2025 (10) TMI 86 - AT - Income Tax

Agent of foreign principal entitled to full Form 26AS TDS credit under s.199(3) and rule 37BA; reassignment optional

ITAT MUMBAI held that the appellant, an agent of a foreign principal, was entitled to claim TDS credit for the entire amount as reflected in Form 26AS ... TDS Credit - TDS belong to the foreign shipping - Appellant being the agent of Foreign Principal - Short Grant of credit for TDS of the entire amount as appearing in form 26AS - credit has been proportionately allowed as per intimation order issued u/s 143(1) - CIT(A) was of the view that the assessee ought to have got the TDS Certificates issued in the name of the foreign shipping line by filing the necessary declarations with the persons responsible for deducting the TDS. HELD THAT:- As gone through the Section 199(3) of the Act which enables the CBDT to make such rules for the purposes of giving such credit including the rules for grant of such credit to a person other than that referred to in sub section (1) and sub section (2) thereof. Pursuant thereto, rule 37BA of the Rules has been notified by the CBDT. According to sub-rule (1) thereof, such credit for TDS has to be allowed to the person to whom payment has been made or credit has been given on the basis of information relating to deduction of tax furnished by the deductor to the Income-tax authority. As in the present case, such information is contained in Form 26AS which is also according to the said rule, thus the assessee should be allowed credit in respect of the entire amount of TDS as reflected in such Form. Although Sub-rule (2) of Rule 37BA enables the recipient of income to file a declaration with the deductor to the effect that such TDS may be reflected in the name of the other person. But this enabling provision is not mandatory. However, if the necessary requirement in the Rule is fulfilled, then, the deductor has to reflect the TDS in the name of the other person in which event the said person would get credit in respect of such TDS. Otherwise, TDS credit has to be allowed to the person from whose payment such TDS has been deducted. As in the present case on account of business expediency, the assessee could not have divulged this information with the importers/exporters/ freight forwarders. In any event of the matter, the assessee has also ensured that the foreign shipping line has deposited due taxes on the payment made by it to the non-resident shipping line. It also understands that, the said non-resident shipping line is complying with the obligations under the Act including filing of its return of income in India. A copy of the acknowledgement for filing of return of income by the foreign shipping line for A.Y 2023-24 has also been annexed for the purpose of reference. Moreover it is not the case of the Revenue that the assessee has not offered the correct income to tax as well as there is no qualification by its Auditor in the audit report. Thus, Allow the balance tax credit in respect to TDS accordingly grounds raised by the assessee stands allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether credit for tax deducted at source (TDS) appearing in Form 26AS is to be granted to the person in whose Form 26AS the deduction is reflected, notwithstanding that part of the receipts represented amounts collected on behalf of a foreign principal and thereafter transferred to that principal. 2. Whether Rule 37BA(2) (and the declaration mechanism therein) is mandatory to permit grant of TDS credit to a person other than the deductee/payee reflected in Form 26AS, or whether Rule 37BA(1) permits credit to be given on the basis of the information furnished by the deductor to the Income-tax authority (Form 26AS) when the declaration-route is not followed. 3. Whether proportionate adjustment of TDS credit under intimation under section 143(1) is permissible where receipts offered to tax in the return are less than receipts shown in Form 26AS, and whether such adjustment without appreciable opportunity contravenes the proviso to section 143(1)(a). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Grant of TDS credit to the person reflected in Form 26AS despite receipts being partly on account of amounts collected for a foreign principal Legal framework: Section 199(1) treats tax deducted in accordance with Chapter XVII as payment of tax on behalf of the person from whom deduction was made. Section 199(3) empowers Central Board of Direct Taxes (CBDT) to prescribe rules for giving credit, including to a person other than the payee. Rule 37BA prescribes the mechanism for credit on the basis of information furnished by the deductor to the Income-tax authority and for declarations by the deductee to reflect credit in another person's name. Precedent treatment: The Court relied on a line of authorities where TDS credit was allowed to the person in whose Form 26AS the deduction appeared or where amounts were passed through/collected on behalf of another (cases concerning pass-through structures, agent/principal arrangements and back-to-back transactions). Those authorities were followed as analogous to the facts before the Tribunal. Interpretation and reasoning: The Court interpreted Rule 37BA(1) as recognizing Form 26AS (information furnished by the deductor) as the basis for allowing credit to the person to whom payment was made or credit was given. Where the deductor reports the deduction under the assessee's PAN and the TDS appears in the assessee's Form 26AS, the assessee is prima facie entitled to the credit, even though a component of the receipts was ultimately payable to a foreign principal and treated in accounts as balance-sheet items. The business model (agent retaining commission and remitting principal's share) and audited accounts reflecting the treatment, without audit qualification, support entitlement to credit. The fact of foreign residency of the principal does not alter the application of these principles where the deductor has in fact deducted tax on amounts reflected under the assessee's PAN and the tax has been deposited. Ratio vs. Obiter: Ratio - where TDS is deducted on payments made/credited to an assessee and is reflected in that assessee's Form 26AS, credit must be allowed to that assessee unless dislodged by contrary statutory compliance under Rule 37BA(2). Obiter - observations on commercial confidentiality reasons for not bifurcating invoices vis-à-vis customers are explanatory of factual context. Conclusion: Credit for the full TDS reflected in Form 26AS is to be allowed to the person in whose Form 26AS the deduction appears when the deduction was made on payments to that person and the tax deposited, even though portions of the receipts were amounts collected on behalf of a foreign principal and subsequently transferred. Issue 2 - Mandatory nature of Rule 37BA(2) declaration-mechanism versus Rule 37BA(1) reliance on Form 26AS Legal framework: Rule 37BA contains two relevant sub-rules: (1) recognition of information furnished by the deductor to the Income-tax authority as the basis for credit, and (2) a procedure enabling a recipient to file a declaration with the deductor to reflect TDS in the name of another person. Precedent treatment: The Tribunal followed judicial pronouncements that have construed the declaration mechanism as an enabling provision and not a mandatory pre-condition for granting credit to the person in whose name the deduction appears in the deductor's information returns/Form 26AS. Interpretation and reasoning: The Tribunal held that Rule 37BA(2) is permissive: where the declaration-procedure is complied with, the deductor must reflect the TDS in the name of the other person; however, failure to comply with the declaration-route does not preclude credit being allowed to the person whose PAN appears in the deductor's report under Rule 37BA(1). The CBDT's rulemaking power under section 199(3) contemplates both methods; sub-rule (1) operates independently to allow credit on the basis of deductor's furnishing of particulars. Hence the declaration route is not a mandatory prerequisite to deny credit to the deductee in whose Form 26AS tax appears. Ratio vs. Obiter: Ratio - Rule 37BA(2) is an enabling provision and does not oust the operation of Rule 37BA(1); credit is to be allowed on the basis of deductor's reporting under Rule 37BA(1) where that is the factual position. Obiter - policy reasons for Rule 37BA(2) (to permit reallocation of credit) are noted but not determinative here. Conclusion: The declaration mechanism under Rule 37BA(2) is not a mandatory pre-condition for granting TDS credit to the person in whose Form 26AS the deduction is shown; Rule 37BA(1) suffices to permit credit where the deductor's information supports it. Issue 3 - Proportionate allowance of TDS credit under intimation u/s 143(1) and requirement of opportunity under first proviso to section 143(1)(a) Legal framework: Section 143(1) intimation may reflect adjustments made during processing of return; the first proviso to section 143(1)(a) requires that adjustments of income be made after giving the assessee opportunity to furnish a return or explanation as prescribed. Precedent treatment: The Tribunal considered the statutory intimation practice of proportionate allowance of credit where receipts offered in the return are lower than receipts shown in Form 26AS and noted prior authorities allowing credit where factual and accounting treatment warranted full credit. Interpretation and reasoning: The intimation had proportionately allowed TDS credit corresponding to receipts offered to tax by the assessee (i.e., credit reduced because return declared lower receipts than Form 26AS). The Tribunal examined the accounting treatment: the assessee declared gross receipts and treated principal's share as balance-sheet items; audited accounts accepted that treatment. In that factual matrix, proportionate disallowance was not appropriate; the assessee had made submissions (including an e-filing reply to a notice under section 139(9)) contesting defect treatment and had not been shown to have been denied reasonable opportunity to rebut adjustments under the proviso to section 143(1)(a). The Tribunal therefore allowed the balance credit of TDS of Rs. 95,799. Ratio vs. Obiter: Ratio - where Form 26AS reflects TDS on payments credited to an assessee and the assessee's audited accounts and filings support treatment of amounts as agent collections (balance-sheet items), the Assessing Officer's proportionate reduction of TDS credit under section 143(1) is not justified without adequate statutory compliance for reallocation or denial; opportunity provisions must be respected. Obiter - remarks on merits of various revenue submissions regarding residency of the principal are explanatory and not determinative. Conclusion: The proportionate reduction of TDS credit under the intimation was set aside; the assessee was entitled to the balance TDS credit shown in Form 26AS and the balance amount was allowed. Cross-references and dispositive conclusion Cross-reference: Issues 1 and 2 are interlinked - allowance of credit under Rule 37BA(1) depends on deductor's reporting (Form 26AS) and is distinct from the reallocation mechanism under Rule 37BA(2). Issue 3 pertains to implementation of credit in the intimation process under section 143(1) and the need to respect opportunity requirements. Dispositive conclusion: The Court allowed the balance TDS credit reflected in Form 26AS (Rs. 95,799) and held that credit must be granted to the person in whose Form 26AS the deduction is reflected under Rule 37BA(1), that Rule 37BA(2) is enabling and not mandatory to defeat that entitlement, and that proportionate reduction in the section 143(1) intimation was inappropriate on the facts where audited accounts and filings supported the assessee's position and no valid statutory denial was established.