Sec 201(1) rightly invoked; Difficulty accruing on realization of tax qua non-resident is much more than that of resident

The Telangana High Court upholds the validity of TDS proceedings initiated against Dr. Reddy’s Laboratories Ltd. (Assessee) on payments made to non-residents as the same was concluded within a reasonable time period i.e., 2 years 9 months from the end of the relevant FY.

On what should be the reasonable period, the High Court underscores that there cannot be a straight-jacket formula.

 A Division Judge Bench of Chief Justice Ujjal Bhuyan and Justice N. Tukaramji observed that “….one thing is very clear when the legislature has prescribed a period of seven years as the limitation for a resident Indian, it would not be justified to read a limitation of less than seven years in the case of a non-resident. The difficulty that would accrue to the realization of tax qua a non-resident would be much more than that of a person, who is a resident”.

While disagreeing with the Delhi High Court in Bharti Airtel Limited vs. Union of India, the bench observed that “when the legislature has consciously not prescribed any time limit for an order under Section 201(1) insofar a non-resident is concerned. The reason is that if the deductee is a non-resident, it may not be administratively possible to recover the tax from the non-resident. Therefore, it would be wrong to read into Section 201(3) of the Act a period of limitation insofar as a non-resident is concerned. Doing so would amount to legislating by the Court which is not permissible”.

Advocate Deepak Chopra appeared for the Assessee whereas Advocate K. Mamata Choudary appeared for the Revenue.

The brief facts of the case were that the Assessee entered into a Trademark Assignment Agreement with two foreign companies i.e., USB Switzerland and USB Belgium for purchase of certain trademarks. During AY 2016-17, it paid Rs.115 Cr and Rs.244 Cr to these entities respectively; In Dec 2015, Assessee was subjected to a survey wherein it was observed that Assessee had not deducted TDS on the above remittances. Consequently, in 2016, Section 201(1)/(1A) proceedings were initiated wherein Assesee contended that the payments are not chargeable to tax. In 2018, Assessee became aware that the said two companies filed an application before the AAR seeking a ruling on the taxability of the payments made to them for transfer of trademarks, thus, requesting Revenue to keep Section 201(1) proceedings in abeyance. Further contended that proceedings were barred by limitation and that a reasonable period for passing an order under Section 201 had lapsed. Revenue dismissed the plea of Assessee and held it to be in default raising tax demand of Rs.55.55 Cr. Aggrieved Assessee, filed the instant writ petition on the grounds of limitation. Revenue challenged the maintainability of the writ as the order under Section 201 is appealable.

After considering the facts, the Bench noted the important question of whether the period of limitation stipulated in Section 201(3) of the Act would apply to the petitioner especially when the same uses the expression ‘a person resident in India’ and the impact of double taxation avoidance agreement.

The Bench stated that observes that Delhi High Court in Bharti Airtel followed its earlier decisions in Vodafone Essar, NHK Japan as well as Hutchison Essar, and after taking into account the amendments brought into Section 201 whereby a limitation period was not provided for payment made to non-residents.

While distinguishing Bharti Airtel ruling wherein Delhi High Court held that the theory of reasonable period would have to be read into Section 201(3), the High Court remarked that a “limitation period of seven years prescribed for a resident Indian would be a useful guide to determine what would be a reasonable period in the case of a non-resident”.

The Bench further highlights that the Assessee itself requested Revenue to keep Section 201 proceedings in abeyance in view of the AAR application which categorically runs counter to its contention that proceedings were concluded beyond limitation.

The Bench also Opines that principles of natural justice would require that proceedings should be completed within a reasonable time.

While concluding that the survey conducted in Dec 2015, the show cause notice issued in Jan 2016, and proceedings concluded in Dec 2018 were within a reasonable time, the High Court dismissed the writ petition without any observations on the merits of the case and allowed the Assessee to seek statutory remedy.

Cause Title: Dr. Reddys Laboratories Limited Vs. The Deputy Commissioner of Income Tax [W.P.No.1513 of 2019 / 2023-Enterslice-26-HC-Tel-IT]

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