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Friday, 11 September 2015 15:44

Section 195, 201(1) TDS - Assessee not liable to TDS when entry is reversed in the books of accounts - Assessee is not in default - Delhi High Court Featured

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Gist

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, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.

Facts

1. Assessee is engaged in the business of installation and commissioning of telecom projects and information technology systems relating thereto

2. Assessee is a wholly owned subsidiary of TLME, which is a company incorporated under the laws of Sweden and has its principal place of business situated in Sweden

3. Assessee was incorporated in India pursuant to the approval granted by the Government of India, Ministry of Industry on 5th February, 1996

4. Assessee was obliged to pay royalty @1% of the total sales to TLME, for use of the trademark ‘Ericsson’

5. In order to account for the royalty payable under the aforesaid agreement, the Assessee passed an entry in the books of accounts
debiting ‘Royalty Account’ and crediting ‘Accrued Expenses Account’ for a sum of Rs.2,24,96,669/-

6. On 18th August, 1998, the Assessee passed another entry in its books transferring the credit balance standing in the Accrued Expenses Account to the account of TLME, thereby crediting TLME’s Account in the ledger maintained by the Assessee

7. The Assessee neither deducted nor paid any TDS in respect of the amount credited to the account

8. 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

9. 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

10. The AO passed an order dated 2nd March, 2000 under Section 201(1) of the Act holding that the Assessee had defaulted in deducting TDS on the amount of royalty credited by the Assessee

11. According to the AO, TDS was deductable at the rate of 48% and, therefore, the Assessee was obliged to deduct a sum of Rs.1,07,98,401/ as TDS and deposit the same with the Income Tax Authorities

12. 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

13. AO also passed another order dated 7th March, 2000 directing the Assessee to pay interest of Rs.39,14,420/- under Section 201(1) of the Act

14. According to the Indo-Sweden Double Taxation Avoidance Agreement, the withholding tax rates on royalty was specified as 20%

15. AO rectified the aforementioned order u/s 154 in view of the DTAA and recomputed the Assessee’s liability under Section 201(1) of the Act at Rs.44,99,334/- (being 20% of Rs.2,24,96,669/-). Consequently, the interest payable under Section 201(1A) was also recomputed at Rs.16,31,000/-

15. Assessee preferred appeals before the CIT(A) against the orders passed by the AO but was unsuccessful

16. Assessee moved to the Tribunal

17. Tribunal Tribunal upheld the contention of the Assessee and held that there was no accrual of income on account of Royalty in the hands of TLME, which resulted in an obligation on the part of the Assessee to deduct any TDS. Tribunal accepted the Assessee’s contention that its Agreement with TLME was void under Section 23 of the Contract Act, 1882 and did not result in any enforceable
debt in the hands of the TLME

18. Revenue moved to the High Court and following question of laws was framed -

" Whether the Tribunal was right in law in holding that the assessee was not liable to deduct TDS under Section 195 of the Income Tax Act, 1961 on 18.8.1998 when it credited a sum of Rs.2,24,96,669/- to the account of M/s. L.M. Ericsson on account of royalty?”

19. High Court after hearing both the parties decided the matter in favour of the Assessee

Adjudication

Citing Supreme Court judgement in the case of Chamanlal Mangaldas & Co. (1960) 39 ITR 8 : " 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 neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. This is exactly what has happened in this court. Here too, the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long term managing agency arrangement for the two companies which it had floated.”

Referring few other case laws Honb High Court held that " we are of the view that the Assessee was not obliged to deduct tax at source. Accordingly, the question of law is answered in favour of the Assessee and against the Revenue and the appeal is dismissed."

Cases referred to

GE India Technology Centre P. Ltd. v. CIT and Another (2010) 327 ITR 456

CIT, Bombay City I v. M/s Shoorji Vallabhdas & Co. 46 ITR 144

CIT v. Chamanlal Mangaldas & Co. (1956) 29 ITR 987

CIT v. Chamanlal Mangaldas & Co. (1960) 39 ITR 8 (Supreme Court)

Additional Info

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