The Hindu Business Line : When the taxman tethers TDS to a time machine

TDS or tax deducted at source has been a bone of contention between the taxpayers and the taxman for sometime now. Failure to comply with TDS provisions results in possible disallowance of expense in the hands of the payer (or entity), besides interest and penal consequences. Naturally, most people believe in the old saying - TDS is very tedious, comments Mr Arvind Singhal, a Delhi-based chartered accountant.

The moot problem, he feels, is till which year the `tax authorities can go backwards' and verify TDS compliance by the payer. Mr Singhal shares with Business Line his views on the subject and talks about a landmark judgment passed very recently by Delhi High Court. "A reasonable period (in this case) was determined for initiating penalty proceedings with respect to default in the payment of TDS," he avers. Read on.

Edited excerpts of the email interaction:

Why do we see tax authorities and payers going so frequently at each other on TDS?

There is an old saying - TDS is very tedious. Failure to comply with TDS provisions results in possible disallowance of expense in the hands of the payer entity besides interest and penal consequences.

To answer your question, in an attempt to mop up tax revenue and ensure maximum tax compliance, the Government has over the years tightened the TDS provisions. For instance, a number of new payments such as royalty, non-compete fees, hire charges for equipment and furniture have been brought under the ambit of TDS.

Also, provisions relating to disallowance of expenses in the hands of the deductor where TDS has not been deducted appropriately have been extended in relation to payments made to residents as well.

In addition to carrying out verification of TDS returns, the tax authorities also conduct surveys to examine whether the payer entities have complied with the applicable TDS provisions.

Is there a cap on the number of years the taxman can go back to investigate tax compliance?

It's not that simple. A key issue for consideration is till which year the tax authorities can go backwards and verify TDS compliance by the payer. For instance, currently in financial year 2008-09, a question may be whether the tax authorities can scrutinise TDS returns and conduct TDS assessment proceedings pertaining to (say) financial year 1995-96, although the payer may not be maintaining even the books of account for that year.

Can payers be expected to keep accounts of things filed many years ago? What does the law say?

It is interesting to note that unlike specific time limits laid down for initiation and completion of scrutiny assessment proceedings, no such time limits have been specified for TDS proceedings. The law simply provides timelines for depositing TDS in the Government coffers, filing of quarterly TDS statements with the tax authorities and issuance of TDS certificate to the payee.

In the absence of any statutory time limit for initiating TDS proceedings against the tax deductor, the tax authorities have in the past effectively adopted a freehand approach in initiating TDS proceedings (including penalty proceedings relating thereto) at any time when they thought fit to do so. There have been instances where TDS assessment orders have been passed for as long as 10 years at a stretch and huge tax demands raised.

Ten years is long time. But is it `reasonable'?

This issue has been highly litigated in the past and various benches of the Income Tax Appellate Tribunal (ITAT) have in certain decisions held that a "reasonable" time limit should be read into the statute even though the same has not been expressly provided therein.

In this context, very recently the Delhi High Court delivered a landmark ruling in the case of a Japanese company wherein the "reasonable" period was determined for initiating penalty proceedings with respect to default in the payment of TDS.

Tell us more about the case and judgment involving the Japanese company.

In the instant case, a foreign company was carrying on its business operations in India. The foreign company was paying, to its expatriate employees in India, certain portion of salary in India and some "Global Salary" in the home country. In respect of salary paid in India, the taxpayer duly deducted tax at source. However, no tax was deducted on the "Global Salary".

On realising the above default, the company did not dispute the said liability and deposited the tax amount along with interest thereon.

Since no time limit has been provided under the statute for initiating penalty proceedings against the aforesaid default, the tax authorities initiated the penalty proceedings after 10 years and levied penalty on the foreign company for committing the aforesaid default.

The matter went up to the Delhi High Court for determining whether the action of the tax authorities was justified in initiating and levying the penalty beyond a "reasonable" period. The Delhi High Court, while upholding the order of the ITAT, noticed that an action must be initiated within a "reasonable" time by the competent tax authority under the law.

It held that a period of four years from the end of the relevant financial year can be read as a "reasonable" time period in a scenario when no statutory timelines have been prescribed.

So, the time-period is basically down to four years now?

Since this is the first High Court order on the subject, hopefully it shall bring respite to the taxpayers and bring an end to wide-scale litigation relating to TDS verification pending before various authorities, wherein such verification proceedings have been initiated after a period of "reasonable" time limit of four years.

D. MURALI
KUMAR SHANKAR ROY

Detaxification.blogspot.com

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