Delhi High Court
C.J. International Hotels Ltd. vs Ito (Tds) on 30 August, 2001
Equivalent citations: [2001]79ITD506(DELHI)
ORDER
Pramod Kumar, A.M. These appeals, filed by the assessed, are directed against the consolidated order dated 21-11-1995 passed by the Commissioner (Appeals)-V, New Delhi, in the matter of consolidated order under section 201 read with section 195 of the Income Tax Act (hereinafter referred to as the Act) for the financial years 1991-92 and 1992-93. Grievance of the assessed, in substance, is that, on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in sustaining the impugned order which, according to the assessed, is contrary to the scheme of section 195 of the Act.
2. The issue requiring our adjudication lies within a narrow compass of facts. The assessed-company, which owns a hotel known as Le-Meridien Hotel, entered into a franchise agreement with M/s Societe Des Hotels Meridien, France, on 16-9-1991, for the purpose of being affiliated with their chain of hotels and to benefit from the use of Meridien trade name, service mark, and service name, as well as its marketing and reservation network. Under clause 7.2 of this franchise agreement, the assessed-company was to pay, as compensation for the basic services rendered by the French company, franchise fees worked out at the rate of 1 per cent of the room sales of the hotel. This franchise fees was required to be paid on quarterly basis, within 30 days from the end of the respective quarter, but there was considerable delay in making of these payments. M/s Societe Des Hotels Meridien, or an appreciation of hardships being faced by the assessed-company and vide letter dated 26-8-1992, had allowed deferment of payment of the franchise fees dues. During the course of scrutiny of TDS returns for the financial years 1991-92 and 1992-93, the assessing officer (TDS) noticed that according to note # 8, appended to annual accounts of the assessed-company, the assessed-company was liable to pay the franchise fees of Rs. 43.24 lakhs for the year 1991-92 and Rs. 103.19 lakhs for the year 1992-93 but these expenses were booked on cash basis in the previous year in which the same were paid by the assessed. On these undisputed facts, the assessing officer observed that the scope of total income of a non-resident, which is subject matter of taxation by way of deduction of tax at source, has been defined in section 5(2) of the Act and according to which total income of a non-resident of a previous year is required to include accruing or arising, or deemed to be accruing or arising, during such year. The assessing officer further observed that this chargeability to tax could not be avoided by method of accounting adopted by the tax deductor company. It was further stated that chargeability of income accruing or deemed to be accruing in India cannot be escaped on the ground that the payer of income maintains his accounts on the cash basis. On the basis of this reasoning, the assessing officer concluded that tax is deductible at source under section 195 as and when any income by way of franchise fees accrues on India and hence becomes liable, as per mercantile basis, to be credited to the account of French company, i.e., "M/s Societe Des Hotels Meridien". The assessing officer was also of the view that the actual method of accounting employed by the tax deductor is not relevant, for determining the TDS liability and the TDS liability must be worked out on the basis of accrual of income in the hands of the foreign company. Accordingly, the assessing officer computed liability under section 201(1) and 201(1A) on the basis of quarters in respect of which franchise fees was payable, and taking the due date for tax deduction, as 30 days from the end of each such quarter. Aggrieved, the assessed carried the matter in appeal before the Commissioner (Appeals). In first appeal, learned Commissioner (Appeals) upheld the action of the assessing officer in principle though some minor modification regarding the levy of interest were made but these modifications are not relevant for the purpose of adjudicating upon the core issue in appeal before us. The assessed, still aggrieved, is in further appeal before us.
3. Rival contentions are conscientiously heard, orders of the authorities below carefully perused, and relevant legal position duly deliberated upon.
4. We find that the lower authorities have proceeded on the fallacy that taxability in the hands of the foreign company and TDS liability of the tax deductor are not one and same thing. It is, however, well settled that tax deduction at source is only one mode of recovery of the taxes due on recipient of that income, but it cannot be equated with final determination of tax liability in the hands of the recipient of such income. No doubt, in case of non-resident assessed, it is open to the regular assessing officer to treat person from or through whom such assessed is in receipt of any income, as an agent under section 163(1)(c) of the Act and, accordingly, assess such person in respect of that income as a representative assessed, but the case before us does not relate to such assessment under Chapter XV and we are only in seisin of the issue regarding tax deduction at source liability of the tax deductor company. The only relevant question, therefore, is as to at what point of time tax deduction at source liability under section 195 crystallises in the present case at the time of payment of the franchise fees, at the time of crediting the same to the account of M/s Societe Des Hotels Meridien, or, as argued by the revenue, at the time of the franchise fees accruing to the aforesaid company. The answer to this question is provided by the plain and unambiguous language of section 195 itself which states that tax is to be deducted "at the time of credit of such income to the account of the payee or at the time of payment thereof ...................... whichever is earlier". In our considered view, it is not open to the revenue, for the purpose of determining TDS liability of an assessed tax deductor, to tinker with, or in anyway reject, the method of accounting employed by such assessed tax deductor. The judicial precedents relied upon by the authorities below deal with the issue of taxability in the hands of the foreign company and, therefore, in our considered view, these judicial precedents have no bearing on the determination about the point of time when TDS liability under section 195 crystallises. It is also not in dispute that account of the payee was not credited at the time of accrual of income and the accounting was done on cash basis. On these facts, TDS liability of the assessed cannot be said to crystallizes at the time of income actually accruing to the foreign company and revenues claim that taxability crystallizes at the time of income accruing to the foreign company is not even relevant for deciding that question. As Rowlatt, J. has said, Cape Brady Syndicate v. IRC 1 KB 64, "in a taxing statute, one has to look merely at what is clearly said; there is no room for any intendment..........," Since section 195 specifically provides for deduction of tax at source at the time of payment or crediting the payees account, whichever is earlier, we are unable to approve the stand of the revenue regarding deduction of tax at source on the basis of accrual of income. In this view of the matter, we are of the considered opinion that the TDS liability, under section 195, arises only when the income is credited to the account of the payee or on actual payment of the same, whichever is earlier. We further hold that mere accrual of income in the hands of the foreign company cannot be a sufficient proximate reason for tax deductors liability under section 195 of the Act. In view of this legal position, as also bearing in mind the fact that the assessing officer has raised the impugned demand under section 201(1) and 201(1A) on the basis of taking TDS liability at the point of accrual of income in the hands M/s Societe Des Hotels Meridien, we cancel the impugned orders, hold that these orders are indeed contrary to the scheme of the Act, and restore the matter to the file of the assessing officer (TDS) for passing fresh orders, if necessary, in accordance with the law and after giving due opportunity of hearing to the assessed tax deductor.
5. In the result, assesseds appeals are allowed for statistical purposes.