liable to deduction in respect thereof. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Effect of a section 195(3) certificate on assessment as assessee-in-default under section 201(1) and interest under section 201(1A) Legal framework: Section 201(1) treats a person who fails to deduct tax as an assessee-in-default; section 201(1A) permits levy of interest. A statutory exemption under section 195(3) can alter the foundational obligation to deduct. Precedent Treatment: The Tribunal followed the High Court's observation that acceptance of the section 195(3) certificate would render the Revenue's action in deducting (or treating non-deduction as default) per se bad. A Coordinate Bench previously applied that consequence. Interpretation and reasoning: The Court reasoned that if, upon verification, the exemption certificate is genuine and applicable, the legal basis for classifying the payer as an assessee-in-default collapses because there was no obligation to deduct in respect of those payments. Accordingly, interest charged under section 201(1A) in respect of the same cannot stand. Ratio vs. Obiter: Ratio - The existence and genuineness of a section 195(3) exemption in respect of specified remittances negate the legal foundation for holding the payer liable under section 201(1) and for charging interest under section 201(1A) in respect of those remittances. Conclusions: The Tribunal directed that, if the certificate is found genuine, the impugned order under section 201(1A) will have 'no legs to stand' and the payer's liability under section 201(1) / interest under section 201(1A) should be set aside insofar as the remittances covered by the certificate are concerned. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Duty to verify certificate and procedural consequences Legal framework: Administrative fact-finding and verification by the Assessing Officer are integral to determining applicability of statutory exemptions; the Tribunal and the High Court can remand for verification of critical documentary evidence. Precedent Treatment: The High Court remitted the matter to the Tribunal for consideration of the contentions relating to the exemption certificate; a Coordinate Bench of the Tribunal directed the Assessing Officer to verify the certificate dated 10/02/2003. Interpretation and reasoning: The Tribunal emphasised that the Assessing Officer must cause verification of the certificate on record and determine whether the contents are correct and genuine. The consequence of such verification is determinative of the taxability/TDS obligations; verification is therefore a necessary precondition before sustaining any holding of assessee-in-default or interest liability. Ratio vs. Obiter: Ratio - The Assessing Officer is required to verify the genuineness and applicability of a section 195(3) certificate produced in the record; a verified and genuine certificate must be given effect to in framing the payer's TDS/section 201 liability. Conclusions: The Tribunal directed the Assessing Officer to verify the certificate and, if found genuine, to apply the legal consequences mandated by the certificate (i.e., no TDS liability and no section 201(1)/201(1A) consequences in respect of remittances covered). The Tribunal followed the High Court's direction in this regard. Cross-references and overall disposition The Tribunal expressly followed the High Court's observations and the Coordinate Bench's prior direction to verify the section 195(3) certificate; implementation of the verification finding is dispositive of both the TDS obligation (Issue 1) and the assessee-in-default/interest consequences (Issue 2). The appeal was allowed subject to the outcome of the directed verification.