TDS credit – in case excess tax is deducted.

Facts:

• The assessee company was engaged in providing software development services and outsourcing services. It was also availing management services from its parent company, namely, CSC, USA.

 

• In lieu of the management services obtained, the assessee paid to certain amount CSC, USA, after deducting tax at source at the rate of 20 percent on the premise that the payment made to the parent company was in the nature of royalty and fees for technical services.

 

• As the non-resident parent company did not have any Permanent Account Number (PAN), the Assessing Officer opined that the tax should have been deducted at source at a higher rate in terms of the provisions of section 206AA.

 

• The Commissioner (Appeals) partly accepted the assessee’s contention by holding that the assessee should have deducted tax at source at the rate of 20 percent. He, however, held that, in addition, surcharge and education cess should have also been levied.

 

• The assessee filed an instant appeal raising two issues. The first issue was that the rate of tax withholding should be 15 percent and, second, no surcharge and education cess should have been levied.

 

Analysis of facts:

The person responsible for paying to the non-resident is required to deduct tax at source (section 195); issue certificate for tax deducted to the deductee (section 203); and the credit for tax deducted at source is given to the deductee by treating it as a payment of tax by the deductor on behalf of the deductee (section 199). It clearly emerges that once a deduction of tax at source has been made on behalf of the deductee (payee), the deductor (payer) becomes functus officio and, cannot, under any circumstance, claim a refund of the tax deducted at source. The deduction of tax at source is always a payment of tax by the deductor on behalf of the deductee and it is only the deductee, who is entitled to the credit of tax deducted by the deductor on his behalf for which a certificate is issued to him.

No statutory provision permits the deductor to claim a refund of the excess tax deducted at the source.

There is a vital distinction between two situations viz., one, in which the amount of income is put to tax at a high rate; and two in which the deduction of tax is made from it at a higher rate.

Obviously, the first situation is a cause of concern as no amount of tax more than what is rightfully due to the exchequer, can be recovered.

On the other hand, the second situation simply encompasses a payment of tax on behalf of the deductee without impacting his tax liability in any manner. If such a deduction has voluntarily been made at a higher rate, the deductee, at the time of filing his return, is always entitled to claim the benefit of TDS and the resultant refund, if any due to him.

Conclusion:

The ITAT Delhi Bench in the case of Computer Sciences Corporation India (P.) Ltd. v. ITO [2017] 77 taxmann.com 306 (Delhi – Trib.) held that once the tax has been deducted at source and certificate of such deduction is issued to the deductee, only the deductee can claim the benefit of deduction of tax at source and in no circumstances the deductor can claim any refund out of the excess amount of tax deducted at source on behalf of the deductee.