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Non-resident taxpayer liable to pay interest for default in payment of advance tax
 

Non-resident taxpayer liable to pay interest for default in payment of advance tax

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Recently, the Delhi High Court (High Court) in the case of Alcatel Lucent USA Inc. (the taxpayer) held that a non-resident taxpayer is liable to pay interest under Section 234B of the Income-tax Act, ...

Recently, the Delhi High Court (High Court) in the case of Alcatel Lucent USA Inc. (the taxpayer) held that a non-resident taxpayer is liable to pay interest under Section 234B of the Income-tax Act, 1961 (the Act) for default in payment of advance tax, since the liability to pay tax in India was not admitted by non-resident taxpayer in its tax return and the Indian payers did not deduct tax on payments made to such non-resident taxpayer.

The High Court held that the taxpayer cannot take credit for tax while computing its advance tax liability, for the tax which was ‘deductible’, though not actually deducted. It was held that the payer did not deduct the tax under Section 195(1) of the Act because of the request made by the taxpayer, consistent with its stand that it was not liable to be taxed in India. Therefore, interest under Section 234B of the Act has to be levied on the non-resident taxpayer.

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    Non-resident taxpayer liable to pay interest for default in payment of advance tax Non-resident taxpayer liable to pay interest for default in payment of advance tax Document Transcript

    • KPMG FLASH NEWS KPMG IN INDIA Non-resident taxpayer liable to pay interest for default in payment of advance tax, since the tax liability was not admitted in its tax return and the Indian payers did not deduct tax 25 November 2013 Background Facts of the case Recently, the Delhi High Court (High Court) in the case of 1 Alcatel Lucent USA Inc. (the taxpayer) held that a nonresident taxpayer is liable to pay interest under Section 234B of the Income-tax Act, 1961 (the Act) for default in payment of advance tax, since the liability to pay tax in India was not admitted by non-resident taxpayer in its tax return and the Indian payers did not deduct tax on payments made to such non-resident taxpayer.  The taxpayer, a US company and a part of the Alcatel Lucent Group. The taxpayer was having a subsidiary in India, which provided marketing support services to the taxpayer. The High Court held that the taxpayer cannot take credit for tax while computing its advance tax liability, for the tax which was ‘deductible’, though not actually deducted. It was held that the payer did not deduct the tax under Section 195(1) of the Act because of the request made by the taxpayer, consistent with its stand that it was not liable to be taxed in India. Therefore, interest under Section 234B of the Act has to be levied on the non-resident taxpayer. _________________ 1 DIT v. Alcatel Lucent USA Inc. (ITA 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 & ITA 340/2012) and DIT v. Alcatel Lucent world Services Inc Taxsutra.com  The taxpayer was engaged in the business of supplying telecom equipments to customers in India. The payers (i.e. Indian customers) did not deduct tax while making payments to the taxpayer.  The income tax authorities conducted a survey in the premises of Indian subsidiary and the Assessing Officer (AO) concluded that the taxpayer was having Permanent Establishment (PE) in India under the India-USA tax treaty and attributed 2.5 percent of sale proceeds of the hardware as profit attributable to the PE in India. In addition to the aforesaid income, the AO also levied interest under Sections 234A, 234B and 234C of the Act. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
    •  Initially, before the tax authorities, the taxpayer denied any liability to pay tax in India. However, before the Commissioner of Income-tax (Appeals) [CIT(A)], it did not press the claim that it was not liable to tax in India. However, the taxpayer contented that it is not liable to pay interest under Section 234B of the Act.  The taxpayer claimed that it was not liable to pay interest under Section 234B of the Act, since the liability to deduct the tax on its income was on the payer. It was 2 claimed that as per Section 209(1)(d) of the Act, the taxpayer was entitled to take credit of tax which was ‘deductible’ while computing its liability for paying advance tax and if the amount of tax so ‘deductible’ by the payer in India is given credit, there was no advance tax payable by the taxpayer.  The CIT(A) and Income-tax Appellate Tribunal (the Tribunal) ruled in favour of the taxpayer. Issue before the High Court  Whether the taxpayer is liable to pay interest under Section 234B of the Act, when the tax was deductible at source, but not deducted by the payer? Taxpayer’s contentions  The liability of the payer to deduct tax is absolute and does not depend upon the stand taken by the nonresident taxpayer with regard to the question whether or not the amount remitted is liable to tax under the Act. In case the payer has any doubt about the taxability of the sum remitted to the non-resident taxpayer, it can make a tax withholding application under Section 195(2) of the Act.  If the payer fails to deduct the tax, his liability to make good the payment along with interest is governed by Section 201(1) and (1A) of the Act and this liability is absolute and exhaustive of the remedy available to the tax department.  Section 234B of the Act which levies interest for default in payment of advance tax is mutually exclusive of Section 201(1A) of the Act and they operate on different fact situations.  The proviso to Section 209(1) inserted by the Finance 3 Act, 2012 is applicable with effect from 1 April 2012 and would apply only from the Assessment Year 2012-13.  Relying on the decision of Jacabs it was contended that the interest charged under Section 234B of the Act needs to be deleted. 4  The payer should have acted strictly in accordance with Section 195(1) of the Act, even assuming that there was a request from the taxpayer that no tax was required to be deducted. Tax department’s contentions  The legal position that while computing its advance tax liability the non-resident taxpayer is entitled to take credit for the tax which was ‘deductible’ though not actually deducted within the meaning of Section 209(1)(d), is not applicable to the facts of the present case.  The facts of the present case were different from the facts of the case of Jacabs where the taxpayer admitted its tax liability on Indian income in the return filed by it and therefore, the payer was liable to deduct tax. Accordingly, in that case it was held that a non-resident taxpayer can claim credit for the same, even though the tax was not actually deducted, while computing its advance tax liability.  The expression ‘assessed tax’ provided in Section 215(5) of the Act is different from the expression ‘assessed tax’ provided in Section 234B of the Act. As per the Explanation to Section 234B of the Act, only the tax ‘actually deducted’ was to be deducted from the tax on the total income and if no tax was deducted, no such adjustment from the tax on the total income assessed is permissible.  Explanation to Section 234B of the Act overrides the provisions of Section 209(1)(d) of the Act and therefore, the benefit of reducing the tax on the estimated income by the tax which was ‘deductible’, but not actually deducted, was not available to the non-resident taxpayer.  When the taxpayer accepted its tax liability in India, it follows that it would also be liable to pay interest under Section 234B of the Act for failure to pay the advance tax. Such a consequence cannot be avoided, once the tax liability is admitted. __________________ 2 The amount of advance tax payable by the taxpayer in the financial year shall be reduced by the amount of income-tax which would be deductible at source during the said financial year…………..shall be the advance tax payable 3 The non-resident taxpayer can take credit only for the amount of tax actually deducted by the payer while computing his advance tax liability _______________ 4 DIT v. Jacabs Civil Incorporated and Mitsubishi Corporation [2010] 330 ITR 578 (Del) © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
    • High Court’s ruling  In the case of Jacabs, the taxpayer admitted taxable income in the income-tax return. However, in the present case, the taxpayer did not admit any taxable income in the income-tax return. Accordingly, the facts of the present case were different from the facts of the case of Jacabs.  It would be inappropriate to hold that even though the taxpayer did not admit any tax liability in India while filing the income-tax return and correspondingly the payers were also not liable to deduct tax under Section 195(1), still it can claim credit for the tax ‘deductible’, though tax was not deducted by the payers from the remittance made to the taxpayer.  The contention of the taxpayer that the liability of the payer under Section 201 of the Act is different from the liability of the non-resident taxpayer under Section 234B of the Act need not be examined, and in the present case it would not make any difference on account of the peculiar facts of the present case.  The taxpayer denied its tax liability in India while filing income-tax return and therefore, it can be inferred that the taxpayer would have asked its Indian payers not to deduct tax from the remittances made to it. If the taxpayer did not make such a representation, it would only be consistent with the taxpayer's stand regarding its tax liability in India. Therefore, even though there may not be any evidence to show that the taxpayer has made a representation to payers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed.  It was open to the taxpayer to deny its tax liability in India on whatever grounds it thinks fit and proper. Having denied its tax liability, it seems unfair on the part of the taxpayer to expect the Indian payers to deduct tax from the remittances.  The general rule is that equity has no place in the interpretation of tax laws. However, when the facts of a particular case justify it, it is open to the Court to invoke the principles of equity even in the interpretation of tax laws. The rule of strict interpretation may be relaxed where mischief can result because of the inconsistent or contradictory stands taken by the taxpayer or even the tax department.  Accordingly, the High Court held that the taxpayer was liable to pay interest under Section 234B of the Act. Our comments The controversy with respect to levy of interest to nonresident taxpayer on default in payment of advance tax is a matter of debate. It is pertinent to note the decision of the Uttaranchal High Court in the case of Sedco Forex International Drilling Co. 5 Ltd. wherein the High Court held that if short payment of advance tax is mainly because of a bona fide dispute regarding the interpretation of law, interest under Section 234B is not applicable. Subsequently, the Bombay High 6 Court in the case of NGC Network has followed the said decision and held that when a duty is cast on the payer to deduct and pay the tax at source, on payer’s failure to do so, no interest under Section 234B can be imposed on the payee. In the instant case, the High Court observed that when the Indian payers did not deduct tax because of the request made by the taxpayer, it is not open to the taxpayer, after accepting the tax liability in the appellate proceedings to claim that the Indian payers ought to have deducted the tax. Accordingly, all consequences under the Act would be applicable, including its liability to pay interest under Section 234B of the Act.  It was open to the taxpayer to change its stand at the first appellate stage and submit the assessment of income. When it does so, all consequences under the Act follow, including its liability to pay interest under Section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned.  The High Court observed that it would be inequitable that the taxpayer, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers. Once the liability to tax is accepted by the taxpayer, all consequences follow. ____________________ 5 6 Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal), DIT v. NGC Network Asia LLC [2009] 222 CTR 85 (Bom) © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
    • www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.