TaxTMI 
TaxTMI 
TaxTMI 
2015 (9) TMI 507
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....ktiebolaget L.M. Ericsson, Sweden (hereafter 'TLME') in the books of the Assessee. The said amount was credited on account of royalty payable; however, the said entry was subsequently reversed, as according to the Assessee, the payment of royalty to TLME was not permissible as per the Industrial policy in force at the material time. Admittedly, no part of the amount in question was ever paid by the Assessee to TLME. According to the Revenue, the fact that such amount had been credited in the books by the Assessee, itself gave rise to an obligation for the Assessee to deduct TAS on such amount as the same represented the accrual of income. This is stoutly disputed by the Assessee. The Assessee contends that in the given facts, no income chargeable to tax accrued in the hands of TLME and, consequently, there was no default on the part of the Assessee to not deduct TAS. 3. The present appeal was admitted and this Court framed the following questions of law on 1st February, 2005:- "1. Whether the Tribunal was right in law in holding that the agreement dated 1.1.1997 between the assessee and M/s. L.M. Ericsson, Sweden for payment of royalty is contrary to public policy and void under....
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....of the amount credited to the account of TLME. On 9th October, 1998, a survey under Section 133A of the Act was conducted on the premises of the Assessee and it was noted that the Assessee had not deducted TAS in respect of the aforementioned amount credited to the account of TLME maintained by the Assessee in its books. 6.3 Subsequently, on 17th December, 1998, the Assessee reversed the entries passed in its books of accounts by debiting the account of TLME and crediting Royalty Account; the entries passed earlier were, thus, nullified. 6.4 The AO passed an order dated 2nd March, 2000 under Section 201(1) of the Act holding that the Assessee had defaulted in deducting TAS on the amount of royalty credited by the Assessee to the account of TLME. According to the AO, TAS was deductable at the rate of 48% and, therefore, the Assessee was obliged to deduct a sum of Rs. 1,07,98,401/ as TAS and deposit the same with the Income Tax Authorities. The Assessee's contention that no royalty was payable in terms of the prevalent industrial policy of the Government of India and, therefore, no income chargeable to tax under the Act accrued to TLME, was rejected. The AO also passed another orde....
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....essee. He relied upon the judgment of the Supreme Court in Transmission Corporation of AP Ltd. v. CIT, (1999) 239 ITR 587 in support of his contention. 8. Mr Madan had further contended that the issue whether the Agreement dated 1st January, 1997 was void or not, was not relevant. He urged that the payment of income tax is not contingent on the validity of agreements and even payments made under void agreements are chargeable to tax under the Act. 9. Countering the aforesaid contentions, Mr Syali, learned Senior Counsel appearing on behalf of the Assessee, contended that the arguments on behalf of the Revenue proceeded on an erroneous assumption that any payment on account of Royalty had been made to TLME. He submitted that the entries passed by the Assessee in its books of accounts had been reversed as the Assessee had been denied the permission to remit any royalty to its holding company. He submitted that at the material time, the industrial policy of the Government of India did not permit payment of royalty by a wholly owned subsidiary to its holding company. He referred to a letter dated 11th July, 2000 issued by the Government of India to the Assessee, clarifying the above ....
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....India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities, and salary) to a non- resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on that proportion of the sum which is so chargeable: (3) Subject to rules made under sub- section (5), any person entitled to receive any interest or other sum on which incometax has to be deducted under sub- section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that subsection, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under su....
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....e books of the payer, would be subject to withholding tax only if credit of such amount reflects accrued income in the hands of the payee, which is chargeable to tax under the Act. 13. The Supreme Court in the case of GE India Technology Centre P. Ltd. v. Commissioner of Income Tax and Another (2010) 327 ITR 456 (SC) explained the statutory scheme as under:- "One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of" any sum paid to any resident". Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of "any amount" referred to in the specified provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in section 195(1). Therefore, this court is required to give meani....
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....any sum "chargeable under the provisions of the Act", which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income-tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income-tax Act. 14. It is also necessary to understand that once tax has been deducted by any person, he has an obligation to deposit the same with the Income Tax Authorities. Such amount is treated by the Authorities as tax paid to the credit of the person whose account is credited. The payer ceases to have any control over the said amount deducted and deposited with the Income Tax Authorities and cannot seek refund of the TAS deducted and deposited with the Authorities. It is only the payee who can interact with the Income Tax Authorities (for the purposes of adjusting or seeking a refund) in respect of such amount deposited in its favour. 15. The rationale for imposing an obligation to deduct TAS on a credit entry being passed by a payer in favour of payee, is that such entry represents an acknowledgement of debt by a payer in fav....
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....period in question. There is also no allegation that this position asserted by the Assessee is not bona fide; it is not the case of the Revenue that nullifying the entries passed by the Assessee is a subterfuge to avoid any obligation. 19. The Assessee had provided an explanation for the reversal of entries relating to royalty in its books by referring to the industrial policy issued by the Government of India. The Guidelines issued by the Ministry of Industry (Department of Industrial Policy and Promotion) for considering Foreign Direct Investment (FDI) proposals by Foreign Investment Promotion Board (FIPB), inter alia, expressly provide as under:- "6. The Board should examine the following while considering proposals submitted to it for consideration. xxxx xxxx xxxx xxxx xxxx (ii) whether the proposal involves technical collaboration and if so (a) the source and nature of technology sought to be transferred, (b) terms of payment (payment of royalty by 100% subsidiaries is not permitted)." 20. By a letter dated 28th June, 2000 addressed to the Under Secretary, FIPB, the Assessee had also sought a clarification whether it could proceed to pay royalty payment to its holdi....
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....that the agreement dated 1st January, 1997 was not acted upon at the material time. In the absence of any income chargeable to tax arising on account of royalty in the hands of TLME at the material time, the question of withholding TAS would not arise. 24. In our view, reliance placed by the Revenue on the decision of Transmission Corporation of AP Ltd. (supra) is wholly misplaced. In that case, the Supreme Court had clarified that where payments of any amount(s) on account of trade payables (i.e. payments in the nature of Revenue) were made, the payer was obliged to deduct tax at the relevant rates on the entire amount paid and it was not open for the payer to deduct TAS at a lower amount on the ground that the income embedded in the payments made would be lower than the amounts paid. The Supreme Court had explained that it was not open for the payer to suo moto take a decision as to the quantum of income embedded in the payments and withhold tax accordingly. And, the question of the quantum of income embedded in the receipts would be determined, subsequently in the assessment proceedings with respect to the payee. The Supreme Court had also noted that in the case where the Asses....
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....aid to the Assessee and, thus, was not chargeable to tax. The Bombay High Court agreed with the Tribunal, however, certified the case as fit under Section 66A(2) of the Income Tax Act, 1961, to be considered by the Supreme Court. The Supreme Court referred to the earlier decision of the Bombay High Court in Commissioner of Income Tax v. Chamanlal Mangaldas & Co. (1956) 29 ITR 987, which was approved by the Supreme Court in Commissioner of Income Tax v. Chamanlal Mangaldas & Co. (1960) 39 ITR 8 and held as under: - ".....Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a "hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously nei....