Mahindra & Mahindra vs. DCIT (ITAT Mumbai Special Bench)

No TDS Liability on payer beyond 6 years & if payee not assessed

Where the assessee floated a GDR issue and made payments to the foreign lead manager by way of management and underwriting commission etc and the AO took the view that the said payments was chargeable to tax in the hands of the recipient u/s 9 (1)(vii) as “fees for technical services” and that the assessee ought to have deducted tax thereon u/s 195 and on account of its failure to do so was liable to be treated as an “assessee in default” u/s 201 and the question arose whether the said order u/s 201, having been passed after the expiry of four years from the end of the relevant financial year, was barred by limitation, in the absence of any provision in the Act HELD:

(a) The argument that s. 201(1) (pre amendment by the FA 2008 w.r.e.f 1.6.2002) applies only where there is a failure to deposit the deducted tax and not where there is a failure to deduct tax and that it is only after the amendment that a failure to deduct tax is covered is not acceptable as the amendment is clarificatory of the legislative intent;

(b) Though s. 201 (1) does not impose any time limit for the initiation of proceedings or the passing of an order, a reasonable time limit would have to be read in as otherwise the authorities would have an indefinite period to take action and the sword of uncertainty would hang forever over an assessee;

(c) A ‘reasonable period’ would have to be determined bearing in mind the fact that an order u/s 201 is to be treated as akin to an assessment order and that it is dependent on the outcome of the assessment of the payee. Accordingly, the maximum time limit for initiating and completing proceedings u/s 201 (1) has to be on par with the time limit for initiating and completing reassessment proceedings u/s 147;

(d) Accordingly, following the time limits imposed by s. 149, s. 201 proceedings should be initiated within six years from the end of the relevant assessment year if the income by virtue of sums paid without deduction of tax at source by the payer chargeable to tax in the hands of the payee is equal to or more than one lakh rupees. If such amount is less than Rs. 1 lakh then the proceedings must be initiated within four years from the end of the relevant assessment year. By the same logic the proceedings u/s 201 (1) must be completed by passing an order within one year from the end of the financial year in which proceedings u/s 201(1) were initiated. These time limits apply to s. 201 (1A) as well;

(e) Though the Delhi High Court has held in CIT vs. NHK 305 ITR 137 that the period of four years was a reasonable period, the same is not binding as it is of a non-jurisdictional High Court and also because there is no unanimity on the subject amongst the Courts;

(f) The underlying principle behind tax deduction at source is the presumption that the amounts paid are chargeable to tax in the hands of the payee. In order to treat the payer as an assessee in default, it is of utmost importance that the sums paid are capable of being brought within the purview of the tax net and an assessment can lawfully be made on the payee. On facts, as no assessment was made on the payee and as the time limit for making an assessment u/s 147 had expired, the order u/s 201 (1) / 201 (1A) passed on the payer was invalid;

(g) “Payment” to or crediting the account of non-resident u/s 195( 1) also covers retention of the amount by non-resident where only net amount is remitted to the Indian party;

(h) Fees for technical services u/s 9(1)(vii) read with Expl 2 covers management commission and selling-commission allowed to the non-resident in respect of the GDR issue. Underwriting commission does not fall within the definition of ‘fees for technical services’ u/s. 9(1)(vii). Reimbursement of expenses is not income;

(i) The term “make available” in Art. 13 of the DTAA means to provide something to one which is capable of use by the other. Such use may he for once only or on a continuous basis. However, if the non-resident uses all the technical services at his end then though the benefit of that directly and solely flows to the payer of the services, the services cannot be said to have been “made available” to the payer.