India: Withholding Tax Default Bites The Payer After 10 Years

In a recent judgement (M/s Mass Awash Private Limited v CIT (International Taxation) [2017] 83 taxmann.com 306 (Allahabad)) (Judgment) a division bench of the Hon'ble Allahabad High Court (High Court) upheld recovery proceedings initiated against the payer for failure to withhold taxes from the payment which was made to a 'non-resident' 10 years ago.

Interestingly, section 201 of the Income-tax Act, 1961 (IT Act) provides that with respect to payments made to a 'resident', recovery proceedings cannot be initiated against the payer after the expiry of seven years from the end of the financial year in which such failure happened.

However, with respect to payments to a 'non-resident', no such limitation period has been prescribed. In this context, the High Court held that in the absence of any such statutory limitation period, while the proceedings had to be initiated within a 'reasonable period'; the action of the tax authorities (IT Department) was valid as the delay was justified and for bona fide reasons given the specific facts of the case.

Facts

  • An Indian company (Payer) had acquired a land parcel from five individual co‑owners, vide a sale deed dated 14 June 2005 (Sale Deed).
  • The Payer paid the sale consideration in tranches, some of which were made in FY 2003-04, FY 2004-05, and balance at the time of execution of Sale Deed (i.e. FY 2005-06).
  • One of the co-owners was a non-resident Indian (NR Seller); however, this fact was not disclosed to the Payer.
  • The NR Seller was represented through her Power of Attorney (POA) holder, who was also one of the co-owners. In the Sale Deed, the address mentioned of all the co-owners (including the NR Seller) were Indian addresses only.
  • While the Payer was obligated under section 195 of the IT Act to withhold applicable taxes on the capital gains realised by the NR Seller, the Payer did not withhold any tax from the payment of the sale consideration as it was unaware of the non-resident status of the NR Seller.
  • Incidentally, the NR Seller neither paid her share of the capital gains tax nor filed income-tax return in India.
  • Subsequently, the NR Seller's tax officer taxed her on the allocable capital gains.
  • On appeals, the first and second appellate authorities – the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) respectively, vide orders dated 16 February 2012 and 28 June 2013 respectively, annulled the order passed by the tax officer. But, the CIT(A) and ITAT directed the IT Department to explore the possibility of recovering tax from the purchaser of property (i.e. the Payer) since it was liable under section 195 of the IT Act for withholding of taxes from payments made to the NR Seller. The IT Department received such directions only on 16 July 2015.
  • Within one month thereafter, in compliance of directions of the appellate authorities, the IT Department initiated recovery proceedings against the Payer by issuing a notice (Notice) under section 201(1)/201(1A) of the IT Act on 12 August 2015, i.e. more than 10 years after the purchase of property under the Sale Deed.
  • The Payer objected to the Notice on the ground of limitation (since the transaction involved was more than 10 years old) as well as on merits (since the Payer was unaware that the NR Seller was a non-resident as she had given her Indian address in the Sale Deed).
  • Rejecting all such objections, the tax officer passed an order against the Payer. Against this order and the aforesaid Notice, the Payer preferred a writ petition before the High Court.

Judgment of the High Court

Before the High Court, the Payer submitted that since the tax officer initiated the recovery proceedings after a lapse of more than 10 years, the same were barred by limitation. It argued that where no limitation period is prescribed in a statute, the competent authority is bound to act within a 'reasonable time' and that in such scenarios, actions taken after a long time, i.e. beyond 3, 4 or 5 years, would be without jurisdiction. To support its claim, the Payer placed reliance upon various judgments of the Hon'ble Supreme Court and various High Courts.

On the contrary, the IT Department's contention was that as it made all efforts to recover tax from the NR Seller, it resulted in delay for initiating proceedings against the Payer.

The High Court ruled as under:

  1. Re: Payer's contention that it was unaware of the non-resident status of the NR Seller

In the facts and circumstances of the case, the High Court rejected this contention of the Payer expressing that a prudent payer would have generally evaluated the contents of the POA, which authorised the attorney to act on behalf of the NR Seller.

  1. Re: Payer's contention that IT Department took time-barred action
  • The High Court noted that though in absence of any limitation period prescribed in the statute, action must be taken by the competent authority within a 'reasonable time'; what is 'reasonable time' would be a case specific determination and would depend upon whether the delay, if any, in exercise of power is for valid and bona fide reasons.
  • The High Court noted that though the IT Department approached the Payer after more than 10 years from the date of Sale Deed, its bona fide is established inasmuch as it first explored the possibility of recovering the entire tax from the NR Seller and it is only when the aforesaid probability was explored and failed, recovery proceedings were initiated against the Payer.
  • In this regard, the High Court also took note of the fact that the Notice was issued by the IT Department within 1 month of receiving the direction from the second appellate authority to proceed against the Payer.
  • In fact, the High Court expressed that the defence of the Payer that it was misrepresented by the NR Seller by not disclosing the fact of her non-resident status would equally be available to the IT Department for explaining the delay.

Comment

Given that the IT Act does not prescribe any limitation period for initiation of recovery proceedings against a payer for failure to withhold taxes from payments made to a 'non-resident', there had been some divergence of judicial views in this regard. For instance, while the Delhi High Court had prescribed a limited period of four years for this purpose, the Calcutta High Court had taken a contrary view. As against such views, in the instant case, the High Court expressed that it would not impose a fixed time and prescribe a period of limitation, which had not been prescribed by the Legislature in its wisdom. The High Court upheld the principle that in the absence of any such statutory limitation period, the IT Department can initiate such proceedings within a 'reasonable time', which would be fact specific – i.e. if the delay in exercise of power is for valid and bona fide reasons, the delayed exercise of power cannot be held invalid.

This Judgment becomes significant from the perspective of any M&A deal – be it a share purchase or an asset purchase etc – especially where the amount is paid to a 'non‑resident'. It fortifies the principle that in such cases, the payer must act in a prudent manner and evaluate its withholding tax obligations as non-compliance can have serious ramifications (such as initiation of recovery proceedings even after 10 years as held in the instant case!) for the payer. Resultantly, transacting parties should take care, inter alia, of this aspect as well and evaluate whether any express contractual protection is warranted in this regard.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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
 
In association with
Related Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions