Facts of the Case

  • The respondent/assessee, Sumitomo Corporation (Japan), received advance payments for offshore supplies from Bhakra Beas Management Board (BBMB).
  • BBMB deducted TDS amounting to Rs. 1,94,55,135/- (including surcharge) before remitting the payment.
  • The net remittance was made in AY 2005-06.
  • The assessee claimed credit of the deducted TDS.
  • The Assessing Officer denied such credit under Section 199 during reassessment proceedings.
  • The Tribunal allowed the credit, holding that the income was not taxable in India.

 Issues Involved

  1. Whether TDS credit can be denied under Section 199 where the underlying income is not taxable in India.
  2. Whether deduction of tax under Section 195 is valid when offshore supplies do not give rise to income chargeable to tax in India.
  3. Whether the assessee is entitled to refund/credit of TDS deducted on advances for offshore supplies.

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that credit of TDS should not be granted under Section 199.
  • It was argued that credit is linked with assessability of income and should be allowed only in the relevant assessment year where income is taxable.
  • The Assessing Officer invoked Section 199 to deny such credit.

 Respondent’s Arguments (Assessee)

  • The assessee argued that offshore supplies were not taxable in India due to absence of Permanent Establishment (PE).
  • It was contended that once income is not chargeable to tax, denial of TDS credit is unjustified.
  • The deduction itself was incorrect as the earlier order under Section 195(2) was cancelled.
  • Hence, the assessee was entitled to refund/credit of TDS deducted.

 Court Findings / Order

  • The High Court upheld the Tribunal’s findings.
  • It was observed that:
    • No income accrued or arose in India from offshore supplies.
    • TDS deduction under Section 195 was not warranted.
    • Section 199 applies only where income is assessable to tax.
  • The Court held that:
    • Advances which are not income cannot be subjected to TDS.
    • Consequently, denial of TDS credit/refund is unsustainable.
  • The appeal was dismissed as no substantial question of law arose.

 Important Clarifications

  • TDS credit cannot be denied merely because income is not taxed in the same year.
  • If income itself is not taxable in India, TDS deduction becomes invalid.
  • Section 199 is applicable only where income is assessable.
  • Offshore supply transactions without PE in India are generally not taxable.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS15052023ITA2762023_195007.pdf

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