OVERLOOK OFSECTION-195 OF INCOME TAX ACT, 1962 COSTS VODAFONE INTERNATIONAL PENALTY DUE to SECTION-201(1)

This article is about section 195, section 201(1) & case of Vodafone International Holdings B.V. vs. Union of India. In this article I brought out the analysis of section 195 linked with section 201(1) by the help of case study of Vodafone International Holdings B.V. vs. Union of India. My motive to write this article is to bring to notice the importance of section 195 & section 201.

SECTION 195

1. Any person responsible for paying to a non-resident or to a foreign company, any interest or any other sum chargeable under the provisions of Income tax Act,1962 shall, at the time of credit of such income to the account of payee or at the time of payment thereof, deduct income tax thereon at the rates in force.

Note: “Any person” includes a Non-resident also i.e. a transaction between non-resident and non-resident also covered. So even if non-resident makes payment (subjected to TDS under this section) to other non-resident come within the purview of this section.

1. Where the person responsible for paying any sum chargeable under this Act considers that whole of such sum would not be income chargeable in the hands of recipient, he may make an application to the Assessing officer to determine by an order, the appropriate proportion of such sum so chargeable to, and upon such determination, tax shall be deducted under this section only on that proportion of the sum which is so chargeable.

SECTION 201(1)

If any person who is liable to deduct TDS does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by the Income Tax Act, he shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of the tax. Consequently he shall be liable to pay interest u/s 220 and penalty u/s 221 for being an assessee in default.

Vodafone International Holdings B.V. vs. Union of India

Highlights of case:

Hutchison Essar Ltd. (HUTCH) is an Indian Company which is the joint venture of Hutchison Group and Essar Group. HUTCH is carrying on the business of providing telecommunication services in India.

Hutchison Telecommunication International Ltd. (HTIL) is a foreign company, registered in Hong Kong. This foreign company has a wholly owned subsidiary company CGP Investment Ltd. (CGP) which is also a foreign company registered in Cayman Islands, Mauritius. The company CGP holds 51.95% shares in HUTCH and through its foreign subsidiary companies, CGP also holds 15.05% shares in HUTCH i.e. overall 67% & Essar Group holds 33% shares in HUTCH.

With a view to acquire controlling interest in HUTCH, Vodafone International purchased the 100% shares in CGP from HTIL.

Now following issues emerges from such transaction:

1. Whether such transaction is taxable in India?
2. Whether, on payment made by the Vodafone to HTIL, Vodafone was liable to deduct tax at source u/s 195?

DECISION held as under:

• The transfer of shares of CGP by HTIL to Vodafone amounts to transfer of controlling interest in Indian Company HUTCH to Vodafone. The dominant purpose of sale of shares of CGP was to transfer the controlling interest of Indian Company.
• Vodafone has acquired a source of income in India, HTIL by reason of this transaction has earned capital gains taxable in India as the income was earned towards sale consideration of transfer to Vodafone of its Indian business/economic interests as a group.

ANALYSIS:

As we can see from above decision Vodafone was liable to deduct tax at source u/s 195.

Non-compliance of which made Vodafone assessee in default u/s 201, consequently Vodafone shall be liable to pay interest u/s 220 and penalty u/s 221.

But if we think what exactly mistake was there is that

As Vodafone considers that transaction entered with HTIL was not income taxable in the hands of HTIL in India, then right course of action was:

Vodafone had to make an application to the Assessing officer to determine by an order, whether such transaction is chargeable to tax in India or not as required u/s195 (see Para 2 mention above). And if Assessing officer order that such transaction is taxable, then Vodafone required to deduct TDS and if Vodafone not satisfied with Assessing officer’s order then can take remedial action.

I do not discuss the other issues in case study as the article is to bring to notice the section 195 & section 201 importance. Further there is remedy available against the order of Assessing officer u/s 248 Appeal to Commissioner (Appeals). So in case assessee is not satisfied with order of Assessing officer, he can appeal against such order.

By:

AMIT BHATIA