In a set back to the IT multinational, IBM India Pvt Ltd., the Karnataka High Court has cleared the hurdle for the Income-Tax Department to recover Rs 1,090.39-crore tax due from the company by staying the order of the Bangalore Bench of the I-T Appellate Tribunal.

The Tribunal had asked the company to pay only Rs 50 crore till adjudication of its plea against the amount demanded as tax by the Department.

A Division Bench comprising Justice D.V. Shylendra Kumar and Justice B. Sreenivase Gowda passed the interim order on Tuesday while hearing an appeal filed by the Department challenging the January 7 order of the Tribunal. The Bench also ordered issue of emergent notice to the company.

This interim order of the High Court permits the Department to initiate process for recovery of tax due from the company.

TDS obligation

The Department had rejected IBM’s claim for deduction of income earned by exporting software through Software Technology Park under Section 10A of the I-T Act; and from export of software from its Special Economic Zone under Section 10AA of the Act for the assessment year 2008-09. Total tax demanded under these two provisions is about Rs 560 crore.

Also, the Department had found that the company had failed to fulfil its obligation of tax deduction at source (TDS) in some of its transaction and had also not paid advance tax to the Government. For these alleged lapses, the Department had also levied penalties apart from demanding payment of TDS.

While the total tax to be paid by the company was assessed at Rs 741.25 crore, the Department had also levied a penalty of Rs. 322.22 crore under Sections 234B for not paying advance tax.

However, the company challenged this demand before the Tribunal while contending that the Department had demanded only Rs 667.83 crore in its draft assessment but the tax demand rose Rs 1,090.39 crore, which is extremely high and contrary to the assessment procedure.

Taking into consideration “the balance of convenience and relative hardship,” the Tribunal had stayed the demand for 180 days or till disposal of the plea while asking the company to pay Rs. 50 crore on or before January 30.

However, the Department had challenged the Tribunal’s order contending that the company had not made out any case for financial hardship for making the payment of the demanded tax while also questioning the Tribunal’s decision to entertain company’s plea asking the company to pay merely Rs 50 crore instead of asking it to pay substantial portion of the demanded tax.

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