Taxation

Liability to Deduct TDS u/s 201 of IT Act is a Vicarious Liability

The ITAT Mumbai passed a judgement dated 9th November 2022 in the case titled ICICI Securities Limited versus Income Tax Officer, International Taxation wherein the appellant questioned the correctness of the order dated 19.04.22 which dealt with the tax withholding demands U/s 201 r/w 195 of the Income Tax Act, 1961, for the AY 2015-16. The present article will discuss the facts, issue, grounds of appeal, and the judgement pronounced in the case.

Facts of the Case

• The assessee was an Indian company registered as a stockbroker under SEBI.
• Ranbaxy Laboratories Ltd. raised funds by the way of issue of GDRs^[1], an acronym for Global Depository Receipts, which were issued by an overseas depository bank named The Bank of New York Mellon (BNY) that represented the shares of Ranbaxy Laboratories.
• The shares in Ranbaxy were held by the BYN through ICICI Bank, as ICICI Bank was the Indian custodian for the underlying shares of the company. 

• Afterwards, a notice was issued by BYN in respect of the GDR arrangement being terminated and notifying all the GDR holders to convert their GDRs into underlying shares of Ranbaxy. The bank also specified that the underlying shares of Ranbaxy shall be sold, and the payment of the sale receipts shall be made to the GDR holders in proportion to their holdings.
• Since the shares of Ranbaxy were held by ICICI Bank on behalf of BNY, the assessee, i.e. ICICI Bank, sold the shares, followed by sending the remittance to BNY bank.
• At the time of the assessment proceedings, the AO opined that the assessee had failed in deducting the TDS in respect of the remittances made to BNY on selling the equity shares of Ranbaxy as per sec 195 of the ITA 1961.
• According to the observation of the AO, even though BYN paid the taxes on the net consideration as received by the assessee on the sale of shares, the said payment was made as advance tax by the BYN, and the assessee should have made such payment as TDS.
• Therefore the AO raised a demand for withholding tax u/s 201 of the IT Act, inclusive of the interest in respect of the delay in payment u/s 201(1A), against ICICI Bank.
• The assessee preferred an appeal before the CIT (A) against the said order wherein it was held that Sec 201 doesn’t exempt the taxpayer from paying the TDS on the payment made to a non-resident, despite the fact that the non-resident paid advance tax and filed the ITR after considering the income earned or profit gained by it on the said transaction, thereby dismissing the appeal of the assessee.
• Upon being aggrieved by the sad dismissal, the assessee filed an appeal before the ITAT Mumbai (hereinafter referred to as the tribunal)

Issue of the Case

Is the Liability to Deduct TDS Under Section 201 of the Income Tax Act a Vicarious Liability?

Grounds of Appeal

The appeal was filed on the below-mentioned grounds.

• The CIT(A) hasn’t followed the prescribed procedure of Faceless Appeal Scheme 2021 while passing the along with not granting a personal hearing as requested by the appellant, making such an order to be illegal, null and void ab initio and hence must be quashed. 

• The CIT (A) didn’t have the jurisdiction to pass the order as the appeal arose from an order which had been passed by the international tax jurisdiction; therefore, the National Faceless Appeal Centre had no jurisdiction to hear and dispose off the said appeal.
• The CIT (A) didn’t adjudicate the ground of appeals that were raised by the appellant, stating that the AO passed the order in haste without giving the Appellant sufficient opportunity to put forth the submissions and without even granting a personal hearing, therefore the CIT (A) has violated the principles of natural justice, even after detailed submissions in support thereof were filed.
• The CIT (A) upheld the AO’s action by treating the appellant in default u/s 201(1) of the IT Act without appreciating that the appellant isn’t the “person responsible for paying” the consideration for the sale of shares to BYN according to sec- 204 of the IT Act, as it was merely a broker carrying out the instructions to sell the shares.
• The learned CIT(A) confirmed the action of AO of considering the appellant as an assessee in default u/s 201(1) of the IT Act, in spite of the fact that the payee had made the payment of tax on the sale transaction and, therefore, the appellant as a payer can’t be asked to make payment of the tax on the same transaction again. Along with this the CIT (A) also confirmed the AO’s action by considering the appellant as an assessee in default as per sec 201 of the IT Act despite the fact that reassessment proceedings were initiated for the purpose of assessing the payee for the AY 2015-16.
• CIT(A) hasn’t adjudicated the ground wherein the AO failed to appreciate that there was no need to withhold the TDS u/s 195; there is no income that must be taxed  from the sale consideration arising to BY Mellon on selling the shares through the recognized stock exchange as the short-term capital loss was incurred on the sale of said shares regarding the provision of sec- 49(2ABB) and thereby, the appellant can’t be held to be an assessee in default as per sec 201(1), even after filing detailed submissions in support of the same. 
• The CIT (A) has failed to adjudicate the ground of appeal raised by the Appellant where the AO didn’t appreciate that the appellant is held to be an assessee in default u/s 201(4) of the Act based on the alleged scores of subscribers of GDRs (non-residents) who weren’t able to avail tax benefit due to non-deduction of tax, even after filling detailed submissions in respect of the same. 
• The CIT (A) didn’t appreciate the fact of the non-applicability of provisions u/s 195A of the Act for computation of the amount liable for TDS on account of the absence of any agreement b/w appellant and BNY Mellon about the tax being borne by the appellant and, in fact, BNY Mellon directly paid the taxes due, even after detailed submissions in support of the same were filed.

• The learned CIT (A) confirmed the AO’s action in levying interest of Rs.44, 55, 51,676 u/s 201(1A) of the Act.
• The learned CIT (A) didn’t appreciate that interest u/s 201(1A) of the IT Act can’t be calculated beyond the date BNY Mellon deposited the taxes. 

Judgement

The tribunal held the legal proposition laid by the CIT (A) as incorrect, together with holding that the liability of deducting TDS u/s 201 of the ITA being the vicarious liability of the payer as an income cannot occur in cases where the primary liability of the person receiving the income is discharged.

Further observation of the tribunal was regarding the raison d’être for the existence of a law that provides for the withholding of tax, or TDS for protecting the interests of the revenue. Also, the provisions contained in sec- 201 are merely recovery provisions which are compensatory and not penal in nature. Therefore if there was an absence of any loss being incurred by the revenue, the provisions of Section 201(1) and 201 (1A) can’t be invoked.

Another observation made by the tribunal was regarding the time gap between the transaction date of the sale of shares and paying the advance tax by BNY, wherein it was held that the gap was well within the permitted time for depositing TDS. Therefore the provisions of vicarious liability can’t be invoked in the absence of any shortfall with regard to the collection of revenue due to a lapse in deducting TDS by the assessee, as well as the absence of any delay in the realization of taxes.

The tribunal also considered that the BYN had paid the advance tax regarding the relevant transaction; therefore, a tax withholding demand u/s 201(1) r/w Section 195 of the Income Tax Act, 1961 can’t be imposed on the assessee.

Conclusion

The tribunal quashed the tax withholding liability as raised against the appellant u/s 201(1) along with the interest liability u/s 201(1A) and allowed the appeal of ICICI Bank, i.e. the assessee. The judgement provides the much-needed clarity on the treatment of TDS liability and held that such liability of deducting the TDS as per sec 201 of the IT Act is a vicarious liability; thus, such liability shall cease to exist when the primary liability of the person receiving the income has already been discharged. 

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