Clearing the air on grossing up

Updated on: Jan 13, 2013

BL14_TAX_PAN | Photo Credit: Sampath Kumar G P

The Bangalore Income-tax Appellate Tribunal recently decided on the extent to which amounts can be grossed up in terms of Section 195A of the Income-Tax Act, 1961. In the facts of this case, a non-resident company had taxable income in the nature of fees from technical services (FTS), but had not furnished its PAN. Accordingly, under Section 206AA of the Income-Tax Act, the Indian assessee had withheld tax at the higher penal rate of 20 per cent, instead of the prevailing rates in force. The Tribunal relied on a strict interpretation of Section 195A — it held that where taxes were to be borne by the payer, for tax deduction purposes, the income shall be grossed up only to the extent of the ‘rates in force’, and not at the penal rate of 20 per cent.

However, as regards the rate at which grossing up of taxes should be effected by the tax deductor, the Income-Tax Appellate Tribunal held that a literal reading of Section 195A mandates grossing up of taxes at the ‘rates in force’, and not at 20 per cent, post which taxes should be deducted at 20 per cent.

Vodafone dispute takes a new turn

The tax demand on Vodafone over the Hutchison acquisition has been revived to boost revenue collections. Although this has been possible because of the last Budget’s retrospective amendments to taxation of indirect transfers, the Shome Committee had recommended that such amendments be made prospective.

Getting refund of excess tax paid

The Delhi Income-Tax Appellate Tribunal in ITO v. SABMiller India Ltd , has held that no addition of income can be made, in the event of a difference between the income reported in the withholding-tax certificate and in the profit and loss (P&L) account of the assessee, that arose out of a clerical error. Also, the assessee could get tax credit on the entire tax withheld (albeit wrongly) by the deductor, irrespective of whether the income was reflected in its P&L account.

The assessee as part of a cost-sharing arrangement between group companies had raised an excess debit note on its subsidiary. It thereafter issued a credit note to the concerned subsidiary. However, the subsidiary withheld tax on the earlier amount (the excess amount) and issued the withholding-tax certificate. The assessee reported the correct (lower amount) in its P&L account. The Tribunal then held that this difference between the two amounts could be not considered as the assessee’s taxable income, and the assessee could get credit on the entire taxes withheld. Furthermore, the assessee would also get a refund of the excess taxes paid, in light of Section 200A of the Income-Tax Act, read with the CBDT Circular No 2/2011.

Published on January 13, 2013
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