Bombay High Court Directs Dept. To Refund TDS Amount Deposited By Assessee Under Protest

The Bombay High Court, while invoking the doctrine of unjust enrichment, directed the department to refund the TDS amount deposited by the assessee under protest.

The bench of Justice K. R. Shriram and Justice N. K. Gokhale has observed that technically, even though the amount deposited by the petitioner would be called ‘tax deductible at source’, what the petitioner paid was ‘an ad hoc amount, not technically a TDS amount’. Moreover, since it is also confirmed by the Court that the amount paid to Davy Mckee Corporation (DAVY) was not chargeable to tax in India, the departments’ insistence on the assessee paying that amount was not in accordance with the law, and the amount so paid over 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 Mckee Corporation (DAVY) and another party. Under the agreement, DAVY agreed to render to the petitioner outside India certain engineering and other related services in relation to the project. Petitioner also entered into another agreement (a supervisory agreement) with DAVY to provide certain supervisory services to Petitioner in India. Under the agreement, DAVY was to deliver to the petitioner the necessary design, drawing, and data with respect to the sponge iron plant outside India. DAVY also agreed to train a certain number of employees of the petitioner in order to make available to such employees technical information, scientific knowledge, expertise, etc. for the commissioning, operation, and maintenance of the plant.

In accordance with a contract with Davy for the construction of a gas-based sponge iron plant in India, the assessee agreed to pay Davy USD 16.23 mn net of taxes. The assessee requested a No Objection Certificate (NOC) to enable remittance without withholding tax at source.

The assessee argued that the contract is 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 there.

The department determined that Davy's payment was taxable in India and ordered a 30% 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 instalments paid to Davy, respectively, and claimed a right to a refund if the payment to Davy was determined to be tax-exempt.

The sum received from the assessee was held by the Revenue to be taxable in India despite Davy's filing a return in India claiming nil income, and as a result, the Revenue reduced the withholding tax paid by the assessee against Davy's tax due. Through the filing of a writ petition 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 ultimately determined to be non-taxable.

Davy's successor sent a letter to Revenue requesting approval for the assessee to receive the refund for the withholding taxes that the assessee had already paid.

The Revenue, however, 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 Davy's behalf.

The court 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 Revenue Authorities where it was not required to be paid would become refundable to the appellant. Of course, that is subject to the condition that the person receiving the payment has not claimed credit for it or is not claiming credit for it.

Case Title: Grasim Industries Ltd. Versus Assistant Commissioner of Income Tax

Case No.: Writ Petition No. 2505 Of 2012

Date: 01/08/2023

Counsel For Petitioner: J. D. Mistri

Counsel For Respondent: Akhileshwar Sharma

Click Here To Read The Order