The Madras High Court has held that the Income Tax Department cannot retain taxes that were not legally due merely because of procedural objections. The Court directed the Department to refund taxes paid by a New Zealand-incorporated company after finding that the company had wrongly paid tax in India under a bona fide misconception regarding its residential status.
The bench of Justice C. Saravanan quashed the Department’s order rejecting the company’s refund claim and directing that the refund, along with applicable interest, be processed within three months.
The petitioner/assessee is a subsidiary of Chennai-based Kern Logistics Private Limited, was incorporated in New Zealand in April 2015 to undertake logistics, warehousing and freight forwarding operations in that country. Believing that its Place of Effective Management (POEM) was situated in India, the company filed income tax returns in India for Assessment Years 2017-18 to 2020-21 and paid taxes aggregating approximately Rs. 56.66 lakh, despite reporting losses during the relevant years.
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Subsequently, the Inland Revenue Department of New Zealand informed the company in November 2021 that it was a resident of New Zealand for tax purposes and was liable to pay tax there on its worldwide income. Acting on this clarification, the company discharged additional tax liability amounting to NZD 64,867 in New Zealand and thereafter sought a refund of the taxes already paid in India, contending that it had been subjected to double taxation.
The Income Tax Department refused the refund by invoking Section 155(14A) of the Income Tax Act, holding that the company had voluntarily declared itself as an Indian resident while filing returns and that the provision dealing with foreign tax credit rectification was inapplicable. The Department also suggested that the company should seek relief from the New Zealand tax authorities rather than from India.
Challenging this decision, the company approached the Madras High Court through a writ petition.
The High Court examined the statutory framework governing tax residency under Section 6(3) of the Income Tax Act and noted that a company is treated as resident in India if its Place of Effective Management is situated in India.
However, the Court also referred to CBDT Circular No. 8/2017 dated 23 February 2017, which clarified that the POEM provisions would not apply to companies having turnover or gross receipts of Rs. 50 crore or less during the relevant financial year. Since the petitioner company’s turnover was below the prescribed threshold, the Court held that the POEM provisions themselves were inapplicable, meaning the company had not been liable to pay tax in India in the first place.
The Court analysed Section 155(14A) of the Income Tax Act and Rule 128 of the Income Tax Rules, which provide a mechanism for granting foreign tax credit after resolution of disputes relating to foreign taxes.
Although the Department argued that the provision was limited to situations where foreign tax credit had earlier been denied because foreign tax payment was under dispute, the Court adopted a broader interpretation. It held that the provision should be construed in a manner that advances substantive justice rather than frustrates legitimate claims on procedural grounds.
Justice Saravanan observed that once it became clear that the petitioner had been taxed in New Zealand and had mistakenly paid tax in India, the Department could not refuse rectification merely because of technical objections regarding the statutory procedure.
One of the most significant observations in the judgment was that tax authorities are concerned only with collecting taxes that are legally payable.
The Court held that the Revenue cannot retain taxes which are not legally due, and excess tax collected must be refunded even if procedural provisions create technical hurdles. According to the Court, Section 155(14A) is both substantive and procedural in nature and should be interpreted in a manner that confers the intended benefit upon the taxpayer rather than denying relief on technical grounds.
The Court also relied upon Section 90 of the Income Tax Act, which gives effect to Double Taxation Avoidance Agreements (DTAAs), including the DTAA between India and New Zealand.
Referring to Article 23 of the India–New Zealand DTAA, the Court noted that the treaty specifically seeks to eliminate double taxation and ensure that income is not taxed twice in both jurisdictions. It further observed that Section 90(2) mandates that where a DTAA provides more beneficial treatment, those provisions must prevail in favour of the taxpayer.
The Court additionally emphasised that Article 51A of the Constitution encourages respect for international treaty obligations, reinforcing the importance of honouring India’s commitments under tax treaties.
In support of its reasoning, the High Court relied upon the Supreme Court’s landmark principle in Commissioner of Sales Tax, U.P. v. Auriaya Chamber of Commerce, reiterating that procedural laws are handmaids of justice and not its mistress. The Court held that procedural requirements should facilitate justice rather than obstruct legitimate claims arising from undisputed facts.
The Madras High Court quashed the Income Tax Department’s order rejecting the refund application and directed the Department to refund the taxes paid by Kern Enterprise Limited for the relevant assessment years together with statutory interest. The Court directed that the entire exercise be completed within three months from receipt of the certified copy of the judgment.
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