Department Ought To Refund Adhoc Amount Withholding Tax Deposited Under Protest, Cannot Retain Same By Construing It As TDS: Bombay HC

While allowing petition of Grasim Industries Ltd. (Assessee) by directing the AO to refund the withholding tax deposited under protest, the Bombay High Court reiterated that “what Assessee paid was ‘an ad hoc amount not technically a TDS amount’, since it is also confirmed by this Court that the amount paid to deductor (DMC) was not chargeable to tax in India, and Revenue’s insistence on Assessee paying that amount was not in accordance with law and the amount so paid over must be refunded to Assessee”.

The High Court relied on CBDT Circular No.7 of 2007 to observe that where no income accrued to non-resident or where no tax is due on that income or tax is due at a lesser rate, the amount deposited to the credit of government cannot be said to be “tax” and can be refunded with prior approval, to the deductor under Section 195.

The Division Bench comprising Justice K. R. Shriram and Justice Dr. N. K. Gokhale observed that “the refusal of the Department to return the amount and retaining the same is unauthorized by law and would only amount to unjust enrichment by the Department on technical grounds”.

Senior Advocate J.D. Mistri appeared for the Assessee while the Revenue was represented by Advocate Akhileshwar Sharma.

Briefly, pursuant to an agreement with Davy Mckee Corporation (DMC) for setting up a gas-based sponge iron plant in India, the Assessee agreed to pay certain sum net of taxes for which NOC to facilitate remittance without deduction of tax at source, was sought from the AO. During assessment, the Assessee contended that no operation in the execution of the said contract is to take place within India and no activity is to be carried on by DMC for rendering the technical services in India, hence, it is not taxable in India.

The AO however, held that the payment to DMC is taxable in India and directed to deduct tax @ 30% as per Section 115A. Accordingly, the Assessee, under protest, paid Rs.2.74 Crore and Rs.2.82 Crore as withholding tax on first and second instalment paid to DMC and contended its entitlement to refund if the payment made to DMC was held non-chargeable to tax.

Later, the DMC filed return in India declaring Nil income against which the AO held the amount received from Assessee taxable in India and thus, adjusted the withholding tax paid by the Assessee against DMC’s tax liability. Thus, Assessee along with DMC challenged the taxability of the amount received by Davy under Section 9(1)(vii), by way of a writ before the co-ordinate bench wherein the receipts were held to be non-taxable.

Later, the DMC’s successor filed a letter with AO giving NOC to the Assessee receiving the refund in connection with the withholding taxes paid by Assessee. However, the AO refused to give effect to co-ordinate bench order holding that the Assessee is not entitled to the refund of withholding tax deposited by Assessee as the same was on behalf of DMC.

After considering the submission, the Bench noted that as per agreement with DMC, USD 16.23 million were to be paid net of tax, hence Assessee had no option but to deposit the 30% extra under protest.

Highlighting the provision of Section 248, the Bench opined that once the assessee succeeds in appeal, the Revenue Authorities must proceed on the basis that the assessee 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 assessee, subject to the condition that the person receiving the payment has not claimed credit for the same, added the Bench.

Finding that neither DMC or its successor ever claimed credit of such TDS and also issued NOC stating to refund the tax paid to the Assessee, the Bench observed that AO’s refusal to return the amount and retaining the same is unauthorized by law and is unjust enrichment on technical grounds.

Accordingly, the High Court directed the AO to foreclose the fixed deposit of such taxes and refund the tax along-with interest to the Assessee.

Cause Title: Grasim Industries Ltd v. Assistant Commissioner of Income Tax [2023: BHC-OS: 9537-DB]

Click here to read/download the Judgment