Thursday, April 6, 2017

No Sec. 195 TDS on crediting income to payee when it is taxable on receipt basis under treaty: ITAT

Facts:-

a) The assessee was liable to make royalty payment, to Saira Europe SPA, Italy. Liability was duly accounted for in the books of account, though payment was made a bit later.

b) Assessing Officer (AO) raised demand on the assessee by treating the due date for depositing tax deductible at source as being 7 days from the end of the month in which amount was credited in the books of account.

c) Assessee contended before AO that as per article 12(3) of India Italy DTAA, royalty payment was taxable only at the point of time when it was actually paid and not at the point of time of credit. AO, on the contrary rejected the contention of assessee.

d) On appeal, CIT(A) upheld order of AO. Aggrieved-assessee filed instant appeal before tribunal:-

Tribunal held in favour of assessee as under:-

1) It is only elementary that the TDS liability under Section 195 is a vicarious liability in the sense that it's survival in the hands of tax-deductor is wholly dependent on existence of tax liability in the hands of recipient of income.

2) When a credit or a payment made by an Indian resident to a non-resident does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all.

3) The provisions of Section 195 are to be read in conjunction with the charging provisions under the statue, as also in conjunction with the relevant double taxation avoidance agreements which override these charging provisions.

4) Section 195(1) states that any person responsible for paying to a non-resident any sum chargeable under the provisions of this Act, shall, at the time of credit of such income to the account of the payee or at the time of payment deduct tax at source.

5) As per Article 13 of India-Italy DTAA, the term "royalties" means payments of any kind “received”. Therefore, royalty payment was not liable to be taxed at the point of time when account of the non-resident was credited, in view of the fact that under the related DTAA, tax liability can only arise at the point of a subsequent event, i.e., payment.

6) Since, income embedded in the payment was not taxable at that point of time of crediting the amount, there could not be any occasion for deduction of withholding of the tax on such income. – [2017] 79 taxmann.com 460 (Ahmedabad - Trib.)
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