While having business dealings with India, is a company
not-resident in India, liable to pay interest for non-payment of Advance Tax?
This and other issues, highly pertinent to Companies from
outside India having business relationship with Indian companies was decided
recently by the Delhi High Court in a dispute involving ALACATEL.
Another issue decided in the case was that accepting
liability at the appellate stage, after refuting it initially, can do more harm
than good.
Let’s now see what happened.
ALCATEL USA supplied Telecom equipment to Companies in India
and the payments were received outside India. The servicing aspects were
handled by the Indian subsidiaries of ALCATEL.
ALCATEL had always contended that it did not have a
Permanent Establishment (PE) in India and that it had only supplied equipment
and received payments outside India. It also took the stand that since it had
no PE in India, no Income arose to it in India and hence no tax was deductible
on its sales to Indian Companies. The company construed the clauses in the
Double Taxation Avoidance Treaty between USA and India in its favour. Based on
this stand, the purchasers of equipment did not deduct any Income Tax on the
amount paid.
However, on verification of facts and circumstances, the
assessing officer came to the conclusion that 2.5% of the total sale
consideration was profits earned in India and hence Income Tax was payable in
India by ALCATEL.
When called upon to file income tax returns, ALCATEL stuck
to its stand that no income arose on its sales in India and hence tax was not
payable in India and it did not pay advance tax.
The company also rejected the claim of interest for
non-payment of advance tax since no tax was payable according to them.
At the first appellate stage, however, the company conceded
that it had a PE in India but the onus was on the payer to deduct tax at
source. It stated that once Tax was deducted at source no further tax was
payable and hence interest was not payable by them
The Delhi High Court did not take kindly to this view of
ALCATEL.
The HC stated that the volte face of the company was bad and
that it had always known that tax was payable and might have told the buyers
not to deduct tax.
The company cannot now take shelter under the provisions of
tax laws which lay down rules for tax deduction at source.
The company has to compensate the government for not paying
tax in time.
Lessons to be
learnt
NRIs and Companies from outside India, while entering into
business deals with companies based in India should go in for Advance Rulings
on their taxability. Wherever advance rulings are obtained, it would be binding
on the revenue .In the absence of such advance rulings, the interpretation of
DTA is tricky and could land them in unwarranted liability towards tax and
interest. They should also desist from adopting vacillating attitudes in
appeals.
Reference-
DIRECTOR OF INCOME TAX vs. ALCATEL LUCENT USA INC.
HIGH
COURT OF DELHI
(2013) 86 CCH 142 DelHC
