RED HAT INDIA P.LTD, MUMBAI V. DDIT (IT) RG II, PUNE

ITA 1086/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7920 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 20-03-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 17-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JASBIR CHOUHAN
• Assessee Lawyers: CHESHTA MOOLCHANDANI; SS M P LOHIA JIGNESH SHAH
• Keywords: Double taxation relief; Initiation of penalty proceedings
• Section: 69C; 201(1); 69; 148; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'L' BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NOS. 1085 & 1086/MUM/2014 (ASSESSMENT YEARS: 2007-08 & 2008-09) M/S. RED HAT INDIA PVT. LTD. VS. DDIT (INTERNATIONAL TAXATION) A 201, SUPREME BUSINESS PARK, SUPREME CITY HIRANANDANI GARDENS POWAI, MUMBAI 411004 RANGE II 3 RD FLOOR, PRAPTIKAR SADAN 60/61 ERANDWANE PUNE 411004 PAN AABCR 7097N APPELLANT RESPONDENT APPELLANT BY: S/S. M.P. LOHIA, JIGNESH SHAH & MS. CHESHTA MOOLCHANDANI RESPONDENT BY: SHRI JASBIR CHOUHAN DATE OF HEARING: 22.03.2017 DATE OF PRONOUNCEMENT: 24.03.2017 O R D E R PER JASON P. BOAZ, A.M. THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE CONSOLIDATED ORDER OF THE CIT(A)-IT/TP, PUNE DATED 29.11.2013 FO R ASSESSMENT YEARS 2007-08 AND 2008-09. COMMON ISSUES BEING INVOLVED, THESES APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY WAY OF THIS COMMON ORDER. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER: - 2.1 THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MARKETING, PROMOTION AND DISTRIBUTION OF RED HAT SUBSCRIPTION S TO CUSTOMERS IN INDIA, ENABLING USERS TO GET UPDATES, UPGRADES, ETC . OF LINUX AND OTHER RED HAT APPLICATIONS THROUGH SUPPORT SERVICES; WHICH INCLUDE ONGOING MAINTENANCE DURING THE SUBSCRIPTION PERIOD AND TROU BLESHOOTING SUPPORT BY RESPONDING TO QUESTIONS/QUERIES/PROBLEMS PERTAIN ING TO THE OPEN SOURCE SOFTWARE THROUGH WEB BASED SYSTEMS AND TELEP HONE CALLS. IN THE ORDER PASSED UNDER SECTION 201(1) R.W.S. 201(1A) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') FOR A.Y. 2007-08 DATED 26 .03.2013 AND A.Y. 2008- ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 2 09 DATED 27.10.2012, THE ASSESSING OFFICER (AO) HEL D THAT THE AMOUNTS REMITTED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRI SES (AE) IN THIS PERIOD WAS EXIGIBLE TO TAX AS ROYALTY UNDER SECTION 9(1) (VI) OF THE ACT AS WELL AS ARTICLE 12(3)(A) OF THE INDIA-SINGAPORE DTAA. THE A O ALSO HELD THAT THESE REMITTANCES WERE ALSO EXIGIBLE TO TAX AS FEES FOR TECHNICAL SERVICES (FTS) UNDER SECTION 9(1)(VII) OF THE ACT AS WELL AS UNDER ARTICLE 12(4)(A) AND 12(4)(B) OF THE INDIA-SINGAPORE DTAA. THE AO WAS OF THE VIEW THAT THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON TH E REMITTANCES TO ITS AE, WHICH IT FAILED TO DO AND THEREFORE TREATED THE ASSESSEE AS AN ASSESSEE IN DEFAULT AND RAISED DEMAND UNDER SECTION 201(1) O F THE ACT AND CHARGED INTEREST UNDER SECTION 201(1A) OF THE ACT. 2.2 THE LEARNED CIT(A) DISPOSED OFF THE APPEALS PRE FERRED FOR ASSESSMENT YEARS 2007-07 AND 2008-09 VIDE THE IMPUGNED ORDER D ATED 29.11.2013 SUBSTANTIALLY UPHOLDING THE AOS ACTION BUT ALLOWED THE ASSESSEE PARTIAL RELIEF. IN DOING SO, THE LEARNED CIT(A) (I) UPHELD THE AOS ACTION IN TREATING THE ASSESSEE AS AN ASSESSEE IN DEFAULT UNDER SECTIO N 201(1) OF THE ACT RAISING TAX THEREON AND IN CHARGING INTEREST UNDER SECTION 201(1A) OF THE ACT AND BUT, HOWEVER, DIRECTED THE AO TO LEVY TDS @ 10%, WITHOUT INCLUDING SURCHARGE AND EDUCATION CESS. 3. AGGRIEVED BY THE ORDER OF THE CIT(A)-IT/TP, PUNE DA TED 29.11.2013 FOR BOTH ASSESSMENT YEARS 2007-08 AND 2008-09, THE ASSESSEE HAS PREFERRED IDENTICAL GROUNDS OF APPEAL FOR BOTH THE ASSESSMENT YEARS WHICH ARE AS UNDER: - ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED DEPUTY DIRECTOR OF INCOME TAX INTERNATIONAL TAXATIO N -II, PUNE/ THE LEARNED CIT(A) HAVE: GENERAL GROUND 1. ERRED IN HOLDING THAT THE APPELLANT IS AN ASSESS EE IN DEFAULT IN RESPECT OF THE PAYMENTS MADE TO RED HAT ASIA PACIFI C PTE LTD, SINGAPORE ('RED HAT SINGAPORE') AND THEREBY LEVYING A TAX LIABILITY UNDER SECTION 201(1) OF THE ACT AND INTEREST THEREO N UNDER SECTION 201(1A) OF THE ACT; SUBSCRIPTION FEES TAXED AS 'FEES FOR TECHNICAL SERV ICES' 2. ERRED IN HOLDING THAT THE PAYMENTS MADE TO RED HAT SINGAPORE FOR PURCHASE OF SUBSCRIPTIONS ARE IN THE NATURE OF 'FEE S FOR TECHNICAL ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 3 SERVICES' AS DEFINED UNDER ARTICLE 12(4) OF THE IND IA-SINGAPORE DOUBLE TAXATION AVOIDANCE AGREEMENT ('TAX TREATY') AND HENCE, SUBJECT TO WITHHOLDING TAX IN INDIA UNDER SECTION 1 95 OF THE ACT; 3. FAILED TO APPRECIATE THAT RED HAT SINGAPORE HAS NOT MADE AVAILABLE ANY KNOWLEDGE/ SKILLS EITHER TO THE APPELLANT OR TO THE END USERS OF RED HAT SUBSCRIPTIONS AND HENCE PURCHASE OF SUBSCRI PTION ARE NOT FEES FOR TECHNICAL SERVICES AS PER TAX TREATY AND N OT LIABLE TO TAX IN INDIA; 4. WITHOUT PREJUDICE TO GROUND NO. 1 TO 3, FAILED TO A PPRECIATE THAT THE TAX LIABILITY ARISING ON PAYMENTS MADE TO RED HAT S INGAPORE, IF ANY, IS TO BE BORNE BY RED HAT SINGAPORE AND HENCE THERE IS NO QUESTION OF GROSSING UP AS PER SECTION 195A OF THE ACT; LEVY OF INTEREST UNDER SECTION 201(1A) OF THE ACT 5. ERRED IN LEVYING IN INTEREST UNDER SECTION 201(1 A) OF THE ACT. INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 C OF THE ACT 6. ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SE CTION 271C OF THE ACT. 4. GROUND NO. 1 4.1 IN THIS GROUND THE ASSESSEE CHALLENGES THE VAL IDITY OF THE ORDERS OF THE AUTHORITIES BELOW, CONTENDING THAT THEY HAVE ER RED IN HOLDING THE ASSESSEE AS AN ASSESSEE IN DEFAULT IN RESPECT OF PA YMENTS MADE TO ITS AE, RED HAT ASIA PACIFIC PTE LTD, SINGAPORE AND THEREBY CHARGING TAX UNDER SECTION 201(1) OF THE ACT. AT THE OUTSET, THE LEARN ED A.R. OF THE ASSESSEE STRONGLY CANVASSED THE PROPOSITION THAT THE AOS OR DERS PASSED UNDER SECTION 201(1) R.W.S. 201(1A) OF THE ACT FOR ASSESS MENT YEARS 2007-08 AND 2008-09 VIDE ORDERS DATED 26.03.2013 AND 27.10.2012 RESPECTIVELY WOULD NOT SURVIVE AND ARE UNSUSTAINABLE IN THESE APPEALS IF (I) NO ACTION HAS BEEN TAKEN BY REVENUE AGAINST THE RECIPIENT/PAYEE, I.E. RED HAT ASIA PACIFIC PTE LTD., SINGAPORE AND (II) AND/OR IF THE POSSIBILITY OF ACTION BEING TAKEN BY REVENUE IS BARRED BY LIMITATION. 4.1.2 IN SUPPORT OF THE AFORESAID PROPOSITION, THE LEARNED A.R. PLACED RELIANCE ON THE DECISION OF THE SPECIAL BENCH OF IT AT, MUMBAI IN THE CASE OF MAHINDRA & MAHINDRA VS. DCIT (2009) 122 TTJ 0577 (SB). ACCORDING TO THE LEARNED A.R., IN THE CITED CASE IT HAS BEEN HEL D THAT AS PER EXPLANATION TO SECTION 191 OF THE ACT, BOTH CONDITIONS, VIZ. (I ) FAILURE ON THE PART OF THE PERSON TO PERFORM HIS OBLIGATION OF MAKING TDS AND (II) NON PAYMENT OF TAX ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 4 BY THE PAYEE/RECIPIENT DIRECTLY SHOULD BE CUMULATIV ELY SATISFIED SO AS TO TREAT A PERSON AS AN ASSESSEE IN DEFAULT. IF ONLY O NE OF THESE TWO CONDITIONS IS SATISFIED THEN THE PERSON RESPONSIBLE FOR DEDUCT ION OF TAX AT SOURCE CANNOT BE TREATED AS AN ASSESSEE IN DEFAULT. THEREF ORE, THE QUESTION OF TREATING THE PERSON RESPONSIBLE FOR PAYING THE AMOU NT TO THE RECIPIENT/ PAYEE AS ASSESSEE IN DEFAULT FOR NON DEDUCTION OF T AX AT SOURCE THEREON IS, INTER ALIA, CONNECTED WITH THE TAX LIABILITY OF THE RECIPIENT/PAYEE OF SUCH SUM. IF NO LIABILITY OF THE PAYEE TO PAY TAX EXISTS OR THE LIABILITY OF THE PAYEE TO TAX HAS NOT BEEN DETERMINED BY REVENUE BY PASSIN G OF SUCH AN ORDER IN ITS HANDS AND/OR THE TIME LIMIT FOR TAKING SUCH ACT ION ON THE PAYEE UNDER ANY PROVISIONS OF THE ACT IS BARRED BY LIMITATION, THE AO IS PRECLUDED FROM HOLDING THE PERSON RESPONSIBLE FOR MAKING TDS ON SU CH PAYMENTS AS AN ASSESSEE IN DEFAULT UNDER SECTION 201(1) OF THE ACT . IT IS CONTENDED BY THE LEARNED A.R. THAT IN THE CASE ON HAND, IN VIEW OF T HE FINDINGS RENDERED BY THE SPECIAL BENCH OF ITAT, MUMBAI IN THE CASE OF MA HINDRA & MAHINDRA LTD. (SUPRA), THE SAME FINDINGS WOULD SQUARELY COVE R THE ISSUE IN FAVOUR OF THE ASSESSEE SINCE NO ACTION HAS BEEN TAKEN BY REVE NUE TO ASSESS THE TAXABILITY OF THE ASSESSEE PAYEE/RECIPIENT IN THE C ASE ON HAND, I.E. RED HAT ASIA PACIFIC PTE. LTD., SINGAPORE AND FURTHER NO AC TION CAN NOW BE TAKEN BY THE AO AGAINST THE PAYEE FOR THE ASSESSMENT YEARS I N QUESTION VIZ. 2007-08 AND 2008-09 AS THE SAME IS BARRED BY LIMITATION. IT IS PRAYED THAT IN VIEW OF THE FACTUAL AND LEGAL MATRIX OF THE CASE, AS DIS CUSSED ABOVE, THE ASSESSEES APPEALS FOR ASSESSMENT YEARS 2007-08 AND 2008-09 BE ALLOWED ON THIS PRELIMINARY LEGAL GROUND AND THE AOS ORDER S UNDER SECTION 201(1) AND 201(1A) BE HELD TO BE UNSUSTAINABLE, AS THE AO IN THE CASE ON HAND IS CLEARLY PRECLUDED FROM HOLDING THE ASSESSEE TO BE A N ASSESSEE IN DEFAULT UNDER SECTION 201(1) OF THE ACT. 4.2 THE LEARNED D.R. FOR REVENUE WAS HEARD. IN RESP ONSE TO THE PROPOSITIONS RAISED BY THE LEARNED A.R. OF THE ASSE SSEE, THAT THE AO WAS PRECLUDED FROM HOLDING THE ASSESSEE IN THE CASE ON HAND AS AN ASSESSEE IN DEFAULT UNDER SECTION 201(1) OF THE ACT AS THE PAYE E/RECIPIENT HAS NOT PAID TAX THEREON AND THAT NEITHER HAS REVENUE DETERMINED THE PAYEES TAX LIABILITY IN THE RELEVANT ASSESSMENT YEARS 2007-08 AND 2008-09. ON THE ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 5 REQUEST OF THE BENCH, THE LEARNED D.R. ASCERTAINED THE POSITION FROM THE AO. THE LEARNED D.R. SUBMITTED THAT THE AO VIDE LET TER DATED 21.03.2017 (COPY PLACED ON RECORD) HAS CONFIRMED THAT NO ORDER S OF ASSESSMENT HAVE BEEN PASSED IN THE CASE OF THE PAYEE/RECIPIENT, RED HAT ASIA PACIFIC PTE. LTD., FOR ASSESSMENT YEARS 2007-08 AND 2008-09 AND SUBSEQUENT YEARS IN THIS REGARD. 4.3.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CA REFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRON OUNCEMENTS CITED. FOR THE ASSESSMENT YEARS 2007-08 AND 2008-09 UNDER CONS IDERATION, THE AO PASSED ORDERS UNDER SECTION 201(1) R.W.S. 201(1A) O F THE ACT HOLDING THAT ASSESSEE TO BE AN ASSESSEE IN DEFAULT FOR FAILURE O N ITS PART TO DEDUCT TAX AT SOURCE ON PAYMENTS MADE BY IT TO ITS AE, M/S. RED H AT ASIA PACIFIC PTE, LTD., SINGAPORE. ACCORDING TO THE ASSESSEE THE VAL IDITY OF THE SAID ORDERS PASSED BY THE AO IS IN QUESTION AND THAT THE SAID O RDERS ARE UNSUSTAINABLE SINCE BOTH THE TWIN CONDITIONS LAID DOWN AS PER EXP LANATION TO SECTION 191 OF THE ACT ARE NOT SATISFIED, I.E. (I) FAILURE ON T HE PART OF THE ASSESSEE TO MAKE TDS ON PAYMENTS TO ITS AE AND (II) NON PAYMENT OF TAX BY THE PAYEE/ RECIPIENT SINCE NO ACTION HAS BEEN TAKEN BY REVENUE AGAINST THE PAYEE/ RECIPIENT AND/OR IF THE POSSIBILITY OF ACTION BEING TAKEN BY REVENUE AGAINST THE PAYEE IS BARRED BY LIMITATION. ON AN APPRECIATI ON OF THE FACTS ON RECORD IT APPEARS TO US THAT IT IS AMPLY CLEAR THAT BOTH T HE AFORESAID REQUISITE CONDITIONS ARE NOT SATISFIED, IN AS MUCH AS, IT IS ADMITTED BY THE AO IN HIS LETTER DATED 21.03.2017 (COPY OF WHICH HAS BEEN PLA CED ON RECORD BY LEARNED D.R.) THAT NO ASSESSMENT IN THIS REGARD HAS BEEN MADE IN RESPECT OF THE TAX LIABILITY OF THE PAYEE/RECIPIENT M/S. RE D HAT ASIA PACIFIC PTE. LTD. FOR ASSESSMENT YEARS 2007-08, 2008-09 AND ONWARDS. THE LEARNED D.R. HAS ALSO NOT CONTROVERTED THE CONTENTION OF THE LEA RNED A.R. OF THE ASSESSEE THAT THE POSSIBILITY OF REVENUE TAKING ANY ACTION I N THIS REGARD IN THE CASE OF THE PAYEE/RECIPIENT IS BARRED BY LIMITATION. IN THIS FACTUAL MATRIX OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE DECISI ON OF THE SPECIAL BENCH OF ITAT, MUMBAI IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS. DCIT (2009) 122 TTJ 577 (SB) (MUM TRIB) WOULD SQUARELY APPLY AN D COVER THE ISSUE IN FAVOUR OF THE ASSESSEE. ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 6 4.3.2 IN THE CASE OF MAHINDRA & MAHINDRA LTD. (SUPR A) THE SPECIAL BENCH OBSERVED THAT IN A CASE WHERE (I) THE ASSESSEE HAS BEEN HELD IN DEFAULT UNDER SECTION 201(1) OF THE ACT AND (II) NO ASSESS MENT HAS BEEN MADE IN THE HANDS OF THE PAYEE/RECIPIENT, I.E. NON PAYMENT OF TAX BY THE PAYEE (AS IN THE CASE ON HAND) AND/OR REVENUE HAS FAILED TO P ASS ORDERS IN PAYEES CASE IN THIS REGARD OR THE POSSIBILITY OF ACTION IS BARRED BY LIMITATION, EXPLANATION TO SECTION 191 OF THE ACT MANDATES IF O NLY ONE OF THE ABOVE TWO CONDITIONS IS SATISFIED, THEN THE PERSON RESPONSIBL E FOR MAKING TDS ON SUCH PAYMENTS CANNOT BE TREATED AS AN ASSESSEE IN D EFAULT AS THE ABOVE TWO CONDITIONS ARE INTER CONNECTED. IN PARA 18.10 O F ITS ORDER THE SPECIAL BENCH HELD AS UNDER: - 18.10 THE UNDERLYING PRINCIPLE BEHIND THE DEDUCTION OF T AX AT SOURCE IS THE PRESUMPTION THAT THERE WILL BE SOME L IABILITY OF THE PAYEE TOWARDS TAX ON THE SUM PAID TO HIM. IF THERE IS NO SUCH LIABILITY THEN THE ENTIRE EXERCISE OF FIRSTLY GETTI NG THE AMOUNT OF TAX COLLECTED/DEDUCTED AT SOURCE AND THEN REFUNDING TO THE PAYEE WILL BE FUTILE. IF THERE IS NO TAX LIABILITY OF THE PAYEE T HEN THERE CANNOT BE ANY QUESTION OF TREATING THE PERSON RESPONSIBLE FOR PAY ING THE SUM WITHOUT DEDUCTING TAX AT SOURCE AS ASSESSEE IN DEFA ULT. THUS THE ESSENCE OF THE PROVISIONS OF DEDUCTION OF TAX AT SO URCE IS THAT THERE IS A PRESUMPTION OF LIABILITY OF THE PAYEE TO TAX ON T HE INCOME. AS DISCUSSED IN AN EARLIER PARA THAT IF THERE IS NO OR LOWER LIABILITY OF THE PAYEE TO TAX ON THE INCOME SO RECEIVED WITHOUT DEDU CTION OF TAX AT SOURCE, THEN THE PAYER CANNOT BE TREATED AS ASSESSE E IN DEFAULT FOR THE WHOLE OR THAT PART OF THE AMOUNT, AS THE CASE M AY BE. IT IS THEREFORE CLEAR THAT THOUGH THE DUTY OF DEDUCTION O F TAX AT SOURCE WAS THERE AT THE TIME OF MAKING THE PAYMENT OR CRED ITING THE ACCOUNT OF THE PAYEE, BUT ITS FAILURE WILL NOT LEAD TO ADVE RSE CONSEQUENCE BY TREATING THE PERSON PAYING THE INCOME AS ASSESSEE I N DEFAULT IF EVENTUALLY EITHER THE PAYEE IS NOT LIABLE TO TAX ON SUCH SUM OR HE HAS ALREADY PAID THE TAX DUE ON THE AMOUNT OF INCOME SO RECEIVED. THUS THE QUESTION OF TREATING THE PERSON RESPONSIBLE FOR PAYING THE INCOME AS ASSESSEE IN DEFAULT BY WAY OF PASSING THE ORDER UNDER S. 201(1) IS INTER ALIA, TIED WITH THE TAX LIABILITY OF THE P AYEE ON SUCH SUM. IF NO LIABILITY OF THE PAYEE TO TAX EXISTS AT THE TIME WH EN ORDER UNDER S. 201(1) IS SOUGHT TO BE PASSED OR THOUGH THE INCOME IS CHARGEABLE TO ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 7 TAX BUT THE LIABILITY OF THE PAYEE TO TAX HAS NOT B EEN DETERMINED BY PASSING ANY ORDER IN HIS HANDS AND FURTHER THE TIME -LIMIT FOR TAKING ACTION ON THE PAYEE UNDER ANY OTHER PROVISION HAS A LSO PASSED OUT, IN SUCH A SITUATION AGAIN THE PASSING OF ORDER UNDE R S. 201(1) WILL BE MERE RITUAL. IT IS SO BECAUSE THE TAX NOW COLLECTED FROM THE PAYER OF INCOME UNDER THIS ORDER WILL BE INCAPABLE OF ADJUST MENT AGAINST THE TAX LIABILITY OF THE PAYEE EITHER EXISTING OR LIKEL Y TO ARISE ON THE INCOME SO PAID TO HIM BECAUSE IN THE FORMER CASE TH ERE IS NO TAX LIABILITY AND IN THE LATTER CASE, SUCH A LIABILITY CANNOT BE CREATED AS THE TIME-LIMIT FOR TAKING ACTION HAVING BEEN RUN OU T. LIKE IN AN ACTION OF SEARCH UNDER S. 132 OR OTHER RELEVANT PROCEEDING S UNDER THE ACT IF IT COMES TO THE NOTICE OF THE DEPARTMENT THAT ANY I NCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT, THE PROCEEDINGS ARE LAUNCHED AGAINST SUCH PERSON AND NOTICE IS ISSUED UNDER S. 1 48 WITHIN THE TIME PRESCRIBED UNDER S. 149. THE PRESENT OUTER LIM IT PROVIDED IN S. 149 IS SIX YEARS FROM THE END OF THE RELEVANT ASSES SMENT YEAR WITHIN WHICH A NOTICE UNDER S. 148 CAN BE ISSUED. IF THE I NCOME SO FOUND TO HAVE BEEN EARNED BY THE ASSESSEE AND ESCAPED TAXATI ON FALLS WITHIN A PERIOD OF SIX YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, NOTICE UNDER S. 148 WILL BE ISSUED AND THE ASSESSME NT SHALL BE FRAMED BY TAXING SUCH INCOME. IF HOWEVER DURING SUC H PROCEEDINGS IT IS CONCLUSIVELY ESTABLISHED THAT THE ASSESSEE HAD E ARNED INCOME NOT DISCLOSED TO THE REVENUE IN PERIOD PRIOR TO THE SAI D SIX YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, THEN SUCH INCOME WILL ESCAPE TAXATION UNLESS IT FALLS WITHIN S. 69 OR 69A OR 69B OR 69C AND THE REVENUE WILL BE RESTRAINED FROM RECOVERING TAX BY. MAKING THE ASSESSMENT OF SUCH INCOME. THE LOGIC BEHIND PROVIDI NG SUCH TIME- LIMIT FOR TAKING ACTION IS THAT THE DEPARTMENTAL AU THORITIES SHOULD REMAIN VIGILANT AND BRING THE ESCAPED INCOME TO TAX AT AN EARLIER POINT OF TIME AND FURTHER TO WORK AGAINST THE INACT ION ON THE PART OF THE AOS ON ONE HAND AND PROVIDING CERTAINTY TO THE ASSESSEE THAT AFTER THIS PERIOD NO ACTION WILL BE TAKEN AGAINST H IM. THUS IT FOLLOWS THAT IF DUE TO ONE REASON OR THE OTHER THE CONCEALE D INCOME OF THE ASSESSEE IS UNEARTHED FOR A PERIOD BEYOND SIX YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, THEN NO TAX CAN BE RE COVERED THEREON. BY THE SAME LOGIC AND TURNING TO THE POINT BEFORE U S WHEN THE PAYEE HAS PAID THE TAX BY OFFERING SUCH INCOME FOR TAXATI ON ON WHICH TAX WAS DEDUCTIBLE BUT NOT DEDUCTED, THEN THE PERSON RE SPONSIBLE CANNOT BE TREATED AS ASSESSEE IN DEFAULT UNDER S. 2 01(1). IN THE LIKE ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 8 MANNER WHERE THE PAYEE HAS NOT OFFERED SUCH INCOME FOR TAXATION AND THERE IS NO REMEDY AVAILABLE WITH THE AO FOR TA XING SUCH INCOME IN THE HANDS OF THE PAYEE I.E. THE TIME-LIMIT FOR T AKING ACTION AGAINST THE PAYEE UNDER ANY POSSIBLE PROVISION OF THE ACT H AS EXPIRED, THEN ALSO THE PAYEE CANNOT BE CHARGED ON SUCH INCOME NOR RESULTANTLY THE PERSON RESPONSIBLE FOR PAYING THE INCOME CAN BE TRE ATED AS ASSESSEE IN DEFAULT. WE HAVE SEEN ABOVE THAT THE PROVISIONS FOR DEDUCTION OF TAX AT SOURCE PRESUPPOSE THE TAXABILITY OF THE SUM PAID IN THE HANDS OF THE PAYEE AND THE TAX SO DEDUCTED IS FINALLY ADJ USTED AGAINST THE TAX LIABILITY OF THE PAYEE. IF TAX IS COLLECTED BY WAY OF ORDER UNDER S. 201(1) FROM THE PERSON RESPONSIBLE FAILING IN HIS D UTY TO DEDUCT OR PAYING AFTER DEDUCTION OF TAX AT SOURCE, BUT SUCH A MOUNT CANNOT BE ADJUSTED AGAINST THE TAX LIABILITY OF THE PAYEE, TH EN THIS COLLECTION OF TAX WOULD BE ILLEGAL. THE CBDT VIDE ITS CIRCULAR NO . 7 OF 2007, DT. 23RD OCT., 2007 [(2007) 212 CTR (ST) 137] HAS ACCEP TED IN PARA 4 THAT WHERE INCOME HAS ACCRUED BUT NO TAX IS DUE ON THAT INCOME OR TAX IS DUE AT A LESSER RATE, THE AMOUNT DEPOSITED T O THE CREDIT OF GOVERNMENT TO THAT EXTENT UNDER S. 195, CANNOT BE S AID TO BE 'TAX'. FROM HERE IT FOLLOWS THAT UNLESS THERE IS A TAX LIA BILITY CAPABLE OF BEING LAWFULLY CREATED AND RECOVERED FROM THE DEDUC TEE, THE AMOUNT OF TAX COLLECTED BY WAY OF DEDUCTION OF TAX AT SOUR CE CANNOT BE CHARACTERIZED AS THE TAX. IN THE SAME CIRCULAR, I T HAS BEEN DIRECTED THAT IN SUCH CASES THE REFUND SHOULD BE MADE TO THE PERSON MAKING PAYMENT UNDER S. 195, THAT IS THE PAYER. SO IF TAX IS RECOVERED IN THE FIRST INSTANCE FROM THE PERSON RESPONSIBLE FOR PAYI NG BY VIRTUE OF ORDER UNDER S. 201(1) BUT THE INCOME CANNOT BE TAXE D IN THE HANDS OF THE NON-RESIDENT EITHER DUE TO SUCH INCOME ACCRUING BUT NO TAX REMAINING DUE THEREON OR TAX NOT LEVIABLE DUE TO TH E TIME-LIMIT FOR TAKING ACTION UNDER ANY PROVISIONS OF THE ACT HAVIN G BEEN EXPIRED, IN SUCH A SITUATION, THE AMOUNT OF TAX SHALL NEED TO B E REFUNDED TO THE PERSON LIABLE TO DEDUCT TAX WHO IS FOR THE TIME BEI NG CONSIDERED AS ASSESSEE IN DEFAULT. WE, THEREFORE, HOLD THAT IN OR DER TO TREAT THE PAYER AS ASSESSEE IN DEFAULT IT IS OF THE UTMOST IM PORTANCE THAT THE INCOME SO PAID OR CREDITED TO THE ACCOUNT OF PAYEE IS CAPABLE OF BEING BROUGHT WITHIN THE PURVIEW OF TAX NET AND SUC H ASSESSMENT CAN BE LAWFULLY MADE ON THE PAYEE. 4.3.3 CONSIDERING THE LEGAL AND FACTUAL MATRIX OF T HE CASE, AS DISCUSSED ABOVE, AND RESPECTFULLY FOLLOWING THE ABOVE CITED D ECISION OF THE SPECIAL ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 9 BENCH OF ITAT, MUMBAI IN THE CASE OF MAHINDRA & MAH INDRA LTD. (SUPRA) WE HOLD THAT IN ORDER TO TREAT THE ASSESSEE/PAYEE A S AN ASSESSEE IN DEFAULT IT IS REQUIRED THAT THE INCOME SO PAID OR CREDITED TO THE ACCOUNT OF THE PAYEE/RECIPIENT IS CAPABLE OF BEING BROUGHT WITHIN THE TAX NET AND SUCH ASSESSMENTS SHOULD BE LAWFULLY MADE BY THE AO ON T HE PAYEE/RECIPIENT. SINCE THESE TWO CONDITIONS AS REQUIRED BY EXPLANATI ON TO SECTION 191 OF THE ACT HAVE NOT BEEN SATISFIED, THE ORDERS OF THE AO UNDER SECTION 201(1) R.W.S. 201(1A) OF THE ACT FOR ASSESSMENT YEAR 2007- 08 AND 2008-09 TREATING THE ASSESSEE AS AN ASSESSEE IN DEFAULT UND ER SECTION 201(1) OF THE ACT AND THEREBY RAISING TAX LIABILITY AND CHARGING INTEREST THEREON UNDER SECTION 201(1A) ARE UNSUSTAINABLE IN LAW AND ARE AC CORDINGLY CANCELLED. WE HOLD AND DIRECT ACCORDINGLY. CONSEQUENTLY, GROUN D NO. 1 OF THE ASSESSEES APPEAL IS ALLOWED. 5. GROUND NO. 2 TO 4 ON MERITS 5.1 IN VIEW OF OUR ALLOWING THE ASSESSEES APPEAL O N GROUND NO. 2 (SUPRA), THE AOS ORDER PASSED UNDER SECTION 201(1) R.W.S. 201(1A) FOR ASSESSMENT YEARS 2007-08 AND 2008-09 DATED 26.03.20 13 AND 27.10.2012 RESPECTIVELY ARE CANCELLED. WE ARE THEREFORE OF THE OPINION THAT THESE GROUND NOS. 2 TO 4 RAISED BY THE ASSESSEE FOR THESE TWO YEARS ON MERITS ARE NOW ACADEMIC IN NATURE AND HENCE ARE NOT ADJUDICATI NG THESE GROUND AT THIS JUNCTURE. 6. GROUND NO. 5 CHARGING OF INTEREST UNDER SECTION 2 01(1A) 6.1 IT IS SUBMITTED THAT THE ASSESSEE HAS FILED A R ECTIFICATION APPLICATION ON THIS ISSUE BEFORE THE AO ON 29.05.2014, WHICH IS PENDING DISPOSAL. EVEN OTHERWISE THIS GROUND OF CHARGING OF INTEREST UNDER SECTION 201(1A) IS CONSEQUENTIAL TO GROUND NO. 1 OF THIS APPEAL AND SI NCE WE HAVE ALLOWED THE ASSESSEES APPEAL ON GROUND NO. 1 BY CANCELLING THE ORDERS OF THE AO UNDER SECTION 201(1) R.W.S. 201(1A) OF THE ACT, WE DIRECT THE AO TO CONSEQUENTLY DELETE THE INTEREST CHARGED UNDER SECTION 201(1A) O F THE ACT FOR ASSESSMENT YEARS 2007-08 AND 2008-09. ITA NOS. 1085 & 1086/MUM/2014 MS. RED HAT INDIA PVT. LTD. 10 7. GROUND NO. 7 INITIATION OF PENALTY PROCEEDINGS UN DER SECTION 271C OF THE ACT. 7.1 THIS GROUND IS DISMISSED AS NOT MAINTAINABLE SINCE NO CAUSE OF GRIEVANCE ARISES TO THE ASSESSEE FROM THE ORDERS OF THE AO BY MERE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 C OF THE ACT. 8. IN THE RESULT, THE ASSESSEES APPEALS FOR ASSESSMEN T YEARS 2007-08 AND 2008-09 ARE ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH MARCH, 2017. SD/ - SD/ - (PAWAN SINGH) (JASON P. BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 24 TH MARCH, 2017 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) IT/IP, PUNE 4. THE DIT TP/IT, PUNE 5. THE DR, L BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.