Bombay High Court Directs Income Tax Department to Refund TDS Amount Deposited By Assessee

Bombay High Court Directs Income Tax Department to Refund TDS Amount Deposited By Assessee

Explains that the revenue authorities’ insistence on the assessee paying the sum was not in accordance with the law

The Bombay High Court has directed the Income Tax Department to refund the Tax Deducted at Source (TDS) amount deposited by the assessee under protest while invoking the doctrine of unjust enrichment.

The bench of Justice K. R. Shriram and Justice N. K. Gokhale observed that even though the amount deposited by the petitioner would be termed TDS, what he paid was an ad hoc amount, not technically a TDS.

Since it was confirmed that the amount paid to Davy Mckee Corporation was not chargeable to tax in India, the IT department’s insistence on the assessee paying that amount was not in accordance with the law. The amount must be refunded to the assessee.

The assessee/petitioner had set up a gas-based sponge iron plant in India, for which it entered into a foreign technical collaboration agreement with Davy and another party.

Under the agreement, DAVY agreed to render to the petitioner outside India certain engineering and project-related services. The petitioner also entered into another agreement with DAVY to provide supervisory services to the petitioner in India. Under this, DAVY was to deliver the necessary design, drawing, and data of the sponge iron plant outside India.

DAVY also agreed to train a certain number of employees of the petitioner to make available technical information, scientific knowledge, and expertise, to the employees for commissioning, operation, and maintenance of the plant.

The assessee agreed to pay Davy USD 16.23 mn net of taxes and requested a No Objection Certificate (NOC) to enable remittance without withholding the tax at source. The assessee said that the contract was not taxable in India since no operations related to its execution must take place there, and Davy must not engage in any activity to provide the technical services.

The IT department determined that Davy's payment was taxable in India and ordered a 30 percent tax withholding in accordance with Section 115A. Under protest, the assessee paid Rs.2.74 crore and Rs.2.82 crore in withholding tax on the first and second installments paid to Davy. It claimed a right to a refund if the payment was determined to be tax-exempt to Davy.

However, the revenue department held the sum to be taxable in India despite Davy's filing a return in India claiming nil income. The department reduced the withholding tax paid by the assessee against Davy's tax due.

Through a writ petition filed before the co-ordinate bench, the assessee and Davy contested the taxability of the sum received by Davy under Section 9(1)(vii), and the receipts were determined as non-taxable.

Davy's successor sent a letter to the revenue department requesting approval for the assessee to receive the refund for the withholding taxes already paid. However, the department declined to comply with the coordinated bench ruling that stated the assessee was not entitled to the return of withholding tax that was placed by the assessee because it was on behalf of Davy.

The bench held that once the appellant succeeds in the appeal, the revenue authorities must proceed on the basis that the appellant did not have any obligation to make the payment. Thus, the amount wrongly deducted or paid to the tax authorities was refundable to the appellant. Still, it was subject to the condition that the person receiving the payment had not claimed credit for it.