Taxmen can waive TDS-related penal interest in some cases

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Mumbai: The Central Board of Direct Taxes (CBDT) in its circular issued on March 24 has empowered tax authorities to reduce or waive penal interest for non-deduction of tax at source (TDS) in certain circumstances, including owing to a retrospective amendment in law.
Interest can also be reduced or waived where tax could not be deducted as the books of a taxpayer were seized in a search operation.
CBDT's circular will also apply where tax was not deducted or deducted at a lower rate on payments made to non residents, and the matter was settled under the mutual agreement procedure between the authorities of the two countries, under the relevant tax treaty. To avail of this benefit, the taxpayer would be required to pay the principal tax sum demanded or make arrangements to pay the same. However, restrictive conditions in this order are unlikely to benefit taxpayers in indirect transfer cases, say experts.
Vodafone International Holdings, for instance, faces a demand of Rs 14,200 crore, which, according to the income-tax department, is due to the $ 11-billion acquisition of Hutchison's India telecom business. Tax authorities had held that Vodafone ought to have deducted tax in India, even if the sale carried outside India was of shares of a non-resident company, as it related to an asset in India (telecom business in India).
To avail of the benefit of a waiver on interest (either partial or full), the condition imposed by CBDT is that the taxpayer did not deduct tax at source owing to a favourable high court order. Subsequently owing to an SC order on a retrospective amendment, it became liable to deduct tax at source. "The circular will have very limited applicability and usefulness in an indirect transfer tax kind of situation (where retrospective amendment was made in the I-T Act) as no positive jurisdictional high court decision on the subject as such is available on which reliance could have been placed by taxpayers," says Punit Shah, partner, Dhruva Advisors.
The reasoning is simple. Vodafone won a favourable decision from the Supreme Court on January 20, 2012. A month later, the Finance Bill, 2012, through a retrospective amendment made indirect transfers taxable in India. Indirect transfer is a transaction where the foreign company's shares being sold derives, directly or indirectly, its value substantially from assets located in India.
Thus, there is only a window of approximately one month available to taxpayers to have relied on a favourable decision of the Supreme Court and not deducted tax at source. This limits applicability of the CBDT circular, says a corporate counsel.
CBDT's circular doesn't relate to the recent decision in case of Cairn UK Holdings where the Delhi tax tribunal upheld tax on capital gains of Rs 10,247 arising on indirect transfer but waived penal interest under sections 234A and 234B relating to non-payment of advance tax and not filing the I-T return.

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