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S. 244A: Deductor entitled to interest on refund of excess TDS from date of payment

Background
Recently, the Supreme Court of India (Supreme Court) in the case of Tata Chemicals Ltd.1 (the taxpayer) dealt with the issue of whether the taxpayer, which is entitled to refund of excess taxes withheld by it under the provisions of the Income-tax Act, 1961 (the Act), is also entitled to interest thereon. The Supreme Court held that the taxpayer is entitled to not only the refund of tax deposited under Section 195(2) of the Act, but also the interest from the date of payment of tax. The Supreme Court observed that the statutory right of the taxpayer, for refund of the sum which is wrongfully retained by the tax department, carries with it the right to interest also. Furthermore, there was no reason to restrict interest on refund only to taxpayers which pay taxes on their own behalf, without extending similar benefit in respect of refund of withholding taxes.

Facts of the case
The taxpayer was a company engaged in the manufacture of nitrogenous fertiliser. During the relevant year, the taxpayer commissioned a plant, and to oversee its operation the taxpayer sought the assistance of two technicians from a foreign company i.e. Haldor Topsoe, Denmark (HTD). HTD raised an invoice including service charges for services of the technicians and reimbursements of expenditure.

The taxpayer approached the Assessing Officer (AO) under Section 195 (2) of the Act, inter alia, requesting him to determine as to what percentage of tax should be withheld from the amount payable to HTD. Consequently, the AO passed a Special order under Section 195(2) of the Act directing the taxpayer to deduct tax at the rate of 20 per cent before remitting the aforesaid amount to HTD. Accordingly, the taxpayer deducted tax on the entire amount of invoice and credited the same in favour of the tax department.



After such deposit, the taxpayer appealed before the Commissioner of Income-Tax (Appeals) [CIT(A)] against the AO’s Special order. The CIT(A) while allowing the appeal concluded that the reimbursement of expenses was not a part of the income, for deduction of tax at source under Section 195 of the Act, and accordingly, directed the refund of the tax that was deducted and deposited on such reimbursements. After disposal of the appeal, the taxpayer claimed the refund of tax on such reimbursements, with the interest thereon as provided under Section 244A(1) of the Act.
The AO held that Section 244A provides for interest only on refunds due to the taxpayer and not to the deductor. Further, refund in the present case is in view of the Circulars  issued by the Central Board of Direct Taxes ( CBDT) and not under the statutory provisions of the Act, hence no interest would accrue on the refunds under Section 244A of the Act. Accordingly, the AO declined the claim of the interest made by the taxpayer.
On refusal to grant interest, the taxpayer appealed before the CIT(A) who declined the claim of the taxpayer. Subsequently, the Tribunal allowed the appeal of the taxpayer and directed the AO to allow the interest as provided under Section 244A(1)(b) of the Act on the aforesaid amount of refund. The High Court has endorsed the view of the Tribunal and dismissed the appeals filed by the tax department.
Supreme Court’s ruling
The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non-discretionary in nature to the taxpayer.• Section 244A grants substantive right of interest and is not procedural. A Circular was issued, clarifying the purpose and object of introducing Section 244A of the Act to replace Sections 214, 243 and 244 of the Act. It is clarified therein that there was some lacunae in the earlier provisions with regard to non-payment of interest by the tax department to the taxpayer for the money remaining with the Government and therefore, said Section is introduced for payment of interest by the tax department for delay in grant of refunds.
A general right exists in the Government to refund any tax collected for its purpose, and a corresponding right exists to refund to individuals any sum paid by them as taxes which are found to have been wrongfully exacted or are believed to be, for any reason, inequitable. The statutory obligation to refund carried with it the right to interest also.
In the present case, the Tribunal and the High Court have granted interest on the amount of tax deposited by the taxpayer from the date of payment on the ground, firstly, the refund of tax is directed by the first appellate authority in the appeal filed by the taxpayer under Section 240 of the Act and secondly, the tax department for having retained the sum by way of tax has to compensate the person who had deposited the tax.
Section 240 of the Act provides for refund of any amount that becomes due to the taxpayer as a result of an order in appeal or any other proceedings under the Act. The phrase ‘other proceedings under the Act’ is of wide amplitude. The Supreme Court observed that the ‘other proceedings under the Act’ would include orders passed under Section 154 (rectification proceedings), orders passed by the High Court or Supreme Court under Section 260 (in reference), or order passed by the Commissioner in revision applications under Section 263 or in an application under Section 273A.
A ‘tax refund’ is a refund of taxes when the tax liability is less than the tax paid. As per the old section, a taxpayer was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal.
In the present case, when the amount is refunded, it should carry interest in the matter of course. As held by the Courts, while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorisedly by the tax department. When the collection is illegal, there is corresponding obligation on the tax department to refund such amount with interest in as much as they have retained and enjoyed the money deposited.
There is no reason to restrict such interest only to a taxpayers which pay taxes on their own behalf, without extending the similar benefit to a resident/deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company.
Refund due and payable to the taxpayer is debt-owed and payable by the tax department. There being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the tax department, the Government cannot shrug off its apparent obligation to reimburse the deductor’s lawful monies with the accrued interest for the period of undue retention of such monies.
The tax department having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right, implies and carries with it the right to interest. Whenever money has been received by a party which ‘ex ae quo et bono’ ought to be refunded, the right to interest follows, as a matter of course.
The present case does not fall either under Section 244A(1)(a) or (b) of the Act. In the absence of an express provision as contained in Section 244(1)(a), it cannot be said that the interest is payable from the 1 April of the assessment year. Simultaneously, since the said payment is not made pursuant to a notice issued under Section 156 of the Act, Explanation to clause 244A(1)(b) has no application.
In such cases, as the opening words of Section 244(1)(b) specifically referred to ‘as in any other case’, the interest is payable from the date of payment of tax. Consequently, the taxpayer is entitled not only the refund of tax deposited under Section 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.


Article referred: https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/india-march26-2014no2.pdf

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