Liability To Deduct TDS Under Section 201 of Income Tax Act Is A Vicarious Liability, Which Ends With Discharge Of Principal Liability Of Recipient Of Income: ITAT

The Bench of Pramod Kumar (Vice President) and Amit Shukla (Judicial Member) held that the provisions of Section 201 of the Income Tax Act are only recovery provisions, which are compensatory in nature and not penal in nature. Therefore, it ruled that if no loss occurred to the revenue department on account of a lapse in deduction of TDS by the assessee, the provisions of Sections 201(1) and 201(1A), raising a tax withholding demand along with interest, cannot be invoked against the assessee.

Ranbaxy Laboratories Ltd. raised funds through the issue of Global Depository Receipts (GDRs). The Bank of New York Mellon (BNY) was the overseas depository bank who issued the GDRs, representing Ranbaxy Laboratories' shares. ICICI Bank Ltd. was the Indian custodian of the underlying shares in Ranbaxy. Therefore, BNY held the underlying shares in Ranbaxy through its Indian custodian, i.e., ICICI Bank, and on the basis of this it issued the GDRs.

Thereafter, BNY issued a notice to the GDR holders regarding the termination of the GDR arrangement, notifying all the GDR holders that they may convert their GDRs into underlying Ranbaxy shares. Alternatively, in case the GDR holders did not want to convert the GDRs into underlying Ranbaxy shares, the BNY specified that the underlying shares of Ranbaxy would be sold and the sale receipts would be paid to the GDR holders, in the proportion of their holdings.

Since ICICI Bank held the shares of Ranbaxy on behalf of BNY, the assessee- ICICI Securities Limited, in exercise of the latter option, sold the said shares and sent the remittances to BNY.

During the assessment proceedings, the Assessing Officer (AO) opined that the assessee had failed to deduct tax at source (TDS) under Section 195 of the Income Tax Act, 1961, on the remittances made by it to BNY on the sale of equity shares of Ranbaxy. The AO observed that though BNY had made payment of taxes on the net consideration received by the assessee on sale of shares, however, it ruled that the said payment of tax was made by BNY as advance tax. The AO held that such payment of tax should have been made as TDS by the assessee.

Accordingly, the AO raised a tax withholding demand under Section 201(1) of the Income Tax Act, 1961, including interest for delay in payment under Section 201(1A), against the assessee. Against this, the assessee ICICI Securities filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) held that Section 201 does not exempt the assessee from paying TDS on the payment made to a non-resident, even if the non-resident had paid advance tax and filed the income tax return after taking into consideration the profit or income earned by it on the said transaction. The CIT(A) thus dismissed the appeal, against which the assessee filed an appeal before the ITAT.

While holding that the legal proposition laid down by the CIT(A) was incorrect, the ITAT ruled that the liability to deduct TDS under Section 201 is a vicarious liability of the payer of an income and thus, the liability to deduct TDS cannot come into play when the primary liability of the recipient of income is already discharged. The Tribunal added that once the principal liability of the recipient of income is discharged, the vicarious liability does not survive.

The ITAT observed that the very raison d'être for the existence of a provision providing for tax withholding or tax deduction at source is that the interests of the revenue is adequately protected. The ITAT added that provisions of Section 201 are only recovery provisions, which are compensatory in nature and not penal in nature. Therefore, it ruled that if no loss occurred to the revenue department, the provisions of Section 201(1) and 201(1A) cannot be invoked.

"Clearly, thus, the provisions of Section 201 are not to punish or prosecute an assessee for his lapses in respect to tax deduction at source responsibilities; there is a separate set of provisions for that purpose, e.g. under section 271C and 276B, and the provisions of section 201 are merely compensatory in nature. What essentially follows is so far as the provisions of Section 201 are concerned, "the tax-deductor has to make good the shortfall in a tax deduction, and the tax-deductor also has to compensate the revenue by way of interest for the period of late realization of this tax to the revenue authorities"", the ITAT said.

The ITAT further observed that the time gap between the date of transaction of sale of shares and the payment of advance tax by BNY was well within the permitted time for depositing tax at source. Thus, the Tribunal held that since there was no shortfall in collection of revenue on account of a lapse in deduction of TDS by the assessee, and nor was there any delay in the realization of taxes, the provisions of vicarious liability under Section 201 cannot be invoked.

While taking into account that BNY had paid the advance tax in respect of the relevant transaction, the ITAT ruled that a tax withholding demand under Section 201(1) read with Section 195 of the Income Tax Act, 1961 cannot be imposed on the assessee.

Quashing the tax withholding liability raised against the assessee under Section 201(1), and the interest liability under Section 201(1A), the ITAT allowed the appeal of the assessee.

Case Title: ICICI Securities Limited versus Income Tax Officer, International Taxation

Dated: 09.11.2022 (ITAT Mumbai)

Representative for the Appellant/assessee: P J Pardiwala, Sr Advocate, along with Madhur Agarwal

Representative for the Respondent: Surabhi Sharma, Commissioner (DR)

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