2001 (8) TMI 282 - AT - Income Tax

ITAT Rules on TDS Liability: Income Credited vs. Accrued

The ITAT ruled in favor of the assessee, emphasizing that tax deduction at source liability arises when income is credited to the payee's account or upon ... Deduction Of Tax At Source Issues:Interpretation of section 195 of the Income-tax Act regarding tax deduction at source liability on franchise fees paid to a foreign company.Analysis:The judgment revolves around the interpretation of section 195 of the Income-tax Act concerning the tax deduction at source liability on franchise fees paid to a foreign company. The assessee, a company owning a hotel, had entered into a franchise agreement with a French company for the use of their trade name and services. The Assessing Officer observed discrepancies in the payment of franchise fees and concluded that tax is deductible at the time the income accrues to the foreign company, irrespective of the accounting method employed by the tax deductor. The CIT(A) upheld the Assessing Officer's action, leading to the appeal before the ITAT.The key issue for adjudication was determining when the tax deduction at source liability crystallizes under section 195. The ITAT emphasized that tax deduction at source is not equivalent to the final determination of tax liability in the hands of the recipient. The judgment clarified that the tax deductor's liability arises at the time of crediting the income to the payee's account or at the time of payment, whichever is earlier, as per the plain language of section 195. The ITAT rejected the revenue's argument that taxability crystallizes at the time of income accruing to the foreign company, emphasizing the importance of following the statutory provisions.The ITAT highlighted that the judicial precedents cited by the authorities focused on taxability in the hands of the foreign company and were not relevant to determining the point of time for TDS liability under section 195. The judgment emphasized that TDS liability arises only when the income is credited to the payee's account or upon actual payment, rejecting the notion that mere accrual of income to the foreign company triggers the tax deductor's liability. Consequently, the ITAT canceled the impugned orders, deeming them contrary to the Act's scheme, and remanded the matter to the Assessing Officer for fresh orders in compliance with the law and after providing a hearing to the assessee tax deductor.In conclusion, the ITAT allowed the assessee's appeals for statistical purposes, highlighting the importance of adhering to the provisions of section 195 for determining tax deduction at source liability on payments to foreign entities.