We Have Heard The Counsels And Also Considered Theimpugned Order And The Appeal Memo v. Deputycommissioner Of Income-Tax, Tds Range 1(1), Mumbai[1] That Asper The Explanation To Section 191 Of The Act, Two Conditions Haveto Be Cumulatively Satisfie

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL (IT) NO. 745 OF 2018 The Commissioner of Income Tax (IT) - 4 … Appellant VersusM/s. Red Hat India Pvt. Ltd. … Respondent Ms. Swapna Gokhale for Appellant. Ms. Fereshte Sethna a/w Mr. Mrunal Parekh and Mr. Abhishek Tilak i/b DMD Advocates for Respondent. CORAMK. R. SHRIRAM &DR. N. K. GOKHALE, JJ.DATED:6[th] September 2023 P.C. : 1.Appellant has proposed eight substantial questions of law in the appeal memo, but Ms. Gokhale at the outset stated that theRevenue is only pressing for two of these eight viz. : a)Whether on facts and circumstances of the caseand in law, ITAT was correct in holding that the orderpassed under Section 201(1) within time in case ofresident prayer had become invalid just becausesubsequently there was no assessment made in thehands of the non-resident payee within 6 years, withoutappreciating that there was no law mandating thepassing of assessment order in hands of non-residentpayee also within 6 years to validate an order alreadypassed under Section 201(1) ? b)Whether on facts and circumstances of the caseand in law, ITAT was correct in relying upon the decisionof special bench decision in case of Mahindra &Mahindra, without appreciating that the questionwhether passing of assessment order in the hands of thenon-resident payee was mandatory to uphold thevalidity of the order under Section 201(1) alreadypassed within permitted time in case of payer assessee, was never under consideration before the special bench(supra) ? 2.Assessee (M/s. Red Hat India Pvt. Ltd.) during the yearunder consideration, i.e., Assessment Year 2008-2009 had madeforeign remittance to Red Hat Asia Pacific Pte Ltd., Singaporewithout deducting tax at source. The reason for non-deduction oftax at source under Section 195 of the Income Tax Act, 1961 (“theAct”) was that payment for purchase of subscription is not taxableas per the provisions of Article 7 read with Article 5 of the IndiaSingapore Double Taxation Avoidance Agreement (“DTAA”). 3.The Assessing Officer (“AO”)held that the impugnedsubscription fees liable to be taxed as ‘ royalty’ within the meaningof Section 9(1)(vi) of the Act as well as Article 12(3) under theDTAA and also taxable as ‘fee of technical services’ within themeaning of Section 9(1)(vi) of the Act as well as Article 12(4)(a)and Article 12(4)(b) of the DTAA. Accordingly, assessee wastreated as an ‘assessee-in-default’ under Section 201(1) of the Actand the order under Section 201(1) and Section 201(1A) forAssessment Years 2008-2009 and 2007-2008 came to be passed. 4.Against this order, assessee preferred an Appeal before theCommissioner of Income Tax (Appeals) (“CIT(A)”). The CIT(A) by an order dated 29[th] November 2013 partly allowed assessee'sAppeal. Aggrieved by the aforesaid order of CIT(A), assessee filedan Appeal before the Income Tax Appellate Tribunal (“ITAT”),which allowed the Appeal by the impugned order dated 24[th] March2017. 5.We have heard the counsels and also considered theimpugned order and the appeal memo. 6.It was the case of assessee before the ITAT that assessee wasnot an assessee-in-default in respect of the payments made to RedHat Asia Pacific Pte Ltd., Singapore and therefore, assessee can notbe saddled with the tax liability under Section 201(1) of the Actand interest thereon under Section 201(1A) of the Act. It was thecase of assessee, relying upon the decision of Special Bench of theITAT, Mumbai in the case of Mahindra & Mahindra Ltd. v. DeputyCommissioner of Income-tax, TDS Range 1(1), Mumbai[1] that asper the explanation to Section 191 of the Act, two conditions haveto be cumulatively satisfied, i.e., (a) failure on the part of person to perform his obligation of making TDS and obligation of making TDS and (b) non-payment of tax by the payee/recipient directly. directly. 6.It was the case of assessee before the ITAT that assessee wasnot an assessee-in-default in respect of the payments made to RedHat Asia Pacific Pte Ltd., Singapore and therefore, assessee can notbe saddled with the tax liability under Section 201(1) of the Actand interest thereon under Section 201(1A) of the Act. It was thecase of assessee, relying upon the decision of Special Bench of theITAT, Mumbai in the case of Mahindra & Mahindra Ltd. v. DeputyCommissioner of Income-tax, TDS Range 1(1), Mumbai[1] that asper the explanation to Section 191 of the Act, two conditions haveto be cumulatively satisfied, i.e., (a) failure on the part of person to perform his obligation of making TDS and obligation of making TDS and (b) non-payment of tax by the payee/recipient directly. directly. If both these conditions are satisfied only then a person canbe treated as an assessee-in-default. If only one condition issatisfied, the person can not be treated as an assessee-in-default. 7.It was the case of assessee that there was no liability of RedHat Asia Pacific Pte Ltd., Singapore to pay any tax in India andtherefore, one of the twin conditions have not been made. In fact,as recorded by the ITAT, it is admitted by AO in his letter dated 21[st]March 2017 that no assessment in this regard has been made inrespect of the tax liability of payee/recipient, Red Hat Asia PacificPte Ltd., Singapore for Assessment Years 2007-2008, 2008-2009and onwards. 8.Paragraph 18.10 of the Special Bench in Mahindra &Mahindra (Supra) which has been quoted in the impugned order,reads as under : “The underlying principle behind the deduction of tax at source isthe presumption that there will be some liability of the payeetowards tax on the sum paid to him. If there is no such liabilitythen the entire exercise of firstly getting the amount of taxcollected/deducted at source and then refunding to the payee willbe futile. If there is no tax liability of the payee then there cannotbe any question of treating the person responsible for paying thesum without deducting tax at source as assessee in default. Thusthe essence of the provisions of deduction of tax at source is thatthe presumption that there will be some liability of the payeetowards tax on the sum paid to him. If there is no such liabilitythen the entire exercise of firstly getting the amount of taxcollected/deducted at source and then refunding to the payee willbe futile. If there is no tax liability of the payee then there cannotbe any question of treating the person responsible for paying thesum without deducting tax at source as assessee in default. Thusthe essence of the provisions of deduction of tax at source is that there is a presumption of liability of the payee to tax on theincome.As discussed in an earlier para that if there is no or lowerliability of the payee to tax on the income so received withoutdeduction of tax at source, then the payer cannot be treated asassessee in default for the whole or that part of the amount, as thecase may be. It is therefore clear that though the duty of deductionof tax at source was there at the time of making the payment orcrediting the account of the payee, but its failure will not lead toadverse consequences by treating the person paying the income asassessee in default if eventually either the payee is not liable to taxon such sum or he has already paid the tax due on the amount ofincome so received. Thus the question of treating the personresponsible for paying the income as assessee in default by way ofpassing the order under section 201(1) is, inter alia, tied with thetax liability of the payee on such sum. If no liability of the payee totax exists at the time when order under section 201(1) is sought tobe passed or though the income is chargeable to tax but theliability of the payee to tax has not been determined by passing anyorder in his hands and further the time-limit for taking action onthe payee under any other provision has also passed out, in such asituation again the passing of order under section 201(1) will bemere ritual. It is so because the tax now collected from the payer ofincome under this order will be incapable of adjustment againstthe tax liability of the payee either existing or likely to arise on theincome so paid to him because in the former case there is no taxliability and in the latter case, such a liability cannot be created asthe time-limit for taking action having been run out. Like in anaction of search under section 132 or other relevant proceedingsunder the Act if it comes to the notice of the Department that anyincome chargeable to tax has escaped assessment, the proceedingsare launched against such person and notice is issued undersection 148 within the time prescribed under section 149. Thepresent outer limit provided in section 149 is six years from theend of the relevant assessment year within which a notice undersection 148 can be issued. If the income so found to have beenearned by the assessee and escaped taxation falls within a periodof six years from the end of the relevant assessment year, noticeunder section 148 will be issued and the assessment shall beframed by taxing such income. If however during such proceedingsit is conclusively established that the assessee had earned incomenot disclosed to the Revenue in period prior to the said six yearsfrom the end of the relevant assessment year, then such incomewill escape taxation unless it falls within section 69 or 69A or 69Bor 69C and the Revenue will be restrained from recovering tax bymaking the assessment of such income. The logic behind providingsuch time-limit for taking action is that the DepartmentalAuthorities should remain vigilant and bring the escaped income totax at an earlier point of time and further to work against theinaction on the part of the Assessing Officers on one hand andproviding certainty to the assessee that after this period no actionwill be taken against him. Thus it follows that if due to one reasonor the other the concealed income of the assessee is unearthed for a period beyond six years from the end of the relevant assessmentyear, then no tax can be recovered thereon. By the same logic andturning to the point before us when the payee has paid the tax byoffering such income for taxation on which tax was deductible butnot deducted, then the person responsible cannot be treated asassessee in default under section 201(1). In the like manner wherethe payee has not offered such income for taxation and there is noremedy available with the Assessing Officer for taxing such incomein the hands of the payee, i.e., the time-limit for taking actionagainst the payee under any possible provision of the Act hasexpired, then also the payee cannot be charged on such income norresultantly the person responsible for paying the income can betreated as assessee in default. We have seen above that the-provisions for deduction of tax at source presuppose the taxabilityof the sum paid in the hands of the payee and the tax so deductedis finally adjusted against the tax liability of the payee. If tax iscollected by way of order under section 201(1) from the personresponsible failing in his duty to deduct or paying after deductionof tax at source, but such amount cannot be adjusted against thetax liability of the payee, then this collection of tax would beillegal. The CBDT vide its Circular No. 7 of 2007 dated 23-10-2007has accepted in para 4 that 'where income has accrued but no taxis due on that income or tax is due at a lesser rate, the amountdeposited to the credit of Government to that extent under section195, cannot be said to be "tax".' From here it follows that unlessthere is a tax liability capable of being lawfully created andrecovered from the deductee, the amount of tax collected by wayof deduction of tax at source cannot be characterized as the "tax".In the same Circular, it has been directed that in such cases therefund should be made to the person making payment undersection 195, that is the payer. So if tax is recovered in the firstinstance from the person responsible for paying by virtue of orderunder section 201(1) but the income cannot be taxed in the handsof the non-resident either due to such income accruing but no taxremaining due thereon or tax not leviable due to the time-limit fortaking action under any provisions of the Act having been expired,in such a situation, the amount of tax shall need to be refunded tothe person liable to deduct tax who is for the time beingconsidered as assessee in default. We, therefore, hold that in orderto treat the payer as assessee in default it is of the utmostimportance that the income so paid or credited to the account ofpayee is capable of being brought within the purview of tax net”and such assessment can be lawfully made on the payee. (emphasis supplied) 9.An Appeal against the Special Bench’s order was dismissed by this Court. We would add, the law laid down by the SpecialBench of ITAT on this issue has our approval. Considering thePage 6 of 7 GITALAXMIKRISHNAKOTAWADEKAR Digitally signed byGITALAXMI KRISHNAKOTAWADEKARDate: 2023.09.1114:56:22 +0545 provisions of Section 201 of the Act, one thing, therefore, iscertain, in order to treat the payer as an assessee-in-default, it is ofutmost importance that income so paid or credited to the accountof payee is capable of being brought within the purview of tax netand such assessment can be lawfully made on the payee. The ITATalso came to the conclusion that assessment should be lawfullymade by AO on the payee/recipient. Since that has not been done,the order of AO under Section 201(1) read with Section 201(1A)of the Act was unsustainable. 10.We are unable to fault this conclusion arrived at by the ITAT. 11.Appeal dismissed. (DR. N. K. GOKHALE, J.) (K. R. SHRIRAM, J.)