The De-Brief

234B interest – what’s that

234B interest is levied when there is short-fall in payment of Advance Tax by a Taxpayer.

The controversy

The controversy has a connection with Section 209 – which lays down how advance tax liability is to be computed. As per Section 209, a Taxpayer can take into account the amount of tax which is “deductible” at source from his income while determining the quantum of Advance Tax payable.

(Note – the law has since changed with the amendment to Section 209 by the Finance Act, 2012. Currently, the Advance Tax liability has to be determined with reference to the  taxes actually deducted)

Quite often, there is a mis-match between the amount of tax which is “deductible” from the income of the Taxpayer and the amount which is actually deducted by the payers of such income. In all such cases, the Taxpayer contends that interest under section 234B should not be applied in case of short-fall in payment of Advance Tax on account of non-deduction or short-deduction of taxes by the payers of the income.

The non-residents’ angle to the controversy

In the case of a non-resident, the entire income is liable to tax deduction at source under section 195. Thus, a non-resident would, in theory, never have any Advance Tax payment obligation since the payer of the income would have to deduct the entire tax amount while making the payment.

However, in practice, on account of different views being taken by the Taxpayer and the Revenue authorities on the issue relating to taxability in India of income of a non-resident, the dispute on taxability led to an incidental dispute on the Advance Tax obligations and consequent applicability of Section 234B interest levy.

The defense of non-resident taxpayers was similar to that taken by resident taxpayers – that since tax was “deductible” from their income, they cannot be held to be in default of payment of Advance Tax. This defense was taken even while contending that the income was per se not liable to tax. By and large, the above defense for non-levy of interest was accepted by various Courts.

The ‘Bombshell’ ruling in case of Alcatel Lucent

However, the division bench of Delhi High Court in the case of Alcatel Lucent had upheld the levy of Section 234B interest on the Taxpayer. The Court had reasoned that since the Taxpayer was denying tax liability, it is quite conceivable that the Taxpayer had influenced its customers (the payers of the income) not to deduct the tax at source. Accordingly, the Court upheld the levy of interest under section 234B on the Taxpayer.

The Present ruling in GE packaged power- Anti-dote to Alcatel Ruling

In a more recent ruling involving various overseas GE group companies that were charged to tax in India on the ground that they had a Permanent Establishment (‘PE’)  in India, the Delhi High Court has held the ruling in case of Alcatel Lucent was rendered in the context of its own “peculiar facts” and did not lay down any general proposition of law.

Similar to the case of Alcatel Lucent, the GE entities were denying the charge from Revenue authorities that their operations resulted in a PE exposure, and consequently denying any tax liability in India. The entities also raised the defense that in any event, interest should not have been levied on the basis that the income was liable to tax deduction at source ( as explained in detail above).

The Revenue relied on the earlier Division Bench ruling of the Delhi High Court in the case of Lucent Alcatel to contend that the 234B interest was applicable.

The court did not accept the Revenue’s contention and reiterated the principle which was widely applied earlier (i.e. before the Alacatel ruling) – that the Taxpayer was entitled to consider the tax that was “deductible” from its income – and since in the case of a non-resident, the entire tax was “deductible” at source by the payer of income under section 195, the payee Taxpayers (GE entities involved in the case) cannot be charged with Section 234B interest levy.

The Court also noted that in Alcatel ruling, the stand of Taxpayer was “vacillating” and after denying PE-related tax liability, the Taxpayer had admitted to tax liabilities in India, and it is only in consideration of those peculiar set of facts and on grounds of equity, that the earlier ruling was rendered.

Lessons from the Ruling

A natural, and perhaps unintended, consequence of the above ruling would be that Taxpayers who are facing similar tax liabilities in India, who might have been considering admitting some tax liability to ‘close-out’ on open disputes would now think twice, since the Revenue authorities are sure to pounce on them and cite their “vacillating” stand and contend that the ratio of Alcatel Lucent ruling should apply to them and Section 234B interest would be applicable. Sticking to the ‘not taxable’ stand now would seem to be an added compulsion to avail 234B interest reprieve!