DIT vs. Alcatel Lucent USA Inc. (ITA 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 & ITA 340/2012) (Delhi HC)

Facts of the case

The taxpayer, a US company and a part of the Alcatel Lucent Group. The taxpayer was having a subsidiary in India, which provided marketing support services to the taxpayer.

The taxpayer was engaged in the business of supplying telecom equipments to customers in India. The payers (i.e., Indian customers) did not deduct tax while making payments to the taxpayer. The income tax authorities conducted a survey in the premises of Indian subsidiary and the Assessing Officer (AO) concluded that the taxpayer was having Permanent Establishment (PE) in India under the India-USA tax treaty and attributed 2.5 per cent of sale proceeds of the hardware as profit attributable to the PE in India. In addition to the aforesaid income, the AO also levied interest under sections 234A, 234B and 234C of the Act.

Initially, before the tax authorities, the taxpayer denied any liability to pay tax in India. However, before the Commissioner of Income Tax (Appeals) [CIT (A)], it did not press the claim that it was not liable to tax in India. However, the taxpayer contended that it is not liable to pay interest under section 234B of the Act.

The taxpayer claimed that it was not liable to pay interest under Section 234B of the Act, since the liability to deduct the tax on its income was on the payer. It was claimed that as per Section 209(1)(d)2 of the Act, the taxpayer was entitled to take credit of tax which was ‘deductible’ while computing its liability for paying advance tax and if the amount of tax so ‘deductible’ by the payer in India is given credit, there was no advance tax payable by the taxpayer.

The CIT(A) and Income Tax Appellate Tribunal (the Tribunal) ruled in favour of the taxpayer.

Issue before the High Court

Whether the taxpayer is liable to pay interest under section 234B of the Act, when the tax was deductible at source, but not deducted by the payer?

Held

In the case of Jacabs, the taxpayer admitted taxable income in the income-tax return. However, in the present case, the taxpayer did not admit any taxable income in the income-tax return. Accordingly, the facts of the present case were different from the facts of the case of Jacabs.

It would be inappropriate to hold that even though the taxpayer did not admit any tax liability in India while filing the income-tax return and correspondingly the payers were also not liable to deduct tax under section 195(1), still it can claim credit for the tax ‘deductible’, though tax was not deducted by the payers from the remittance made to the taxpayer.

The contention of the taxpayer that the liability of the payer under section 201 of the Act is different from the liability of the non-resident taxpayer under section 234B of the Act need not be examined, and in the present case it would not make any difference on account of the peculiar facts of the present case.

The taxpayer denied its tax liability in India while filing income-tax return and therefore, it can be inferred that the taxpayer would have asked its Indian payers not to deduct tax from the remittances made to it. If the taxpayer did not make such a representation, it would only be consistent with the taxpayer’s stand regarding its tax liability in India. Therefore, even though there may not be any evidence to show that the taxpayer has made a representation to payers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed.

It was open to the taxpayer to deny its tax liability in India on whatever grounds it thinks fit and proper. Having denied its tax liability, it seems unfair on the part of the taxpayer to expect the Indian payers to deduct tax from the remittances.

It was open to the taxpayer to change its stand at the first appellate stage and submit the assessment of income. When it does so, all consequences under the Act follow, including its liability to pay interest under section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned.

The High Court observed that it would be inequitable that the taxpayer, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers. Once the liability to tax is accepted by the taxpayer, all consequences follow.