Section 159 fastens the liability upon the ‘Legal representatives’ under certain circumstances when a person is liable to pay tax dues. Section 160 defines ‘Representative assessee’ and section 161 gives the circumstances under which liability of representative assessee arises. When representative assessee has to pay tax on behalf of a person, section 162 confers right upon such representative assessee to recover the tax paid from person on whose behalf it is paid.  Section 163 comes under Chapter XV-C titled ‘Representative assessee – Special cases’ and stipulates as to who may be regarded as an agent of non-resident.

A conjoint reading of the provisions of sections 160 to 163 would show that under the given circumstances, certain persons can be treated as representative assessee on behalf of non-resident specified in sub-section (1) of section 9 of the Act. This would include an agent of non-resident and also who is treated as an agent under section 163. Section 163 deals with special cases where a person can be regarded as an agent. These are:

(i)            Who is employed by or on behalf of the non-resident; or

(ii)           Who has any business connection with the non-resident; or

(iii)          From or through whom the non-resident is in receipt of any income, whether directly or indirectly; or

(iv)          Who is the trustee of the non-resident; or

(v)           Any other person, a resident or even a non-resident, who has acquired a capital asset in India by means of transfer.

A issue has arose before the Courts as to whether an Indian company, whose share are transferred between two non-residents can be treated as agent under section 163 of the IT Act.  The Courts have taken a view that the Indian company, whose shares are transferred and who has no connection with the transfer, cannot be treated as agent under section 163 of the IT Act.

These decisions are discussed below:

General Electric Co. v. Dy. DIT [2011] 13 26/ 201 Taxman 341 / [2012] 347 ITR 60 (Delhi) – The shares of Indian Co were transferred between tow non-residents.  The Revenue issued show cause notice treating the Indian co, whose shares were transferred, as agent under section 163.  

On writ petition, the HC observed that agent can be taxable only with respect to income referred in 161.  Representative assessee u/s 163 cannot be for unconnected income. 

The HC observed that a harmonious reading of sections 160 to 163 would show that:

(i)            In order to become liable as a representative assessee, a person must be situated such as to fall within the definition of a representative assessee;

(ii)           The income must be such as is taxable under section 9;

(iii)          The income must be such in respect of which such a person can be treated as a representative assessee;

(iv)          The representative assessee has a statutory right to withhold sums towards a potential tax liability;

(v)           Since the liability of a representative assessee is limited to the profit of representative assessee, there can be multiple representative assessees in respect of a single non-resident entity – each being taxed on the profits or gain relatable to such representative assessee. [Para 41]

In the instant case, the Revenue contended that there is a business connection between the petitioner and the respondent No.4 (Indian Co).  The Court observed that even if, business connection is proved, it would at the most make the respondent No. 4 an agent of the first petitioner.  However, in order to assess a particular income, it has to be further established by the department that the respondent No. 4 had some connection with the income earned by the first petitioner, which is sought to be taxed at the hands of the respondent No. 4. There is no such live link of income earned by the first petitioner and the respondent No. 4 in respect of the transaction which is sought to be taxed.  

The HC held that when section 163 is read in conjunction with section 161, an agent can only be a representative-assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received.  Given that Indian company had no role in transfer, the HC quashed show cause notice and allowed the writ petitions. 

WABCO INDIA LTD. vs. DCIT (INTERNATIONAL TAXATION) (2018) 407 ITR 317 (Madras HC); 97 620 (Madras) – The assessee was incorporated under the Companies Act, 1956.  The shares of the assessee were transferred between two non-residents.  The Department issued a show-cause notice u/s. 163(1)(c) of the Act, to the Appellant, whereby it was alleged that the capital gains had arisen directly as a result of consideration received by CD from the Appellant and the Appellant was proposed to be held as agent u/s. 163(1)(c) of the Act for tax liability that might arise against CD.

The HC held that no case was made out by the Department that in respect of transfer of shares to a third party, that too outside India, the Indian company could be taxed when the Indian company had no role in the transfer. Merely because those shares related to the Indian company, that would not make the Indian company an agent qua deemed capital gains purportedly earned by the foreign company.  The HC held that notice was not valid and is set aside.

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