Retrospective Immunity Under Section 40(a)(i) Second Proviso Applies to Payments Made to Indian Branch of Foreign Company Without TDS

ORDER

Sandeep Singh Karhail, Judicial Member. – The assessee has filed the present appeal against the impugned order dated 24.06.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”), by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2014-15.

2. In this appeal, the assessee has raised the following grounds: –

1 (a) The orders of the authorities below in so far as these are against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant’s case.

(b) The appellant denies itself to be assessed on a total income of Rs.13,70,93,539/- as against returned loss of Rs.1,28,63,377/- under the facts and circumstances of the case.

3 The authorities below ought to have provided relief under the Non-Discrimination clause of Article 26 of the Double Taxation Avoidance Agreement between India and United States of America in accordance with law.

4 (a) Without prejudice, the authorities below failed to appreciate the fact that the appellant was under the genuine belief that M/s. Panduit International was a domestic company and therefore did not deduct tax at source under the facts and circumstances of the case.

(b) Without further prejudice, the authorities below failed to take cognisance of the fact that the appellant had deducted tax at source from other non-resident payees which proves the Bona fide intention of the appellant as regards to compliance with the provisions of the Act.

5 (a) The appellant denies itself liable to be levied to interest under sections 234A and 234B of the Act, as the computation of interest of was not provided to the appellant as regard to the rate, period and method of calculation of interest under the facts ad circumstances of the case.

(b) Without prejudice, the interest under sections 234A and 234B is not leviable and ought to have been waived on the facts of the case.

3. Ground No. 1 is general in nature. Therefore, the same needs no specific adjudication.

4. The issue arising in Ground No. 2 pertains to the disallowance made under section 40(a)(i) of the Act on account of non-deduction of tax at source while making payment to the Permanent Establishment of a foreign company.

5. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee was engaged in the trading of networking cables and equipment. For the year under consideration, the assessee filed its return of income on 29.11.2014, declaring a total income of Rs. NIL after claiming current year loss of Rs. 1,28,63,377/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was noticed that the assessee has claimed expenditure amounting to Rs. 83,89,19,447/-. It was further observed that during the year under consideration, the assessee made purchases from the India Branch Office of M/s. Panduit International Cooperation, which is a US company. As the assessee had made payments towards purchases to a branch office of a foreign entity, which constitutes its Permanent Establishment in India, and the profits of the Permanent Establishment are liable to tax in India, the assessee was asked to show cause as to why the expenditure in respect of payment made towards purchases be not disallowed as the assessee failed to deduct tax at source under section 195 of the Act. After considering the submissions of the assessee, the Assessing Officer (“AO”), vide order dated 13.10.2016, passed under section 143(3) of the Act, made a disallowance to the extent of Rs. 14,99,56,916/- under section 40(a)(i) of the Act.

6. The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the disallowance made by the AO under section 40(a)(i) of the Act. Being aggrieved, the assessee is in appeal before us.

7. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the second proviso to section 40(a)(i) of the Act is applicable in the present case as the recipient has duly furnished its return of income for the year under consideration after taking into account the payment received from the assessee, and thus the assessee cannot be considered as an “assessee in default” and no disallowance can be made under section 40(a)(i) of the Act. In support of its submission, the learned AR made reference to the return of income filed by the India Branch Office of M/s Panduit International Cooperation and Annexure – A to Form 26A certifying the compliance of conditions of the first proviso to section 201(1) of the Act, which forms part of the paper book from Pages 245 – 247.

8. On the other hand, the learned Departmental Representative (“learned DR”), at the outset, submitted that for the applicability of the provisions of the second proviso to section 40(a)(i) of the Act, it is relevant that all the conditions of the first proviso to section 201(1) are satisfied. The learned DR submitted that the assessee has only placed on record the Annexure to Form 26A, and the complete Form has not been placed on record. It was further submitted that the India Branch Office of M/s Panduit International Cooperation filed a NIL return and therefore did not pay the tax on the sum received from the assessee. Accordingly, the learned DR submitted that, as in the present case, all the conditions of the first proviso to section 201 of the Act are not satisfied, the assessee cannot claim the benefit of the second proviso to section 40(a)(i) of the Act.

9. We have considered the submissions of both sides and perused the material available on record. In the present case, it has not been disputed that the assessee made payments to the India Branch Office of M/s Panduit International Cooperation for the purchase of goods. By placing reliance on the second proviso to section 40(a)(i) of the Act, it is the plea of the assessee that since the payee has duly furnished its return of income for the year under consideration, after taking into account the payment received from the assessee, therefore, the assessee cannot be considered as an “assessee in default”, and no disallowance can be made under section 40(a)(i) of the Act.

10. Before proceeding further, it is pertinent to analyse certain relevant provisions of the Act which are necessary for the adjudication of the issue at hand. As per the provisions of section 40(a)(i) of the Act, if an assessee, while making the payment outside India or in India to a non-resident, not being a company or foreign company, did not deduct tax at source under Chapter-XVII-B or after deduction has not paid the tax deducted at source on or before the due date specified under section 139(1) of the Act, the entire amount paid by the assessee shall not be allowed as a deduction while computing the income of the assessee chargeable under the head “Profits and Gains of Business or Profession”. However, the second proviso to section 40(a)(i) provides an immunity from the disallowance under section 40(a)(i) of the Act, and the same reads as follows: –

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this subclause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.”

11. It is pertinent to note that the second proviso to section 40(a)(i) of the Act was inserted in the statute by the Finance (No.2) Act, 2019, with effect from 01.04.2020. We find that a similarly worded proviso was inserted in section 40(a)(ia) of the Act by the Finance Act, 2012, with effect from 01.04.2013, in respect of payments made to residents without deduction of tax at source. The Hon’ble Bombay High Court in Pr. CIT v. Perfect Circle India (P.) Ltd. [IT Appeal No. 707 of 2016, dated 7-1-2019] and the Hon’ble Delhi High Court in CIT v. Ansal Land Mark Township (P.) Ltd 377 ITR 635 (Delhi), held that the second proviso to section 40(a)(ia) of the Act is declaratory and curative in nature, and thus it is retrospectively applicable from 01.04.2005. We find that extending the similar logic to the amendment by the Finance (No.2) Act, 2019, with effect from 01.04.2020, to the provisions of section 40(a)(i) of the Act that the said amendment was carried out in order to remove the anomalies in the sections similar to section 40(a)(ia) of the Act, the Coordinate Mumbai Bench of the Tribunal in Celltick Mobile Media (India) (P.) Ltd. v. Dy. CIT 188 ITD 883 (Mumbai – Trib.), held that the amendment to section 40(a)(i) of the Act, whereby the second proviso was inserted, is applicable retrospectively from 01.04.2015. Accordingly, respectfully following the decision of the Coordinate Bench cited supra, we are of the considered view that the second proviso to section 40(a)(i) of the Act is also applicable to the year under consideration.

12. Since, for the purpose of the second proviso to section 40(a)(i), the assessee is required not to be treated as an “assessee in default” under the first proviso to section 201(1) of the Act, it is relevant to also note the said provisions and the same reads as follows: –

“Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee—

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed”

13. Thus, as per the provisions of the first proviso to section 201(1) of the Act, a person, who has failed to deduct the whole or any part of the tax, shall not be deemed to be an “assessee in default”, if the payee, (i) has furnished his return of income; (ii) has taken into account such sum for computing its income; (iii) has paid the tax due on the income declared by him in such return of income; and (iv) and has furnished a certificate to this effect from an Accountant.

14. In order to satisfy the fulfilment of all the conditions of the first proviso to section 201(1) of the Act, the assessee has placed on record an acknowledgement of the Income Tax Return of the India Branch Office of M/s Panduit International Cooperation for the assessment year 2014-15 and Annexure A to Form 26A issued by the Chartered Accountant certifying that the payment made by the assessee towards purchase of goods has been taken into account by the payee for computing its taxable income in the return filed in India. Further, the assessee has also placed on record the order passed under section 201(1A) of the Act for the assessment year 2014-15, levying only interest under section 201(1A) of the Act, after agreeing with the submissions of the assessee that the payee has filed its return of income and discharged the tax liability.

15. On the contrary, as per the learned DR, the documents filed by the assessee do not satisfy the fulfilment of all the conditions of the first proviso to section 201(1) of the Act. Firstly, as per the learned DR, the assessee has filed only Annexure A, and the covering Form 26A issued by the Chartered Accountant has not been placed on record by the assessee. Further, the learned DR submitted that the payee, i.e., the India Branch Office of M/s Panduit International Cooperation, filed a NIL return for the assessment year 2014-15 and, therefore, did not pay any tax for the year under consideration. Thus, it was submitted that the plea of the assessee that the tax was paid by the payee on the amount received from the assessee is unacceptable.

16. From the perusal of Annexure A to Form 26A filed by the assessee, which forms part of the paper book from pages 246-247, we find that the same contains the certificate of the accountant under the first proviso to section 201(1) of the Act certifying the furnishing of the return of income, and payment of tax by the payee. It is evident that the said certificate was issued on 18/11/2015 and has also been signed by the Chartered Accountant, whose membership number and the firm’s registration number, along with the full address, have also been mentioned. From the perusal of the format of Form 26A along with Annexure A, we find that Form 26A, on which emphasis has been laid by the Revenue, is merely a declaration by the payer that it was responsible for paying the amount to the payee. Further, Form 26A contains details such as the name, PAN/Aadhaar no./TAN of the payer, its address, and the name of the payee. Form 26A also contains a declaration by the payer that the interest under section 201(1A) of the Act has been paid, and contains the details of such payment. We find that the certificate from the accountant, as required in the first proviso to section 201(1) of the Act, is in fact in Annexure A to Form 26A, which has been duly furnished by the assessee in the present case certifying the requisite details. Therefore, we do not find any merit in the submissions of the learned DR that by not furnishing Form 26A, the assessee has not fulfilled one of the conditions of the first proviso to section 201(1) of the Act. In any case, various details required in Form 26A are already available with the Revenue, such as the name, PAN/Aadhaar no./TAN of the payer, its address, and the name of the payee. Further, the interest under section 201(1A) of the Act was quantified pursuant to an order passed by the JCIT (International Taxation) (OSD), Bangalore, i.e. AO-TDS. Thus, we are of the considered view that, as all such details are already available with the Revenue, absence of Form 26A is a mere technical aspect, in the peculiar facts of the present case, and therefore, the benefit otherwise available to the assessee cannot be denied.

17. Insofar as the contention of the learned DR that, as the payee, i.e. India Branch Office of M/s Panduit International Cooperation, filed a NIL return and no tax was paid for the year under consideration, therefore, all the conditions of the first proviso to section 201(1) of the Act are not satisfied, we find from the plain reading of the provisions of the first proviso to section 201(1) of the Act that the same only requires the payment of tax due by the payee on the income declared in the return of income after taking into account the sum received from the payer. From the perusal of the acknowledgement of the Income Tax Return filed by the India Branch Office of M/s Panduit International Cooperation on 26.11.2014, forming part of the paper book on page 245, we find that the current year loss of Rs. 2,18,98,209 was declared. Thus, accordingly, the payee filed a NIL return of income for the year under consideration. It is further evident that the said return was filed under section 139(1) of the Act. Be that as it may, it is pertinent to note that the term used in clause (iii) of the first proviso to section 201(1) of the Act is “paid the tax due”. Thus, we are of the considered view that the provisions of the first proviso to section 201(1) of the Act nowhere require the payee to compulsorily pay tax on the return filed, and it is only in a case where the taxes are due on the income declared by the payee that the same shall be payable. In our considered view, reading the provision in the manner interpreted by the learned DR would be contrary to Article 265 of the Constitution of India, which specifically requires that no tax can be levied or collected without authority of law. Thus, no one can be compelled to pay taxes which are otherwise not payable as per law. Further, as noted above, the payee has declared a loss during the year under consideration. Accordingly, reading the provision in the manner suggested by the learned DR would also render the provisions of the Act pertaining to set-off and carry-forward of losses completely otiose, since, as per the Revenue, even if the taxpayer has incurred a loss, taxes should be paid. We are of the considered view that such an interpretation by the Revenue is completely contrary to the provisions of the Act. Further, from the perusal of the decision of the Hon’ble Kerala High Court in Academy of Medical Sciences v. CIT [2018]  403 ITR 74 (Kerala), placed reliance by the learned DR, we find that in the said decision, the payee filed the return belatedly and did not pay the tax due on the income declared. However, such are not the facts in the present case, as the return was filed by the payee under section 139(1) of the Act, and no tax was due after taking into account the payment received from the assessee. Therefore, we are of the considered view that the aforesaid decision is factually distinguishable and thus not applicable to the present case.

18. Before concluding, it is pertinent to reiterate that vide order dated 29.04.2016 passed under section 201(1A) for the assessment year 201415, only interest under section 201(1A) of the Act was levied on the assessee, after agreeing with its submissions that the payee has filed its return of income and discharged the tax liability.

19. Therefore, in view of the facts and circumstances of the present case, legal position and judicial pronouncements as noted above, we are of the considered view that all the conditions of the first proviso to section 201(1) of the Act are satisfied in the present case, and thus, the assessee cannot be deemed to be an “assessee in default”. Accordingly, we are of the considered view that the assessee is covered by the immunity granted under the second proviso to section 40(a)(i), and thus, the impugned disallowance made under section 40(a)(i) of the Act, being unsustainable, is deleted. As a result, the impugned order on this issue is set aside, and Ground No. 2, raised in assessee’s appeal, is allowed.

20. In view of our aforesaid findings, Grounds No. 3 and 4 are rendered academic and therefore are kept open.

21. The issue arising in Ground No. 5, raised in assessee’s appeal, pertains to the levy of interest, which is consequential in nature. Therefore, the same needs no separate adjudication.

22. In the result, the appeal filed by the assessee is allowed.