- Parallel assessment proceedings against a non-resident and its representative assessee are permissible under law;
- However, the liability of the representative assessee will stand exonerated to the extent of tax recovered from the non-resident.
Recently, the Mumbai Income Tax Appellate Tribunal ("Tribunal") held1 that the Revenue is allowed to initiate assessment proceedings against a non-resident taxpayer as well the representative assessee of the non-resident taxpayer. However, in case the Revenue is able to recover the taxes directly from the non-resident taxpayer, the liability of the representative assessee shall stand exonerated to that extent.
Air India Limited ("AIL"), an Indian public company entered into a wet lease2 agreement ("Lease Agreement") for three aircraft with Cabrijet Inc. ("Cabrijet"), a company incorporated in Antigua and Barbuda. However, AIL prematurely terminated the Lease Agreement, following which Cabrijet initiated arbitration proceedings seeking compensation. Holding in favour of Cabrijet, in its award the arbitral tribunal directed AIL to compensate Cabrijet to the tune of USD 22.4 million (around INR 973.5 million).
During Cabrijet's assessment proceedings, it was held that any income arising from the termination of the Lease Agreement would be in the nature of a revenue receipt, and taxable in the hands of Cabrijet in the year in which the right to receive the said income crystallized. The Revenue also initiated proceedings against AIL as the representative assesse of Cabrijet to bring to tax the amount paid by AIL to Cabrijet. AIL appealed to the Commissioner of Income Tax (Appeals) ("CIT(A)"). The CIT(A) after considering a plethora of judgments of the High Courts and the Supreme Court of India ("Supreme Court") held that the same income cannot be brought to tax twice – first in the hands of the non-resident taxpayer and then in the hands of the representative assesse of the non-resident taxpayer. Accordingly, the CIT(A) held in favour of the AIL and deleted the amount stating that the amount is not required to be assessed in the hands of AIL. The Revenue took the matter up in appeal before the Tribunal.
Whether the same income can be brought to tax in the hands of both, the non-resident taxpayer as well its representative assessee?
The Tribunal, ruling in favour of the Revenue, held that the assessment proceedings against AIL were legally sustainable. It stated that merely because the assessment of the representative assessee was followed by an assessment of the non-resident taxpayer, that would not result in the assessment of the representative assessee becoming bad in law.
Following the decision of the Supreme Court of India ("Supreme Court") in the case of Claggett Brachi & Co. Ltd. v. CIT3 the Tribunal stated there is no inherent preference for assessment directly on a taxpayer, and the only limitation on the assessment vis-ŕ-vis the two parties, i.e. the non-resident taxpayer and the representative assessee is that once an assessment is made on one of them, the assessment in respect of the same income cannot thereafter be made on the other. Further, while the Income Tax Act, 1961 ("ITA") provides that income may be assessed in the hands of the representative assessee, there is no bar on the direct recovery of taxes from the taxpayer. Thus, regardless of whether the assessment is made on AIL or Cabrijet, the Revenue's right to recover tax from Cabrijet would remain intact, and, to the extent that the Revenue is able to recover the tax from the Cabrijet, the liability of AIL would correspondingly stand exonerated.
Under the ITA the Revenue is afforded the option of taxing either the representative assessee or the beneficial owner of income. In certain circumstances, the ITA imposes a vicarious liability on the representative assessee to be assessed in respect of the income of the non-resident taxpayer.
It is settled law that when there is a doubt as to which person among two is liable to be assessed, parallel proceedings may be taken against both and alternative or 'protective' assessments may be carried out. In Jagannath Hanumanbux v. ITO4, the Calcutta High Court held that it is open to the Revenue to make assessments on two persons in respect of the same income, where it is doubtful which person is really liable to charge, because unless such 'protective' or alternate assessment is made, the assessment proceedings against the party ultimately found to be liable, may become time-barred. However, the Revenue may not recover the tax in respect of the same income from both person, as doing so would result in double taxation of the same income.
In a landmark ruling5 the Supreme Court observed that if an assessment is made on either the representative assessee or the non-resident taxpayer, there can be no assessment on the other. However in that case, the Supreme Court did allow a reassessment to be made directly on the non-resident taxpayer even where the original assessment was made on the representative assessee of that non-resident taxpayer. Interestingly, in Barium Chemicals v. ITO6 the High Court of Andhra Pradesh ("AP HC") went so far as to hold that in light of the plain language of section 166 of the ITA7, actions for recovery of tax can be taken simultaneously against both against the non-resident taxpayer as well as its representative assessee. The decision of the AP HC may not provide the correct position of law. Further, the Supreme Court's ruling has been followed8 by a number of High Courts. However, the High Courts have interpreted the ruling of the Supreme Court to permit simultaneous assessment, but not simultaneous recovery of tax. The Tribunal appears to have adhered to this position of law.
While the ruling may pose as a slight deterrent for non-resident investors and non-residents doing business in India, from the Revenue's perspective, the assessment of persons in the capacity of a representative assessee serve only as a measure to protect a valid demand and ensure that the tax is paid.
1 DIT v. Air India Limited- as an agent of Cabrijet Inc., ITA No.6630/Mum/06
2 In industry parlance, a "wet lease" usually refers to an arrangement wherein the lessor provides the lessee with an aircraft and crew, as opposed to a "dry lease" where only the aircraft is leased.
3 (1989) 177 ITR 409 SC
4 31 ITR 603
5 Supra, n.2
6 ITO (1975) 100 ITR 637
7 Direct assessment or recovery not barred.
166. Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income
8 CIT v. Fertilizers & Chemicals (Travancore) Ltd., (1987) 155 ITR 823; CIT v. Alfred Herbert (India) (P) Ltd., (1986) 159 ITR 583 (Cal); Barium Chemicals v. ITO, ITO (1975) 100 ITR 637