Facts of the Case

The present batch of appeals was filed by Agence France Press, a non-resident company engaged in the business of distribution of news. The Revenue sought to tax the assessee in relation to its activities in India. During the assessment proceedings, the levy of interest under Section 234B of the Income Tax Act, 1961 was upheld by the Income Tax Appellate Tribunal (ITAT).

The ITAT relied upon the judgment of the Delhi High Court in Director of Income Tax, International Taxation vs Alcatel Lucent USA Inc., wherein interest liability under Section 234B had been upheld.

The assessee challenged the levy of interest before the Delhi High Court.

Issues Involved

  1. Whether a non-resident assessee is liable to pay interest under Section 234B of the Income Tax Act where the payer had an obligation to deduct tax at source under Section 195?
  2. Whether failure of the payer to deduct tax at source can result in fastening interest liability on the non-resident payee?

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee contended that being a non-resident, the statutory obligation to deduct tax was on the payer under Section 195.
  • Since tax was deductible at source by the payer, there could be no liability to pay advance tax by the assessee.
  • Consequently, no interest under Section 234B could be levied.
  • Reliance was placed upon the earlier Delhi High Court ruling in DIT vs Jacabs Civil Inc. (330 ITR 578) and later affirmed reasoning in DIT vs GE Packaged Power Inc.

Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue argued that ITAT rightly relied upon Alcatel Lucent USA Inc.
  • It was contended that the assessee had income chargeable to tax in India and therefore interest under Section 234B was correctly leviable.
  • Revenue maintained that non-payment of advance tax attracts Section 234B irrespective of TDS obligations.

Court Order / Findings

The Delhi High Court held in favour of the assessee and against the Revenue.

The Court observed that the issue had already been settled in Director of Income Tax vs GE Packaged Power Inc., wherein it was categorically held that:

  • The primary obligation to deduct tax from payments made to a non-resident lies upon the payer under Section 195.
  • If the payer fails to deduct tax, the Revenue has remedy under Section 201 by treating the payer as an assessee-in-default.
  • Such failure cannot shift the burden of interest under Section 234B upon the non-resident payee.

The Court clarified that Jacabs Civil Inc. governs such situations and Alcatel Lucent was confined to its peculiar facts.

Accordingly, the substantial question of law was answered in favour of the assessee and the appeals were allowed.

 

Important Clarification

This judgment reinforces the settled legal principle that where tax is deductible at source under Section 195 from payments made to a non-resident:

  • Liability for deduction rests on the payer
  • Failure of deduction does not create advance tax liability upon the payee
  • Consequently, Section 234B interest cannot be levied upon the non-resident assessee

Sections Involved

  • Section 234B – Interest for default in payment of advance tax
  • Section 195 – Deduction of tax at source on payments to non-residents
  • Section 201 – Consequences of failure to deduct or pay TDS
  • Section 4 – Charge of income tax
  • Section 5 – Scope of total income
  • Section 9 – Income deemed to accrue or arise in India
  • Section 90 & 91 – Double taxation relief provisions

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:2752-DB/RKG23032015ITA2222015.pdf

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