Delhi HC rules on interest liability under Section 234B

15th November, 2013

Reinforcing, perhaps, the significance of finer distinctions in fact situations and observing that tax laws have to be interpreted at times with a touch of equity, the Delhi High court in DIT –I v. Alcatel Lucent held that interest under Section 234 B of Income Tax Act was payable by the assessee, since tax was payable and neither payment had been made nor TDS deducted.

Admitting liability, shifting burden of compliance

The assesses had filed return declaring ‘nil’ income under protest, on the strength of the India-USA DTAA, being of the view that sale of goods (telecom equipment) outside India could not be subject to tax in India. The department opined that the assessee had a PE in India, part of the proceeds were taxable in India, advance tax was payable and since no payment had been made, interest under Section 234 B was also to be paid.    

The assessee at the appellate stage did not dispute its tax liability but contended that tax should have been deducted by the Indian purchaser of the goods. Further it was entitled as a non-resident assessee to take credit of ‘tax deductible’ and once this was done, no tax liability remained and hence no liability for interest ensued.

The decision in Jacab’s case

The assessee relied on Delhi high court in Director of Income Tax  v. Jacabs Civil Incorporated and Mitsubishi Corporation : (2010) 330 ITR 578. In that case it was held that no liability for interest devolved on the assessee when the person responsible under Section 195 should have deducted TDS but failed to do so. Also, the non-resident assessee had admitted tax liability in the return and could take credit of tax deductible.        

Mitsubishi  ruling not agreed with

In Mitsubishi, the facts were similar to the present case wherein the assessee initially resisted but then agreed on taxability. The court had then, held that the ratio of Jacab’s would apply and granted relief to the assessee. In the present judgement, the court observed that this was ‘inaccurate’.

Department takes umbrage at vacillating stands

The department contended, with force, that assessee cannot choose to deny and accept liability and that ‘the assessee would have told the Indian payer that no tax should be deducted from the remittance’.        

Tribunal’s duty to consider probabilities        

Although there was no direct evidence that in fact, the assessee had asked/forced the Indian payer not to deduct TDS, the court opined that it can be reasonably presumed this would be consistent with the assessee’s stand that it was not liable to tax.  It observed that the ITAT should have accorded due weightage to such probabilities.                   

Strict interpretation of statute and principle of equity

Once the assessee accepted liability, all consequences would follow. Though a strict interpretation was pressed for by the assessee in that, the Indian payer ought to have ascertained his duty to deduct tax, the court held that it would be inequitable to allow the assessee to admit liability but shift the burden of tax.