Court Rules Payment Routed Through Crown Agents Does Not Exempt Hindustan Zinc Ltd. from Tax Deduction at Source Under Income Tax Act
In a significant judgment dated September 5, 2026, the Rajasthan High Court (Division Bench) dismissed the appeal filed by Hindustan Zinc Ltd. against the order of the Income Tax Appellate Tribunal (ITAT), Jodhpur Bench, concerning the disallowance of a deduction under Section 40(a)(i) of the Income Tax Act, 1961. The court upheld the revenue's contention that payments made by Hindustan Zinc Ltd. for acquiring technical know-how from a foreign company, M/s Davy McKee (Stockton) Limited (DML), are chargeable to tax in India and that the appellant had an obligation to deduct tax at source under Section 195 of the Act.
The controversy arose from payments made under a technical know-how agreement linked to an Indian industrial project-specifically, the lead-zinc smelter project at Chanderiya. Though the payments to DML were routed through the Crown Agents in the United Kingdom under a financial aid arrangement funded by the UK Government, the court emphasized that such routing does not absolve the appellant of its tax deduction liability.
The appellant had claimed a deduction under Section 35AB for expenditure incurred on technical know-how. However, the Assessing Officer partially disallowed this claim, reasoning that tax was not deducted at source on the payments made to the foreign company. The ITAT upheld this disallowance, and the High Court concurred, finding that the contractual obligation and payment liability rested with Hindustan Zinc Ltd., notwithstanding the grant mechanism involving Crown Agents.
The court's detailed analysis clarified key legal principles:
- - Section 195 imposes an obligation on the "person responsible for paying" to deduct tax when a sum is chargeable to tax in India.
- - Section 9(1)(vii) deems fees for technical services payable by a resident and utilized for business in India as income accruing or arising in India.
- - The mere physical transmission of funds from the UK via Crown Agents does not shift the source or legal payer of the income.
- - The India-United Kingdom Double Taxation Avoidance Agreement (DTAA) supports the principle that income is deemed to arise in India when the payer is a resident and services are utilized within India, irrespective of the place of payment transmission.
- - The appellant's own claim for deduction under Section 35AB recognized the payment as expenditure incurred for acquiring technical know-how in India, reinforcing the chargeability of the sum under Indian tax law.
The High Court further distinguished the present facts from precedents cited by the appellant, including cases addressing offshore services or different contractual structures. It held that the interposition of a third party (Crown Agents) administering grant funds does not negate the contractual and tax obligations of the Indian resident payer.
Ultimately, the Court affirmed that the failure to deduct tax at source on payments for technical services to a non-resident foreign company rendered the expenditure disallowable under Section 40(a)(i). The appeal was thus dismissed, reinforcing the principle that contractual and tax obligations must be examined based on substance over form and that foreign aid disbursement mechanisms cannot be used to circumvent Indian tax laws.
This judgment is significant for Indian companies engaged in cross-border technical services agreements, especially where foreign grants or third-party disbursement mechanisms are involved. It underscores the taxpayer's responsibility to comply with withholding tax provisions and clarifies the application of source rules under domestic law and DTAA.
Bottom Line:
Income Tax, Section 40(a)(i) applicability - Payment made to a foreign company under a technical know-how agreement - Held, payment through Crown Agents did not absolve the appellant-assessee of its liability under Section 195, as the payment was for technical services utilised for an Indian project, and was chargeable in India under Section 9(1)(vii) of the Income Tax Act. Deduction disallowed under Section 40(a)(i) for failure to deduct tax at source.
Statutory provision(s):
Income Tax Act, 1961 Sections 9(1)(vii), 35AB, 40(a)(i), 195; India-United Kingdom Double Taxation Avoidance Agreement (Article 13(7))
Hindustan Zinc Ltd. v. D.C.I.T. (Assessment), (Rajasthan)(DB) : Law Finder Doc Id # 2974683
