A six-year time limit is reasonable for passing TDS default orders for non-residents.
Issue
In the absence of a specific statutory time limit in the Income-tax Act, 1961, what is the “reasonable period” within which an order can be passed under Section 201 to treat an assessee as being in default for failing to deduct tax on payments made to non-residents?
Facts
- An assessee-company made payments to a non-resident consultant from Assessment Year 2010-11 to 2015-16 without deducting tax at source (TDS) as required under Section 195.
- The tax department initiated proceedings under Section 201 to treat the company as an “assessee in default” for these years.
- The assessee challenged the proceedings, arguing that since the law prescribed no specific time limit, the orders must be passed within a “reasonable period,” and that period had already expired, making the orders barred by limitation.
- The court observed that while older judicial precedents, which were relevant for earlier assessment years, had considered four years to be a reasonable period, a new benchmark was needed.
Decision
The court ruled partly in favour of the assessee.
- It held that a period of six years from the end of the relevant financial year should be adopted as the new “reckoning yardstick” for what constitutes a reasonable period to pass a Section 201 order in cases involving non-residents.
- Applying this newly established six-year time limit:
- The orders for the assessment years that were passed beyond the six-year limit were held to be time-barred and were set aside.
- However, the order for the Assessment Year 2011-12, which was found to have been passed within the six-year limit, was held to be valid and was sustained.
Key Takeways
- Reading a Time Limit into the Law: When a statute is silent on the time limit for a particular action, the law implies that the action must be completed within a “reasonable period.” The courts will determine what is reasonable based on the context and other provisions of the Act.
- An Evolving Standard: The definition of a “reasonable period” is not fixed forever. It can evolve as the statutory framework changes. In this case, the court updated the standard from four years to six years for the relevant period.
- Certainty for Taxpayers: By establishing a clear time limit, even where none is explicitly written, the judiciary provides certainty and prevents taxpayers from being indefinitely exposed to proceedings for past events.
- Limitation Creates a Right: Once the period of limitation expires, the taxpayer gains a right to be free from assessment or proceedings for that year. The tax department cannot take action after this period has passed.
HIGH COURT OF MADRAS
Vedanta Ltd.
v.
Deputy Commissioner of Income-tax (International Taxation)
G.R. Swaminathan and K. Rajasekar, JJ.
W.A.(MD) Nos. 373 & 374 of 2023 and others
C.M.P. (MD)Nos. 4105 & 4111 of 2023 and others
C.M.P. (MD)Nos. 4105 & 4111 of 2023 and others
AUGUST 29, 2025
R.V. Easwar, Sr. Counsel and G. Baskar for the Appellant. N. Dilipkumar, Standing Counsel for the Respondent.
JUDGMENT
G.R. Swaminathan, J.- These writ appeals are directed against the common order dated 24.02.2023 made in W.P.(MD)Nos.11831 of 2019, 7939 of 2022, 8269 and 8270 of 2017 and 8344 and 8351 of 2021.
2. The assessee is the appellant in all these appeals. The following table captures the relevant details:-
| s. No | WA. No. | WP.No | Date of ending of F.Y | A.Y | Date of SCN | Date of final order | Demand raised In Rs. |
| 1. | 413/2023 | 8269/2017 | 31.03.2010 | 2010-11 | 14.03.2017 | 31.03.2017 | 4,24,73,595 |
| 2. | 373/2023 | 8270/2017 | 31.03.2011 | 2011-12 | 08.02.2017 | 31.03.2017 | 3,91,23,060 |
| 3. | 374/2023 | 11831/19 | 31.03.2012 | 2012-13 | 31.01.2018 | 28.03.2019 | 8,06,92,780 |
| 4. | 414/2023 | 8344/2021 | 31.03.2013 | 2013-14 | 31.01.2018 | 22.03.2021 | 9,60,51,920 |
| 5. | 415/2023 | 8351/2021 | 31.03.2014 | 2014-15 | 01.03.2021 | 27.03.2021 | 10,25,55,135 |
| 6. | 375/2023 | 7939/2022 | 31.03.2015 | 2015-16 | 01.03.2021 | 30.03.2022 | 5,75,27,600 |
3. The appellant company is engaged in the business of mining and exploration of metals and oil and natural gas. During the relevant financial years commencing from 2009-2010 to 2014-2015, the appellant entered into a Consultancy Agreement and Representative Office Agreement with Vedanta Resources Public Limited Company (VRPLC) which is a non-resident entity. For the services rendered by VRPLC, remuneration was paid by the appellant without deducting tax at source. Treating the appellant as an assessee in default in terms of Section 201(1) of the Income Tax Act 1961, show cause notices were issued in respect of the assessment years commencing from 2010-2011 to 2015-16 on various dates. After receiving the appellant’s reply, final orders were also passed on various dates and demands were raised. Challenging the same, the appellant filed the aforementioned writ petitions.
4. The prime ground of attack was that the orders passed under Sections 201 and 201(1A) are time-barred. According to the appellant, final order could not have been passed beyond a period of four years from the end of the relevant financial years. The learned Single Judge rejected the said contention and held that such an order can be passed anytime within 7 years. The learned Single Judge made it clear that the issue of limitation alone had been decided and that the merits of the matter have not been gone into. Liberty was given to the appellant to file statutory appeals. Aggrieved by the same, these writ appeals have been filed.
5. The learned Senior Counsel appearing for the appellant reiterated all the contentions set out in the grounds of appeals. He pointed out that the payments made to the foreign entity were in lieu of the management services rendered by it. The appellant’s file is with the international taxation circle of the department. The appellant had informed the department in their returns that tax had not been deducted at source on account of the double taxation treaty between India and UK. In fact, the department was fully aware of the nature of the transactions. It is not as if such payments had been made for the first time to the foreign entity. On earlier occasions, the department never disputed the stand of the appellant that what was paid to the foreign entity was only for management services which did not require deduction of tax at source, and the payments made were allowed as expenditure. But in respect of the aforesaid financial years, the department took the stand that what was paid was fee for technical services and hence, the tax ought to have been deducted at source. The learned Senior Counsel would strongly contend that during the relevant time, since no limitation period was prescribed in the statute in respect of payments made to non-residents, courts have been holding that the order under Sections 201 and 201A cannot be passed beyond a period of four years.
6.The learned Senior counsel relied on the following case laws:-
| (1) | ESI Corpn. v. C.C. Santhakumar 3213/112 FLR 636 (SC)/1 SCC 584. |
| (2) | Transmission Corpn. of A.P. Ltd. v. Sri Rama Krishna Rice Mill (2006) 3 SCC 74. |
| (3) | Commissioner of Customs, Kandla v. Essar Oil Ltd. 1 (SC)/(2004) 11 SCC 364. |
| (4) | Veerayee Ammal v. Seeni Ammal (2002) 1 SCC 134 |
| (5) | State of Gujarat v. Patel Raghav Natha AIR 1969 SC 1297. |
| (6) | State of Punjab v. Bhatinda District Coop. Milk (P.) Union Ltd. (2007) 11 SCC 363. |
| (7) | J.Sheik Parith v. Commissioner of Customs 2020 (374) E.L.T. 15 (Mad). |
| (8) | Mohamad Kavi Mohamad Amin v. Fatmabai Ibrahim (1997) 6 SCC 71. |
| (9) | M. Srinivasa Rao v. Asstt. CIT 53/[2007] 295 ITR 136 (Madras). |
| (10)CIT | v. Goyal M.G. Gases (P.) Ltd. 189 (Delhi). |
| (11) | Bharti Airtel Ltd. v. UOI 80 (Delhi). |
| (12) | CIT v. NHK Japan Broadcasting Corpn. 230 (Delhi). |
| (13) | Vodafone Essar Mobile Services Ltd. v. UOI 625 (Delhi). |
| (14) | CIT (TDS) v. C.J. International Hotels (P.) Ltd. 818 (Delhi). |
| (15) | CIT v. Hutchison Essar Telecome Ltd. [2010] 323 ITR 230 (Delhi) |
| (16) | DIT (International Taxation) v. Mahindra & Mahindra Ltd. 306 (Bombay) |
| (17) | CIT v. U.B. Electronic Instruments Ltd. 259 (Andhra Pradesh) |
| (18) | CIT, TDS v. Bharat Hotels Ltd. 384 ITR 77 (Karnataka) |
| (19) | CIT (TDS) v. Anagram Wellington Assets Management Co. Ltd. 389 ITR 654 (Gujarat) |
| (20) | CIT v. Satluj Jal Vidyut Nigam Ltd. 345 ITR 552 (Himachal Pradesh). |
| (21) | Mass Awash (P.) Ltd. v. CIT (International Taxation) (Allahabad). |
| (22) | B hura Exports Ltd. v. ITO (TDS) 88 (Calcutta) |
| (23) | CIT(TDS) v. H.M.T. Ltd. 31 (Punjab & Haryana) |
Written arguments were filed on behalf of the assessee and we were taken through it also.
7. Pe r contra, the learned Standing counsel appearing for the department submitted that the order of the learned Single Judge is well reasoned and that it does not call for interference. He pointed out that Section 201 has been amended from time to time and as the Section stood when the impugned orders were passed, the limitation was seven years with respect to residents and that therefore, the reasonable time to pass an order with respect to non-residents cannot be lesser than this period. He also pointed out that the writ petition ought to have been dismissed on the ground that the assessee did not exhaust the appeal remedy. He relied on the following case laws:-
| (i) | UOI v. Rajeev Bansal 238 (SC) |
| (ii) | Dr. Reddys Laboratories Ltd. v. Dy. CIT, International Taxation 97 (Telangana) |
| (iii) | CIT v. Idea Cellular Ltd. 163 (Telangana) |
| (iv) | Jagran Prakashan Ltd. v. Dy. CIT (TDS) 39 (Allahabad) |
He prayed for dismissal of these writ appeals.
8. We carefully considered the rival contentions and went through the materials on record. As per Section 195 of the Income Tax Act, an obligation is cast on a person making payment to a foreign company to deduct tax at source under certain circumstances. Section 201 of the Act sets out the consequence of failure to deduct tax and provides that such a person shall be deemed to be an assessee in default. According to the Department, the assessee failed to carry out this statutory obligation and hence, they should be deemed to be an assessee in default. The learned Senior Counsel for the assessee made it clear that he is contesting the impugned orders only on the ground of limitation and not on merits.
9. It is not in dispute that during the relevant period, while specific periods were prescribed in respect of deductions to be made from the residents, no such period was prescribed in respect of nonresidents. The stand of the department is that since no limitation has been prescribed in the latter case, Courts should not prescribe any ceiling period. We cannot accept such a contention. The position has been amply made clear in the recent decision of the Hon’ble Supreme Court reported in UOI v. Citi Bank, N.A. 19 SCC 188. It was held therein as follows:-
“19. It is a settled proposition of law that when the proceedings are required to be initiated within a particular period provided under the statute, the same are required to be initiated within the said period. However, where no such period has been provided in the statute, the authorities are required to initiate the said proceeding within a reasonable period. No doubt that what would be a reasonable period would depend upon the facts and circumstances of each case. “
10. The High Courts of Delhi, Bombay, Calcutta, Karnataka as well as Madras have been holding that an order under Section 201 of the Act has to be passed within a reasonable period. The Hon’ble Division Bench of the Karnataka High Court in the decision Nilgiri Dairy Farm (P.) Ltd. v. ITO (International Taxation) (Karnataka)following its earlier decision in Bharat Hotels Ltd. (supra) held that to pass an order under Section 201(1) and/or Section 201(1A) in respect of non-residents, four years would be the limitation or reasonable time. The Hon’ble Division Bench of the Delhi High Court in Bharti Airtel Ltd (supra), following its earlier decision in Vodafone Essar Mobile Services Ltd. (supra) took the same view. The decision of Hon’ble Bombay High Court in Mahindra & Mahindra Ltd. (supra) is also on the same lines. However the Hon’ble Division Bench of the Allahabad High Court in Mass Awash (P.) Ltd. (supra) declined to prescribe any limitation for exercising power under Sections 201(1) and 201(1A) and held that an order has to be passed within a reasonable time and what would be reasonable will have to be construed depending on the facts of each case.
11. Thus the overwhelming weight of authority is that an order under Sections 201 and 201(1A) of the Act will have to be passed within a reasonable period of time in respect of non-residents. The learned single Judge is right in his opinion that the concept of reasonable period cannot be confined to a strait-jacket formula and that it appears to be a dynamic concept. This is evident from the fact that in respect of the deductions pertaining to resident Indians, the limitation period is being varied from time to time. Till 01.04.2010, no specific limitation period was prescribed. By way of Finance (No. 2) Act, 2009, with effect from April 1, 2010, sub-sections (3) and (4) along with provisos were inserted, the relevant extract of which read as under:
“(3) No order shall be made under sub-section (1) deeming a person ‘to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of—
| (i) | two years from the end of the financial year in which the statement is filed in a case where the statement referred to in section 200 has been filed ; |
| (ii) | four years from the end of the financial year in which payment is made or credit is given, in any other case:” |
This was amended in the year 2012 with retrospective effect from 01.04.2010 and the four years period was enhanced to six years. With effect from 01.10.2014, it became seven years. This was the position which prevailed when the impugned orders were passed.
12. The learned Single Judge opined that “the reasonable period” for passing order under Section 201(1) of the Act deeming a person to be an “assessee in default” for failure to deduct taxes in respect of payments to non-residents shall also be seven years from the end of the financial year in which the payment is made or credit given w.e.f. 01.04.2010. Reason has also been given for taking such a view. It is well settled that the law of limitation is a procedural law and it is to be retrospectively applied subject to certain exceptions. The law of limitation that is in vogue on the date of the commencement of the action governs it (vide B. K. Educational Services (P.) Ltd. v. Parag Gupta & Associates 213 (SC)/(2019) 11 SCC 633). It is equally well settled that if during the running of limitation, there is an amendment extending the period, the Amendment Act will apply. In the cases on hand, the earliest financial year is 2009-10. The limitation period was originally four years and then extended to six years w.e.f 01.04.2010. As per this, the limitation period would expire only on 31.03.2016. Even before the expiry of this period, another amendment came w.e.f 01.10.2014 extending the period to seven years. That is why, the learned Single Judge took the view that the reasonable period for non-residents should also be seven years.
13. We are not in agreement with the aforesaid view. This is for two reasons. The expression “reasonable” implies a kind of fluidity. Reasonableness is the antithesis of rigidity. When a particular period, whether four years or seven years, is taken as the ceiling for passing an order under Section 201 of the Act in respect of payments made to non-residents, it means that the said period has been prescribed as the limitation period. Conceptually, it ceases to be a reasonable period. What is reasonable period has to be determined with reference to the facts of that particular case. It cannot be prescribed for all categories of cases.
14. As rightly highlighted by the learned Senior Counsel appearing for the assessee, the number of transactions pertaining to non-residents would be very small compared to that of residents. The task of gathering information in the case of non-residents is also comparatively less arduous. Therefore, the period of limitation in the case of non-residents cannot be greater than what has been prescribed in the case of residents.
15. Looked at from this perspective, if at all, while seven years can be the outer limit, it cannot become the touchstone to test all the impugned orders on that basis. In respect of the assessment years 2010-11 and 2011-12, show cause notices were issued in Feb/March 2017. Final orders were passed on 31.03.2017. Good enough !. But in respect of the assessment years 2012-13 and 2013-14, show cause notices were issued only on 31.01.2018. While final order was passed in one case on 28.03.2019, in the other, final order was passed only on 22.03.2021. Show cause notices for the other two assessment years were issued only on 01.03.2021. The appellant is the assessee in respect of all the six assessment years. The subject matter is the same in respect of all the impugned orders. The recipient in all the cases is also the same entity. Since payment to overseas entity is involved, the assessee falls under the International Taxation Circle. Nothing stopped the department from issuing notices in respect of the assessment years commencing from 2012-13 to 2015-16 when they issued show cause notice on 08.02.2017 for the first time for the AY 2011-12. Even if seven years is taken as the yardstick, while it is possible to save the orders dated 31.03.2017 on that ground, the same logic cannot obviously be extended to the orders passed in respect of the other assessment years. There is no earthly reason as to why simultaneous action was not initiated in respect of all the assessment years in Feb 2017 itself. Admittedly, by then, the assessment year 2015-16 had already ended. The moot question is why show cause notice in respect of the assessment years 2014-15 and 2015-16 were issued only on 01.03.2021. If seven years can be a reasonable period for the assessment year 2010-11 and 2011-12, it definitely cannot be a reasonable period for passing an order under Section 201 of the Act for the assessment years 2014-15 or 2015-16. In other words, seven years cannot be the reasonable for all the subject assessment years. ‘One-size-fits-all’ approach ill-fits the facts on hand. We have to observe that the department did not conduct itself reasonably but for reasons best known to it, delayed things in respect of AY 2012-13 to 2015-16.
16. We have found an easier way to resolve the issue. The learned Single Judge had rightly observed that the period of limitation has been varied from time to time. Section 201 had been amended yet again. This time, the distinction between residents and non-residents has been done away with. Both types of transactions have been placed on the same footing. Limitation period is now six years. This is the position w.e.f. 01.04.2025. It is true that when the impugned orders were passed, the statute had prescribed seven years as limitation in respect of payments made to residents. For the reasons indicated in the previous paragraph, we cannot reckon seven years as the reasonable period for all the six assessment years. We are, therefore, of the view that taking six years which is now the statutorily mandated period can be taken as the reckoning yardstick.
17. We have to assign our reason as to why we are not accepting the argument of the learned Senior Counsel for the assessee that four years must be taken as the limitation period. When it came to determining what could be the reasonable period for the purpose of passing order Under Section 201 in respect of non-residents, the High Courts had taken inspiration from the period prescribed in respect of the residents and held that the reasonable period in respect of non-residents would also be four years. But almost all those decisions were concerned with the assessment years prior to 2010-2011.
18. Coming to the facts on hand, it is seen that in respect of the assessment year 2010-2011, the final order was passed on 31.03.2017. Six years has to be reckoned from 31.03.2010. Therefore, the order dated 31.03.2017 impugned in WP(MD)No.8269 of 2017 is set aside. As regards the assessment year 2011-12, 31.03.2011 is the reckoning date. The order impugned in WP(MD)No. 8270 of 2017 was passed on the last date of limitation and is saved. In respect of the remaining four assessment years, all the orders impugned in WP(MD)Nos.11831 of 2019, 8344 of 2021, 8351 of 2021 & 7939 of 2022 were passed beyond six years from the reckoning date. They are set aside.
19. For the foregoing reasons, the impugned common order dated 24.02.2023 is set aside except in respect of WP(MD)No.8270 of 2017. W.A.(MD)Nos.374, 413, 414, 415 and 375 of 2023 are allowed and W.A.(MD)No.373 of 2023 is dismissed. The assessee is given liberty to file appeal before the authority against the order impugned in W.P.(MD)Nos.8270 of 2017. If such an appeal is filed within four weeks from the date of receipt of a copy of this order, the appellate authority shall entertain the same and dispose it of on merits. No costs. Consequently, connected miscellaneous petitions are closed.