The Hindu Business Line : Advance tax bogey haunts foreign companies

The recent ruling of the Special Bench of the Delhi Tribunal in Ericsson-Motorola-Nokia case has brought into focus the question of interest on default in the payment of advance tax.

WITH the opening up of the Indian economy, not only have the inbound transactions of foreign companies increased phenomenally but also the tax issues relating to income arising out of such transactions. The legal position taken by foreign companies in tax returns — that their income is not taxable and, consequently, that they are not liable to pay advance tax — is being challenged by the tax authorities. The taxmen not only levy tax on such income but also charge penal interest under Sections 234B and 234C for non-payment of advance tax.

As regards levy of interest under Section 234, the Supreme Court, in CIT vs Ranchi Club Ltd (247 ITR 209), held that interest cannot be levied under the Section if there is no specific direction in the assessment order to that effect. This position was reiterated by various High Courts and was accepted by the tax community by and large. But clouds of uncertainty have once again crept in after a recent ruling of Special Bench of the Delhi Tribunal in the Ericsson-Motorola-Nokia case (dated June 22, 2005).

In this case, the foreign companies supplied telecommunication systems to Indian cellular operators and claimed in their tax returns that income from supplies outside India was not taxable in India and, therefore, did not pay any advance tax. They also claimed that their entire income was anyway subject to tax withholding in India and were, therefore, not liable to pay advance tax. However, the authorities taxed income from supplies and levied interest under Section 234 for non-payment of advance tax.

The Tribunal examined the argument of the tax authorities and the series of Supreme Court decisions. While giving its verdict on interest levy under Section 234, three important decisions of the apex court were considered by the Tribunal. In CIT vs Anjum M. H. Ghaswala (252 ITR 1), the Supreme Court was dealing with the issue of powers of the Settlement Commissioner to waive interest levied under Section 234. In this case, the apex court clearly laid down the principle that interest under Section 234 is mandatory and cannot be waived or reduced by the tax authorities.

The Tribunal examined the old as well as the new provisions and observed that under the former discretion was given to the tax authorities to either waive or reduce the interest. Whereas, under the new provisions, the intention of the legislature was to make the collection of statutory interest mandatory. If the interest is mandatory in nature, it follows that if there is a default the assessee becomes automatically liable to pay the interest.

In the Kalyankumar Ray vs CIT (191 ITR 634) case, the apex court examined the issue whether Form No. ITNS 150 is to be treated as part of the assessment order and whether the specific direction mentioned in the form for levy of interest satisfies the requirement that the interest must be charged in the assessment order itself. In this case, the assessee's contention was that the tax officer had not incorporated the working of interest under Section 234 in the assessment order itself. The apex court proceeded to hold that the I-T Act does not require that both the computation of total income as well as the tax should be done on the same sheet of paper, which is superscribed as "assessment order". The court held that if Form ITNS 150 is signed or initialled by the tax officer who has signed the assessment order, the same has to be read as assessment order.

In the CIT vs Ranchi Club Ltd (247 ITR 209) case, the Supreme Court dealt with the issue of validity of interest levy under Section 234 without a specific direction in the assessment order. The apex court confirmed the Patna High Court decision, which categorically held that levying interest under Section 234 is invalid if there is no specific direction in the assessment order.

The apex court also confirmed the principle laid down by the Patna High Court that the notice of demand issued under Section 156 accompanied by Form ITNS 150 served as a "decree" and that a decree cannot go beyond the judgment. Therefore, no interest can be charged in the assessment form if there is no specific direction in the assessment order mentioning the section under which interest is to be charged. The Tribunal also noted that the ratio of the apex court in the Ranchi Club case had been followed by a number of High Courts. After considering the three decisions, the Tribunal held that interest under Section 234 cannot be held to be invalid merely on account of there being no specific direction in the assessment order or on the ground that the section under which interest is levied is not specified in the body of the assessment order. It would be sufficient if Form ITNS 150 contains a specific reference to the section under which interest is charged, calculation shown under the relevant columns, the said form signed or initialled by the same tax officer who signed the assessment order, and is also dated.

In view of this Tribunal ruling, the ratio of the Supreme Court decision in the Kalyankumar Ray case would prevail over its ruling in the Ranchi Club case. As a result, even if there is no specific direction in the assessment order for levy of interest under Section 234, but the assessment order is accompanied by Form ITNS 150 clearly providing for levy of interest and duly initialled by the tax officer who signed the assessment order, the levy would be valid and enforceable. Therefore, the Ranchi Club ruling may not provide "shelter" from interest levy under Section 234. However, the Ranchi Club decision will still help in cases where Form ITNS 150 is not provided to the assessee along with the assessment order or where the Form itself is defective and incomplete. Therefore, it would be important to have a close look at the assessment order and Form ITNS 150 to ensure that the interest levy is valid; the Ranchi Club ruling can "rescue" the assessee. A silver lining, in a sense, is the argument that foreign companies are not liable to pay advance tax as their entire income is subject to tax withholding in India. The Tribunal in the instant case has once again accepted this argument. It observed that all the payments made to the foreign company are tax deductible at source (assuming that they are taxable). Having regard to Sections 201 and 209 of the Act, the company cannot be held to have defaulted in payment of advance tax. It is entitled to take into account the tax that is deductible by the payer, though not actually deducted. Consequently, there is no liability to pay interest. Therefore, this additional argument can save significantly, the interest burden on foreign companies.

(The author is Director, Deloitte Haskins & Sells.)

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