India: Proceedings Against Bharti Airtel For Non- Deduction Of Tax Barred By Limitation

Last Updated: 12 January 2017
Article by Afaan Arshad and Ashish Sodhani
  • In the absence of any limitation period prescribed in the statute, a reasonable period should be applicable for proceedings against non-deduction of tax for payments made to non-residents.
  • Considering that the limitation period prescribed under s. 201(3) of the ITA was not brought about by way of a retrospective amendment, it did not overrule the ratio in NHK Japan, which prescribed a limitation period of 4 years for resident and non-resident deductees.
  • An unending limitation period with respect to initiating proceedings against non-deduction of taxes would operate harshly on non-residents. Such a limitation period cannot be justified on the basis of easing administrative and revenue collection burdens on the Revenue.

Recently, the Delhi High Court in the case of Bharti Airtel Ltd. and Anr. v. Union of India and Anr.1 held that proceedings in relation to non-deduction of tax at source on payments made to non-resident entities is barred by limitation which should be set at 4 years.

Background

Bharti Airtel Limited ("Taxpayer"), a resident Indian entity, had engaged non-resident entities for providing services in relation to inter-connections. In doing so, some charges were accrued - which were paid by the Taxpayer to those foreign entities. The Taxpayer did not withhold taxes while making such payment. Accordingly, show cause notices were issued to the Taxpayer from the Revenue Department asking it to show cause as to why it should not be deemed to be an assessee-in-default as it made payments on account of interconnection charges to various foreign entities without deduction of tax under the Income Tax Act, 1961 ("ITA"). The show-cause notices were issued to the Taxpayer after considerable time had passed i.e. a notice on March 31, 2011 was issued for the financial years 2002 to 2011 and another notice on March 5, 2012 for the financial years 2002 to 2007.

Issue

The Taxpayer challenged these show-cause notices by way of a writ petition in the High Court of Delhi. The issue to be decided by the Court was whether the issuance of the show cause notice by the Revenue Department is barred by limitation.

In this context, it should be noted that prior to 2010, there was no limitation period under the ITA for issuance of show cause notice for non-deduction of taxes. In light of no express time limitation, the Delhi High Court in the case of Commissioner of Income Tax v. NHK-Japan Broadcasting Ltd2 and Commissioner of Income Tax v. Hutchison Essar Telecom Ltd3 had set the limitation period at four years. The Finance Act 2009, however, amended the ITA to provide for a limitation period for residents ("Amended Provision") leading to an ambiguity on whether it would also be applicable to non-residents as well. Further, the statement of objects and reasons also did not provide for any explanation in respect of non-residents being left out from the limitation period that was prescribed. However, a circular issued by the Central Board of Direct Taxes stated that no time limit has been prescribed for non-residents "as it may not be administratively possible to recover the tax from the non- resident".

Arguments

The Taxpayer argued that in the absence of a prescribed time limit under the Amended Provision for non-resident deductees, the ratio in the case of NHK- Japan (Supra) should apply and initiation of proceeding for non-deduction of tax should be within a reasonable period of time. The Court in this case had come to this conclusion on the basis that the period of limitation for initiating proceedings must be the same as the period for completion of assessment as prescribed under the ITA.4 The Taxpayer also argued that the legislature consciously did not provide a limitation period for non-residents as it chose to not disturb the law laid down by the Court in the case of NHK- Japan (Supra).

The revenue, however, relied on Bharat Steel Tubes Ltd. v. State of Haryana5 and stated that the absence of any period of limitation in respect of non-resident remitters meant that the legislature made a conscious distinction between resident and non-resident beneficiaries, based on good reasons. It argued that there is sound rationale for such distinction because in the case of remittances to non-residents, the true nature of the transaction and whether deductions are to be made within the country or not cannot be easily gathered and therefore the legislature did not prescribe any time limit for exercise of powers in respect of such transactions. Further, it argued that NHK- Japan (Supra) was decided before the Amended Provision came into effect and therefore the decision did not examine the true import of the amended provisions.

Ruling

The Court ruling in favour of the Taxpayer concluded that proceedings for non-deduction of withholding tax under the ITA should be initiated within a reasonable time period. While reaching this conclusion, the Court relied on its earlier decision in the case of Vodafone Essar Mobiles Ltd.6 The Court in the case of Vodafone had held that limitation period of four years as ruled in the case of NHK Japan (Supra) would continue to apply even after the amendment was brought into place. This is because if the intent of the legislature was to nullify the effect of the judgment it would have made the amendment retroactive in nature but since the amendment was prospective in nature the reasonable period of 4 years should continue to apply.

Further, the Court noted that the circular relied on by the Revenue which stated that no limitation has been provided for non-residents as it may not be administratively possible to recover the tax from the non- resident was outrightly rejected by the Court following the decision in the Supreme Court decision of G.E. Technologies,7 wherein the Court had held that administrative convenience (for not imposing a time limit) cannot outweigh the harsh nature of the consequences of unlimited period of time within which a proceeding for non-deduction of tax could be initiated. Accordingly, the Court upheld the decision in the cases mentioned above and held that a reasonable period of 4 years should continue to apply in respect of initiation of proceedings for non-deduction of tax under the ITA.

Analysis

Needless to say that the judgment is welcomed so much so that it upholds the decision in the earlier cases on a long standing issue which has been debated time and again. In fact, considering that there are precedents on both sides, by dwelling into the Amended Provisions it provides more clarity to the issue. It needs to be considered that if a payment was made by a resident to a non-resident, there should be some certainty to such resident on the proceedings that may be initiated by the Revenue Department for non-deduction of tax. By not having a time limitation on such proceedings, the fear of proceedings will always loom over the resident taxpayer which will tend to create a regressive environment. Additionally, the question that will also need to be answered is for how long should the resident deductor continue to maintain relevant documents i.e. tax returns, books of accounts etc. in relation to the transaction if no time limitation is specified. This again would cause undue hassle and stress to the resident deductor.

The taxpayers of the country have been rooting for a trust based taxation system. It is imperative that certainty, fairness and stability should continue to serve as guiding principles and not the amount of tax that can be collected. It is necessary to guarantee and enforce internationally recognized taxpayer rights and safeguards to counter excessive discretion and corruption. In that sense, keeping the doors open for scrutiny and not providing for a period of limitation in such cases compromises on the certainty and trust sought by taxpayers.

Footnotes

1 W.P.(C) 2166/2012

2 2008 (305) ITR 137 (Del)

3 [2010] 323 ITR 230 (Delhi)

4 Section 147/148 and 153 of the Income Tax Act.

5 70 STC 122 (SC)

6 (385) ITR 436 (Del).

7 2010 (10) SCC 29.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Afaan Arshad
Ashish Sodhani
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.