ITO vs. M/s Prasad Production (ITAT Chennai Special Bench)

S. 195 (1) TDS obligation does not arise if the payment is not chargeable to tax. Samsung Electronics not followed

The assessee made a remittance to IMAX Canada towards technology transfer fee without deduction of tax at source. The AO took the view that the consideration was “fees for technical services” u/s 9 (1)(vii) and that tax ought to have been deducted at source as per Transmission Corporation 239 ITR 587 (SC). He accordingly held the assessee to be an “assessee-in-default” u/s 201 though the CIT(A) reversed the same. On appeal by the revenue, the question as to whether a person responsible for making payment to a non-resident was liable to deduct tax at source u/s 195 (1) if he did not apply to the AO u/s 195 (2) for permission to remit without deduction at source was referred to the Special Bench. HELD by the Special Bench:

(i) The effect of the judgements of the Supreme Court in Transmission Corporation and Eli Lilly 312 ITR 225 is that s. 195 (1) applies only if the payment made to the non-resident is chargeable to tax. If the payer has a bona fide belief that no part of the payment has income character, s. 195 (1) will not apply and it is not necessary to apply to the AO u/s 195 (2). This interpretation is supported by the Circulars of the CBDT setting out the alternative procedure for TDS;

(ii) As regards Samsung Electronics 320 ITR 209 (Kar) (which held that s. 195 / 201 liability cannot be avoided on ground of non-taxability of recipient), a judgement of a non-jurisdictional High Court need not be followed where there are conflicting High Court judgements or where the judgement is rendered per incuriam (Kanel Oil 121 ITD 596 (Ahd)) or where the correct legal position was not brought to the notice of the High Court (Lalsons Enterprises 89 ITD 25 (Del) (SB). Apart from the judicial conflict, the alternative TDS procedure as per the CBDT Circulars was not brought to the attention of the High Court. Consequently, the judgement of the Special Bench in Mahindra & Mahindra 313 ITR 263 (AT)(Mum) (which held that s. 195 (1) did not apply if the payment was not chargeable to tax) has to be followed in preference to that of Samsung Electronics;

(iii) As regards the merits, though the question framed is general and there is no specific direction in the order of reference, the Special Bench, the entire appeal is open before the Special Bench and it is not confined to the question framed (NTPC 24 ITD 1 (SB) followed);

(iv) On merits, as the services rendered by the payee were auxiliary to the sale of equipment, the consideration was not chargeable to tax in India.