TaxTMI 
TaxTMI 
2015 (6) TMI 323
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....peals had to be filed in respect of the action of the revenue in levying interest on tax not paid u/s.201(1A) of the Act. Hence the Assessee has filed appeals being ITA Nos.1588 to 1591/Bang/2012 which relate to challenge to levy of interest u/s.201(1A) of the Act. ITA Nos. 749 to 752/Bang/2012 are treated as appeals filed challenging the order passed u/s.201(1) of the Act. 2. The Assessee is a wholly owned subsidiary of IBM World Trade Corporation, US ("IBM WTC"). The Assessee follows the mercantile system of Accounting. The Assessee makes provision for certain expenses in its books of accounts. As per the global group accounting policy, each of the entity of IBM group worldwide has to quantify its expenses every quarter, within 3 days of the end of every quarter. In respect of expenses for which invoices have been submitted or the payments have become due in respect of the expenses, the same are accounted for and if Tax Deduction at source (TDS) is found to be applicable on these expenses, the same is accounted for. However, in respect of expenses in respect of which only service/work has been provided/performed by the vendors, but for which the invoices have not been furnishe....
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.... F.Y. 2006-07 Particulars Amount Section Percentage Amt to be deducted Interest Commission 8823629 194H 5.65% 498535 358945 Subcontracting 1334844862 194C 1.13% 15083746 10860297 Professional & Consultancy 71477952 194J 5.65% 4038504 2907723 Advt & Marketing 21641814 194C 1.13% 244552 176077 Recruitment 46079329 194C 2.26% 1041392 749802 Repair & Maintenance 4420775 194C 2.26% 99909 71934 General Exp. - Education Exp. 92581732 194C 2.26% 2092347 1506489 Rent 174993369 194I 22.66% 39653497 28550518 Other Expenses 16154003 194C 2.26% 365080 262857 Foreign payments 1134433077 195 10% 1344330 967917 TOTAL 2905450542 64461892 46412559 FY 2007-08 Particulars Amount Section Percentage Amt to be deducted Interest Commission 233671617 194H 5.65% 13202446 7921467 Subcontracting 479760513 194C 1.13% 5421293 3252776 Professional & Consultancy 127571394 194J 5.65% 7207783 4324....
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....the same shall not be allowed as deduction while computing "Income from Business". The relevant statutory provisions read as follows: "Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of any assessee- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under subsection (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescri....
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....s deduction. 8. Another consequence, apart from disallowance of the relevant amount while computing income from business, is that the Assessee is liable to proceeded against u/s.201(1) & 201(1A) of the Act. Under Sec.201(1) if the person responsible for paying to a non-resident or non-resident, any income chargeable to tax under the Act, fails to deduct tax at source, then he can be considered as an Assessee in default in respect of the tax payable on such income. Under Sec.201(1A) such person is also liable to pay interest on such tax from the date on which it ought to have been paid till the time it is actually paid to the credit of the Government. According to the AO, the Assessee was therefore liable to treated as Assessee in default and was also liable to pay interest on tax payable. "Consequences of failure to deduct or pay. 201. (1) If any such person referred to in section 200] and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct the whole or any part of the tax] or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other c....
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.... though under the relevant provisions of law in Chapter XVII-B of the act there was obligation to deduct tax at source even when the amount is credited to a "Suspense Account", there should be legal liability to pay and the payee should be known and only then the obligation to deduct tax at source arises. The Assessee also submitted that the provision entries are reversed in the subsequent financial year(s) and necessary taxes are withheld at source at the time of actual payment (when legal liability to pay arises and the identity of the party is known). 11. The Assessee relied on CBDT Circular No.3/2010 dated 2.3.2010. The above circular was issued in the context of the provisions of Sec.194A of the Act dealing with TDS obligation at the time of credit of interest income to the account of the payee and in response to representations received from Indian Banks Association (IBA) seeking clarification regarding deduction of tax at source from payment of interest on time deposits by banks using Core-Branch Banking Solutions (CBS) Software. In case of banks using CBS software, interest payable on time deposit is calculated generally on daily basis or monthly basis and is swept and p....
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....the depositor's / payee's account. Therefore, the Page 2 of 2 Explanation is not meant to apply in cases of banks where credit is made to provisioning account on daily/monthly basis for the purposes of macro monitoring only by the use of CBS software. 4. In view of the above position, it is clarified that since no constructive credit to the depositor's / payee's account takes place while calculating interest on time deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest by banks for the purposes of macro monitoring only. In such cases, tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals as per practice of the bank or as per the depositor's / payee's requirement or on maturity or on encashment of time deposits; whichever event takes place earlier; whenever the aggregate of amounts of interest income credited or paid or likely to be credited or paid during the financial year by the banks exceeds the limits specified in section 194A. (emphasis supplied) 12. The Assessee therefore submitted that withholding tax prov....
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.... is no claim of expenses as the same is added back U/s 40(a)(ia), treating of such disallowance as a provision towards contingent liability cannot be ruled out. The details of the TDS made on such provisions made at the end of the year is also provided by the assessee on sample basis, contending that the number of entries are huge and hence cannot be provided in full within limited period. The complexity of the accounting aspect followed by the assessee gives rise to the non-verification of the deductions claimed under the Income Tax Act. 15. The AO called for details of payment of TDS but the Assessee could not produce the same. In the circumstances, the AO treated the Assessee as an Assessee in default in respect of taxes not deducted at source in respect of Provision for expenses made in the books of accounts and also levied consequent interest on taxes not paid to the credit of the Central Government. 16. Before CIT(A), the Assessee explained the manner in which Provision was created in the books and how the same was reversed and actual expenses booked in the profit and loss account and the point of time at which TDS is made and paid to the Government. Before CIT(A), the ....
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..../- 06-12-2007 - Rs. 40,50,902/- It was further clarified that at the time of making the year-end provisions, the same was being disallowed by the appellant in the computation statements and suffered tax in the year in which the disallowance was made. However, in the subsequent year, the earlier year-end provisions were reversed by crediting the same to the profit and loss account (implying an income) as and when actual expenses (vendor liability) were booked. TDS was done at the time of actual expense booking. At the time of reversing the provisions in the subsequent year, these provisions were credited to the P & L A/c and the profit for the subsequent year was inflated to that extent. When the actual expenses were booked (i.e. the vendor liability), the same was debited to the P & L A/c, it was pointed out that any short/excess provisions would therefore automatically get adjusted in the P&L A/c. In the Return of Income, the disallowance (made in the earlier year) was claimed as an allowance separately owing to the TDS having been done in that year and consequently there was no double deduction claimed in the above process. According to the Assessee, if the act....
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...., it was stated that if the monthly expenditure was constant, then a provision of same amount would be made for the last accounting month. Further, if there was a progressive increase in the amount of expenditure on a month-on-month basis or year-on-year basis, the same progression percentage was considered for accounting the provision. Thus, according to the appellant, a scientific method was being followed to arrive at the provision amounts. However, since there was an element of estimation involved, the provisions did not partake the nature of a liability payable to the vendors (at the time of making the provisions), the same could not be considered as income in the hands of the vendors. Accordingly, the appellant concluded that the provisions of tax deduction at source ("TDS") were not applicable. In this context, the appellant was directed to furnish instances of expenses incurred on a recurring basis, instances of past years data relied upon as well as a write-up on constant expenses suitably backed by corroborative evidence. None of the above particulars were provided at any point of time during appellate proceedings. 3.3.2 As for the consolidated Provision A/c called for....
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.... Therefore, having remitted the TDS amount in FY 07-08, the TDS demand should not arise and should be deleted. 3.3.3 A consolidated CA's certificate dt. 29-02-2012 for the aforementioned years (viz., AYs 2006-07 to AY 2009-10) was furnished along with the appellant's letter dt. 08-03-2012 in r/o a review conducted to ascertain compliance in r/o tax deducted at source ("TDS") as appropriate in the immediately succeeding financial years on such expenses. The CA certified that the procedures performed solely for the said financial years was carried out in the immediately succeeding financial year in r/o "Sub-contracting" and "Commission" expenses only. Its first step was to examine whether the expense provision accruals made (which were disallowed u/s 40(a)(ia) of the Act) were reconciled with the subsequent vendor payments made against these provisions. The matching exercise was done based on certain factors such as description and period of services mentioned in the vendor invoices. In the second step, all the payments for the services pertaining to prior year (indentified in Step 1 above) were traced into the electronically filed Tax Deduction at Source ("TDS") ....
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....ppeals before the Tribunal. 23. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assessee at the outset brought to our notice that pending disposal of the appeals, the Assessee had furnished before the AO, details regarding the actual payment of TDS in subsequent financial year, on the provisions made in the various financial years. These details were verified by the AO. The AO has addressed a letter to the DR in which the AO after verification has found that the Assessee had deducted tax at source at the time when the provision made in one financial year is subsequently reversed and the expense booked in the subsequent financial year. The following are the contents of the said letter (copy filed by DR in Court), in so far as it relates to taxes deductible at source. "3. During the course of appellate proceedings before the Hon'ble ITAT the assessee company took the same plea that it had deducted tax at source in the subsequent year on all the amounts that was disallowed u/s. 40a(i) and 40a(ia) as and when these amounts were paid. The Hon'ble ITAT therefore directed that such details be produced befo....
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....account." (emphasis supplied) 24. In view of the above, the demand on account of tax u/s.201(1) of the Act, in our view, will no longer survive. However the appeals will survive with regard to the liability of the Assessee to interest u/s.201(1A) of the Act. Therefore the appeals in so far as it relates to challenge to order u/s.201(1) of the Act have to be allowed. 25. As far as the question whether the TDS provisions are attracted when the Assessee makes a provision for expenditure in the books of accounts, the learned counsel for the Assessee made submissions which are identical to submissions made before the AO/CIT(A). His submissions were:- 1. When payee is not identified there can be no charge u/s.4(1) of the Act and therefore there can be no obligation to deduct tax at source. 2. The returns of TDS to be filed under the Income Tax Rules, 1962 contemplates furnishing of names of payees. 3. Judicial decisions recognise that there can be no TDS obligation in the absence of payee. 4. If there is no income chargeable to tax in the hands of the payee, there can be no TDS obligation. TDS obligations arise only when there is "Income". TDS obligations do not aris....
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....judicial forums based on those circular are all not relevant as the same are relevant only in the case of Banks and cannot be pressed into service in other cases such as the case of the Assessee. 27. We have carefully considered the rival submissions. Provisions of Sec.40 of the Act start with a non obstante clause and provides that, "Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession".Sec.40(a)(i) and 40(a)(ia) of the Act lists of certain items of expenditure and categories payees as "Residents" "Non-Residents". In respect of the items of such expenditure there if there is an obligation to deduct tax at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, than the expenditure cannot be claimed as a deduction. Sec.200(1) appears in Chapter XVII-B of the Act and it provides that any person deducting any sum in accordance with the foregoing provisions of this Chapter i.e., Chapter XVII-B shall pay within the prescribed time, the sum so deducted to the credit ....
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....e", in Sec.194-J Explanation (c) when payment made is Fees for Technical or Professional Service and Sec.195 Expln.-1 when payment is made to non-resident. The reason for introduction of provisions such as Sec.194(2) of the Act has been explained in CBDT circular No.550 dated 1.1.1990 as follows: "26.3 Under the existing provisions of section 193 of the Incometax Act, tax has to be deducted at source by the person responsible for making any payment in the nature of interest on securities at the time of payment. The liability to deduct tax at source was being postponed by making a provision for such payment. In order to prevent the postponement of liability to deduct tax and payment to the credit of the Central Government, the Finance Act has provided that tax will be deducted at source either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier. For this purpose, credit to any suspense account or any other account, by whatever name called, shall be deemed to be a credit of such income to the account of the payee." (emphasis supplied) 30. It is thus clear from the statutory provisions that the liability to tax at source e....
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....s tax paid by the payee only on assessment in the hands of the payee. Sec.195 however uses the expression "Chargeable to Tax". In the present case, it is not the case of the Assessee that payments made to non-residents are not chargeable to tax nor has the Assessee been able to demonstrate as to how payment made to non-resident is not chargeable to tax. The Assessee is a person making payment and the simple obligation cast upon him is to deduct a sum specified by the Act from and out of the payment and remit to the credit of the Central Government. The person making payment after deduction of tax at source gets a valid discharge in law for the entire amount paid. 33. As rightly contended by the learned DR, the CBDT Circular No.30/2010 is a specific circular applicable in the case of Banks and issued under peculiar circumstances. The Assessee cannot take shelter under the said Circular. 34. The argument that TDS provisions operate on income and not on payment, in the facts and circumstances of the present case, is erroneous. As we have already seen Sec.194C, 194J and 195, which are the sections applicable in the present case, does not use the expression, "Income". The above se....
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....case the Assessee's claim that there was no accrual of liability, as we have already seen is not correct. 36. The next decision on which the learned counsel for the Assessee placed reliance was that of the ITAT Pune Bench in the case of DCIT Vs. Yeota Merchants Co-op.Bank Ltd., ITA No.805/PN/2011 for AY 07-08 order dated 31.8.2012. In the aforesaid case Provision for audit fees was disallowed u/s.40(a)(ia) of the Act for non-deduction of tax at source u/s.194J of the Act. The audit fee in question was payable to auditors who are appointed by the Co-operative Department, after the end of the relevant previous year. The Tribunal found that such audit fee was a statutory liability payable as per the provisions of the law of State of Maharashtra applicable for State Co-operative Societies. It was therefore held that there was neither accrual of liability nor was the payee known and therefore TDS provisions were not implemented due to peculiar situation and therefore the disallowance u/s.40(a)(ia) of the Act was deleted. In the present case, as we have already seen, there is nothing to show that there was no accrual of liability nor was there any statutory liability that existed.....
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....ion the question was whether the difference between the Maximum Retail Price (MRP) and the price at which prepaid cards used in cellular phones are sold to a dealer is commission on which Bharati Airtel Ltd., had to deduct tax at source u/s.194-H of the Act. The Hon'ble Karnataka High Court in para-63 observed that where existence of income in the hands of the payee is absent there can be no TDS obligation. The learned counsel for the Assessee has placed reliance on the above observation. In our view the question before the Court was different and the issue with which we are concerned in the present appeals was never under consideration by the Hon'ble High Court. It is possible to pick words from a decision and use it out of context. 39. In the case of UCO Bank Vs. Union of India & others W.P.(C) 3563/2012 dated 11.11.2014, the question before the Hon'ble Delhi High Court was as to whether the Bank in which deposits are kept by the Registrar General of Delhi High Court pursuant to orders of court, should deduct tax at source u/s.194A of the Act. The Hon'ble Court held that Registrar General was neither the payee nor recipient of income and that the funds kept in ....