S. 234B: A non-resident assessee which does not admit income chargeable to tax must be inferred to have induced the Indian payer not to deduct TDS and so it is liable for advance-tax interest

DIT vs. Alcatel Lucent USA Inc (Delhi High Court)

 

The assessee, a USA company, supplied telecom equipments to customers in India. It claimed that it did not have a PE in India and that the income was not chargeable to tax. The AO rejected the claim and attributed 2.5% of the sale proceeds of the hardware as profit attributable to the PE in India. He also levied interest u/s 234B for failure to pay advance-tax. Before the CIT(A), the assessee accepted that the income was chargeable to tax but argued, relying on Jacabs Civil Incorporated 330 ITR 578 (Del), that as it was a foreign company and the income was liable for TDS, it was not liable to pay advance-tax. The CIT(A) and Tribunal accepted the assessee’s contention. On appeal by the department to the High Court, HELD allowing the appeal:

(i) There is a distinction between a case where the assessee admits that it has income chargeable to tax in India but does not pay advance tax on the basis that the Indian payer ought to have deducted tax at source u/s 195. In such a case (as was the fact situation in Jacabs), the assessee is entitled to take credit for the tax which was “deductible” by the Indian payer while computing its advance tax liability even though no tax was in fact deducted. However, in a case where the assessee does not admit any income in the return, this benefit is not available. An inference or presumption can be drawn that the assessee had represented to its Indian telecom dealers not to deduct tax from the remittances made to it even though there is no positive or direct evidence to that effect;

(ii) The argument that the Indian parties should have discharged their TDS obligations u/s 195 despite the presumed request of the assessee is one of convenience or despair and not acceptable because in a practical view of the matter, the Indian payers could not have resisted the assessee’s request given future business prospects and the need to keep the assessee in good humour;

(iii) Also, having denied its tax liability and leading the Indian payers to believe that no tax was deductible it is inequitable& unfair on the assessee’s part to shift the responsibility to the Indian payers & expect them to deduct tax from the remittances. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided;

(iv) Also, applying equitable principles, as the assessee deprived the revenue of the advance tax, it must pay compensation by way of interest.

(Clarified that Mitsubishi Corporation, which was decided along with Jacabs, was also a case like that of the assessee and that it was mistakenly given relief)

Consider the impact of this verdict on Daimler Benz A.G 108 ITR 961 (Bom)(FB), Sedco Forex 264 ITR 320 (Utt), NGC Network 313 ITR 186 (Bom) & Madras Fertilisers 149 ITR 703 (Mad) where non-residents were held not liable to pay s. 234B interest on the basis that tax is “deductible” at source u/s 195 without any qualification