Facts of the Case

The respondent assessee, M/s Babcock Power (Overseas Projects) Ltd., a non-resident company incorporated in the United Kingdom, had established a project office in India during Assessment Years 1987-88 to 1989-90 for execution of a coal-based thermal power plant project.

For execution of the project, the assessee engaged foreign technicians who were deputed to work in India. These employees remained on the payroll of the UK office, and their salaries were paid abroad in foreign currency into their overseas bank accounts. The employment contracts were approved by the Ministry of Mines for purposes of Section 10(6) of the Income-tax Act.

The assessee did not deduct tax at source under Section 192 on the salaries paid to such foreign technicians on the belief that tax deduction provisions were not applicable. However, the Assessing Officer held the assessee liable for non-deduction of TDS and levied interest under Section 201(1A) of the Act.

Issues Involved

  1. Whether the assessee was liable to deduct tax at source under Section 192 on salaries paid to foreign technicians working in India.
  2. Whether interest under Section 201(1A) could continue to be levied even after the concerned employees had already paid taxes through advance tax or self-assessment tax.
  3. Whether the Tribunal was correct in directing recomputation of interest by considering taxes already paid by the employees.

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The assessee had failed to deduct tax at source under Section 192 on salary payments made to foreign technicians deputed in India.
  • Interest under Section 201(1A) was mandatory and payable for the default committed by the assessee.
  • The Tribunal erred in limiting the period for levy of interest only up to the date on which employees paid advance tax or self-assessment tax.
  • The Assessing Officer was justified in charging interest for the entire period till the order under Section 201(1A).

Respondent’s Arguments (Assessee)

The assessee submitted that:

  • Section 192 was not applicable because both the assessee and foreign technicians were non-residents, salaries were paid outside India, and employment contracts were executed abroad.
  • The assessee acted under a bona fide belief based on legal opinion and judicial precedents, including the Supreme Court judgment in Electronic Corporation of India vs Commissioner of Income Tax.
  • Since the foreign employees had already paid taxes through advance tax and self-assessment tax, no further interest could be levied beyond those dates.
  • Interest under Section 201(1A) could only run up to the actual date of payment of tax by the employees.

Court Findings / Court Order

The Delhi High Court upheld the order of the Tribunal and dismissed the Revenue’s appeal.

The Court observed that the issue was already covered by an earlier judgment involving the same assessee in ITA No. 82/2000. The Court reiterated that interest under Section 201(1A) is mandatory in nature and compensatory, not penal. However, once the employees themselves had paid taxes through advance tax or self-assessment tax, the employer’s liability for interest could survive only up to the date of such payment.

The Court approved the Tribunal’s direction to recompute interest from the first day of April following the relevant financial year till the actual date of tax payment by the employees. No further interest was payable thereafter.

Accordingly, the substantial question of law was answered against the Revenue and in favour of the assessee. The appeal was dismissed without costs.

Important Clarification

The judgment clarifies that:

  • Interest under Section 201(1A) is mandatory and compensatory in nature.
  • However, where the employee/payee has already discharged tax liability through advance tax or self-assessment tax, the deductor cannot be saddled with interest beyond the date of such payment.
  • The liability of the deductor is restricted only to the period during which tax remained unpaid to the Government.
  • The decision follows earlier Delhi High Court rulings in:
    • CIT vs ITC Ltd.
    • CIT TDS vs American Express Bank Ltd.
    • CIT vs Adidas India Marketing Pvt. Ltd.
    • CIT vs Trans Bharat Aviation Pvt. Ltd.

Sections Involved

  • Section 192 of the Income-tax Act, 1961
  • Section 201(1) of the Income-tax Act, 1961
  • Section 201(1A) of the Income-tax Act, 1961
  • Section 260A of the Income-tax Act, 1961
  • Section 10(6) of the Income-tax Act, 1961

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:4432-DB/VKR05092014ITA1782002.pdf

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