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Telangana High Court (HC) rules that withholding tax proceedings in case of payments to non-residents should be concluded within a reasonable period
In case of Dr. Reddy’s Laboratories Ltd. [1] ( Taxpayer), the issue before Telangana HC was whether any limitation period under Section 201 of the Income Tax Laws (ITL) applies for passing withholding tax order against a taxpayer in respect of payments to non-residents when the relevant provision expressly applies only in respect of payments to a person resident in India. This has been a controversial issue giving rise to conflict of views between different HCs of the country.
The time limit in respect of payments to residents was introduced in ITL in 2009 initially for a period of four years and subsequently extended to seven years. However, no time limit exists in respect of payments to non-residents, for which reason cited in Explanatory Memorandum[2] and Circular[3] is the administrative difficulty in recovery of taxes from the non-residents.
The Telangana HC, in the present case, took note of the following earlier rulings on the issue of limitation period for passing withholding tax order in respect of payments to non-residents in absence of limitation period prescribed in the ITL:
Withholding orders passed prior to introduction of limitation period for payments to residents
Andhra Pradesh HC in the case of CIT v U.B. Electronic Instruments Ltd.[4] which held that in absence of a specific limitation period, a reasonable period needs to be imputed.
Punjab & Haryana HC in the case of CIT v. H.M.T. Ltd.[5] and Calcutta HC in the case of Bhura Exports Ltd. v ITO[6] which held that in absence of specific limitation period, no limitation period can be imputed.
Mumbai Tribunal Special Bench in the case of DIT v. Mahindra & Mahindra Ltd.[7] which held that even though no limitation period is prescribed, nevertheless the withholding tax order has to be passed within a reasonable period of time i.e., within the time limit available for making reassessment of income in the hands of the non-resident payee. This was upheld by Bombay HC[8] which declined to follow Calcutta HC ruling in Bhura Exports Ltd (supra) but did not express an opinion on what should be reasonable time period.
Withholding order passed post introduction of limitation period for payment to residents
Delhi HC in the case of Bharti Airtel Ltd v. UOI [9] which followed its earlier rulings in the cases of CIT v. NHK-Japan Broadcasting Ltd.[10] , CIT v. Hutchison Essar Telecom Ltd.[11] and Vodafone Essar Mobile Services Ltd. [12] v. UOI to hold that in absence of a specific limitation period in law, a reasonable period of four years needs to be imputed.
The Telangana HC disagreed with the Delhi HC ruling in the case of Bharti Airtel Ltd. (supra) and held that since the statute has consciously not provided for any limitation period in case of payments to non-residents on the ground of administrative difficulty of recovery of taxes from non-residents, it is incorrect to read period of limitation into the provision for passing of withholding tax order. At the same time, in absence of specific limitation period, such order has to be passed within a reasonable period.
What is a reasonable period would depend upon facts and circumstances of each case. It cannot be less than seven years as applicable to payment to a resident since recovery of taxes from non-resident is more difficult.
[1] [TS-583-HC-2023(TEL)] [2] Explanatory Memorandum to Finance (No.2) Bill 2009 [3] Circular No. 5 of 2010 [4] [2015] 371 ITR 314 (AP) [5] [2012] 340 ITR 219 (P & H) [6] [2014] 365 ITR 548 (Calcutta) [7] [2009]30 SOT 374 (Mum)(SB) [8] [2014]48 taxmann.com 150 (Bombay) [9] [2016] 76 taxmann.com 256 (Delhi) [10] (305 ITR 137)(Del) [11] (323 ITR 230)(Del) [12] (385 ITR 486)