Holding Company Not Liable To Deduct TDS On The Share Purchase Transaction By Its Subsidiary: Bombay High Court

The Bench, consisting of Justices N.J. Jamadar and K.R. Shriram, has ruled that the liability to deduct TDS under Section 195 of the Act is applicable only to a person who has paid any sum, or is responsible for paying any sum, to a non-resident.

The Petitioner Ingram Micro Inc., a company incorporated in the United States of America and engaged in the business of distributing technology products, has worldwide operations and is collectively known as the Ingram Group. Ingram Micro Asia Holdings Inc., the U.S. subsidiary of Ingram Micro Inc., had an Indian subsidiary called the Ingram Micro India Private Ltd (IMIPL).

Similarly, Techpac Holdings Ltd, a company engaged in distribution of technology products and registered in Bermuda, holds several companies under its fold which are collectively called the Techpac Group. The Indian entity of the Techpac Group was called the Tech Pacific (India) Ltd (TPIL).

In 2004, Ingram Micro Asia had acquired the shares of Techpac Holdings from its existing shareholders under the Share Purchase Agreement (SPA). Ingram Micro Inc., the holding company of Ingram Micro Asia, stood as a Guarantor for the payment of the sale consideration under the SPA by Ingram Micro Asia to the sellers, i.e., the existing shareholders of Techpac Holdings. However, the guarantee was never invoked against Ingram Micro Inc. because Ingram Micro Asia had discharged its obligation under the SPA and therefore Ingram Micro Inc. had stood discharged from its obligation as a guarantor under the SPA. Pursuant to this acquisition, the Indian entity of the Ingram Group (i.e., IMIPL) was merged into the Indian entity of the Techpac Group (i.e., TPIL).

Thereafter, the Income Tax Officer had issued a show cause notice against the petitioner Ingram Micro Inc. under Section 201 of the Income Tax Act, 1961 and treated it as an Assessee in default under the Act for not deducting tax at source (TDS) on the purchase of shares of Techpac Holdings. Ingram Micro Inc. filed a writ petition before the High Court against the order of the Income Tax Officer.

Ingram Micro Inc. contended before the High Court that it did not make any payment to anybody with respect to the share purchase transaction and therefore it was not liable to deduct tax at source under Section 195 of the Income Tax Act. Ingram Micro Inc. submitted that there was no breach of any obligation under Section 195 of the Act and therefore the notice issued under Section 201 of the Act should be quashed.

Section 195 of the Income Tax Act provides that any person responsible for paying to a non-resident any sum chargeable under the provisions of the Income Tax Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income tax thereon at the rates in force. Section 201 of the Act provides that where a person is required to deduct tax under the Act and he fails to do so, he shall be treated as an assessee in default in respect of such tax.

The High Court observed that the conclusions drawn by the Assessing Officer (AO) regarding Ingram Micro Inc.'s liability to deduct TDS by placing reliance on the Annual Reports of the Ingram Group, which had mentioned the factum of Ingram Group's acquisition of Techpac Holdings, was misplaced. The High Court held that the comments mentioned in the said Annual Reports were with respect to the Ingram Group as a whole and were not restricted to the activity of the petitioner Ingram Micro Inc. The Court observed that the Share Purchase Agreement had been entered into by Ingram Micro Asia as the purchaser and not on behalf of its holding company Ingram Micro Inc. It held that a subsidiary company was an independent entity different from its parent company and the actions and transactions of the subsidiary company could not be attributed as the transactions of its holding company. The Court observed that the Income Tax Officer had not produced any evidence in the present case to indicate that Ingram Micro Inc. had paid any amount or could even be regarded as responsible for paying any sum to a foreign company under the SPA so as to be liable to deduct TDS under the Act.

"Respondent no.1 has also not produced any evidence or referred to any document to even indicate that petitioner has paid any amount or can be even regarded as person responsible for paying any sum to a non resident (or a foreign company) chargeable under the provisions of the Act. Respondent no.1 has failed to appreciate that tax is required to be deducted by the person paying any sum or a person responsible for paying any sum to a non resident which is chargeable to tax under the Act and, therefore, there is no question of applicability of Section 195 of the Act to petitioner."

The High Court held that even if Ingram Micro Inc. was considered as the ultimate beneficiary of the share purchase transaction undertaken by its subsidiary, it would still not be liable to deduct tax at source since Section 195 of the Act was only applicable to a person who is responsible for paying any sum to a non-resident. Since in the present case the petitioner Ingram Micro Inc. did not make any payment to the shareholders of Techpac Holdings, there was no obligation on it to deduct tax at source.

The High Court therefore allowed the writ petition and set aside the notice issued by the Income Tax Officer under the Act.

Case Title: Ingram Micro INC. VERUS The Income Tax Officer, (International Taxation)

Citation: 2022 LiveLaw (Bom) 80

Counsel For The Petitioner: Mr. J.D. Mistri, Mr. Madhur Agrawal, Mr. Atul K. Jasani

Counsel For The Respondent: Mr. Suresh Kumar

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