GE India Technology Centre vs. CIT (Supreme Court)

DATE: (Date of pronouncement)
DATE: September 10, 2010 (Date of publication)

Click here to download the judgement (samsung_GE_India_195_TDS_software.pdf)

TDS obligation u/s 195(1) arises only if the payment is chargeable to tax in the hands of non-resident recipient

The assessee, an Indian company, made remittance to a foreign company for purchase of software. The assessee took the view that the payment was not chargeable to tax in India and did not deduct tax at source u/s 195. The AO & CIT (A) took the view that the payment constituted “royalty” and was chargeable to tax and that the assessee was liable u/s 201 for failure to deduct tax at source though this was reversed by the Tribunal. On appeal by the department, the High Court reversed the Tribunal by taking the view in CIT vs. Samsung Electronics 320 ITR 209 that the assessee was not entitled to consider whether the payment was chargeable to tax in the hands of the non-resident or not and had to deduct tax u/s 195 on all payments. On appeal by the assessee, HELD reversing the High Court:

(i) S. 195(1) uses the expression “sum chargeable under the provisions of the Act”. This means that a person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax. Also s. 195(1) uses the word ‘payer’ and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation u/s 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default;

(ii) S. 195(2) applies where the payer is in no doubt that tax is payable in respect of some part of the remittance but is not sure as to what is the taxable portion. In that situation, he is required to make an application to the ITO(TDS) for determining the amount. S. 195(2) & 195(3) are safeguards and of practical importance;

(iii) The department’s apprehension that if tax is not deducted on all payments, there will be a seepage of revenue is ill founded because there are adequate safeguards in the Act to prevent the payer from wrongly not deducting tax at source such as s. 40(a)(i) which disallows deduction for the expenditure;

(iv) The Karnataka High Court in CIT vs. Samsung Electronics 320 ITR 209 misunderstood the observations in Transmission Corporation of AP 239 ITR 387. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded in them. The controversy was different and the Court held that if some part of the payment was taxable, an application u/s 195(2) had to be made. The High Court’s interpretation completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the Act i.e. chargeable u/s 4, 5 and 9;

(v) As the High Court had not decided the question whether the payments for supply of software was “royalty” or not, the matters are remitted to the High Court for a decision on that point.

Note: The judgements in Vodafone International Holdings B.V. vs. UOI (Bom), Van Oord 36 DTR 425 (Del) & Prasad Productions 3 ITR (Trib) 58 Che (SB) are impliedly approved on this point. On the question of whether software payments are assessable as “royalty” see Velankani Mauritius vs. DDIT (ITAT Bangalore), Kansai Nerolac Paints vs. ADIT (ITAT Mumbai) & Dassault Systems 229 CTR 105 (AAR) where it has been held following Tata Consultancy Services 271 ITR 401 (SC) that income from software supply is not “royalty” but is “business profits” & not chargeable to tax in the absence of a PE