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Upholds TDS Disallowance Against Hindustan Zinc On UK Know-How Payment
The has dismissed an appeal by , upholding the disallowance of a tax deduction for a ₹8.10 crore payment made to a UK-based company for technical know-how. A Division Bench comprising Justice Pushpendra Singh Bhati and Justice Praveer Bhatnagar ruled that the payment was subject to under , even though the foreign currency was released by from a grant.
A Cross-Border Tax Conundrum
The case revolved around a technical know-how agreement between Hindustan Zinc and (DML) for the Chanderiya lead-zinc smelter project. The payment was structured under the , where the provided grant assistance administered through . Hindustan Zinc claimed the entire amount as deduction under , but the Assessing Officer disallowed a portion under for failure to deduct tax at source. The (ITAT) sustained the disallowance, leading to the present appeal.
The Appellant's Stand: A Mere Conduit?
, representing Hindustan Zinc, argued that the company was not the actual payer. The foreign currency was remitted by
in the UK from grant funds, and Hindustan Zinc only deposited the equivalent rupee amount with the
.
"No amount travelled from the appellant in India to DML outside India,"
he contended, asserting that the payment could not be treated as
. Reliance was placed on
decisions in
,
, and
to argue that Section 195 applies only when the sum is in India.
Revenue's Counter:
The Revenue argued that the rested squarely on Hindustan Zinc. DML raised invoices on the company, which certified them before release of payment. The grant mechanism, it contended, was merely a funding arrangement that did not alter the character of the underlying payment. The technical know-how was utilized for Hindustan Zinc's business in India, making the consideration chargeable as under . Failure to deduct tax attracted the consequence under .
Court's Reasoning: The Payer is the Key
The High Court rejected the appellant's contention, holding that the identity of the payer is determined by the contractual obligation, not the funding mechanism. The Bench observed that Hindustan Zinc itself claimed the deduction under
, treating the amount as expenditure incurred for acquiring know-how.
"The two positions cannot be reconciled on the record,"
the Court noted.
"A payment by a third person pursuant to an agreed funding mechanism may discharge the liability of the contracting party without converting the third person into the person who incurred the underlying expenditure."
The Court further held that the did not alter the position. provides that are deemed to arise in the state where the payer is a resident. The physical place of remittance is not determinative; what matters is the person on whom the obligation rests. Since the contractual obligation was undertaken for Hindustan Zinc's Indian project, the was in India.
Key Observations
The judgment highlighted the inconsistency in the appellant's stance:
"Thus, for claiming the deduction, the appellant treated the contractual consideration as expenditure incurred for acquiring know-how; while resisting the statutory consequence of such payment, it seeks to characterise the same consideration as not being payable by it at all."
On the role of , the Court observed:
"The payment made to DML through the under the grant arrangement represented discharge of the consideration incurred under the appellant's technical know-how agreement for its Indian business and could not be treated as having its source outside India merely by reference to the location from which the released the funds."
The Verdict: Appeal Dismissed
Answering both against the assessee, the High Court held that the provisions of were not rendered inapplicable merely because the foreign currency was released through . The ITAT's order dated was affirmed. The decision reinforces the principle that in tax matters, substance prevails over form, and cannot be masked by funding arrangements.
