Facts

The facts in the lead matter i.e. Sonata Information Technology Ltd were considered by the Supreme Court. The assessee is a distributer of imported pre- packaged shrink-wrapped standardized software from Microsoft and other suppliers outside India. Assessee has made payment to the  suppliers which represented  the purchase price of  the software. The AO  held that the payment made to  the suppliers constituted royalty as the sale of  software included a  license to  use which was deemed to accrue or arise in India and  held that tax  at  source  was liable to be deducted under section 195 of the Act. The CIT(A) upheld the decision of the AO. However, the tribunal held that the amount paid by the assessee to the foreign suppliers was not in the nature of royalty and did not give rise to any income taxable in India and hence there was no liability to deduct tax   at source. The High Court accepted the department appeal and placed reliance on Transmission Corp. of A. P. Ltd v. CIT [1999] 239 ITR 587 (SC), where unless the payer made an applicationto the AO under section 195(2) of the Act and obtained    a permission for non-deduction of tax it would not be permissible for the payer      to contend that the payment made to the non-resident did not result in ‘income’ taxable in India and therefore there was noneed to deduct tax at source.

 

Issue

On account of a remittance to a non-resident abroad by an Indian company, does the obligation to deduct tax at source arise the moment there is a remittance irrespective of it being chargeable to tax under the Act?

 

Views

The decision of CIT v.  Cooper Engg. Ltd [1968] 68 ITR 457 (Bom HC) held that     if the payment made to a non-resident is  not  chargeable to tax  in  India, then no tax is deductible at source even though the assessee may not have made an application undersection 18(3B) [i.e. now section 195(2)].

The decision of Vijay Ship Breaking Corpn. v. CIT [2008] 314 ITR 309 (SC) held that the assessee was not bound to deducttax at source once Explanation 2 to

 

 

section 10(15)(iv)(c) stood inserted as tax deduction at source arises only if the    tax is assessable in India.

In Eli Lilly & Co (India) (P.) Ltd [2009] 312 ITR 225 (SC), the Court considered whether tax deducted at source provisions are in the nature of machinery provisions enabling collection and recovery of tax forming an integrated code with the charging and computation provisions which determine taxability in the hands of the assessee.

The decision of PILCOM v. CIT [2020] 271 Taxman 200 (SC) held that the obligation to deduct tax at source under section 194E is not affected  by the DTAA and if the taxability is disputed by the assessee, the benefit of the DTAA can be pleaded and based on the case made out the amount would be refunded with interest but that would not by itself absolve the liability under section 194E of     the Act.

 

Held

The Honourable Supreme Court analysing the provisions of section 195 of the Act held that the section imposes an obligation on any person responsible for paying   to a non-resident any interest or any other sum which is chargeable under the provisions of the Act to deduct tax at the rates in force. The expression used in section 195(1) of the Act is ‘chargeable under the provisions of the Act’ which        is of utmost importance. Therefore, a person paying interest or any other sum to     a non-resident is not liable to deduct tax if such some is not chargeable to tax under the Act. Further, section 195 of the Act contemplates not merely amounts being pure income payments but also covers composite payments which have an element of income embedded in them and the payer is responsible for deducting tax at source in respect of such composite payments. Further, the CBDT Circular No. 728 dated 30-10-1995 has clarified that the person responsible for deducting tax can take into consideration the effect of the DTAA in respect of payments of royalty andtechnical fees while deducting tax at source.

The language used in section 195(1) of the Act is identical to  the language  used in section 18(3B) of the 1922 Act.  The  Supreme Court pointed out  that the application under section 195(2) of the Act pre-supposes that the person responsible for making a payment to a non-resident is certain that tax is payable    in respect of some part of the amount to be remitted to the non-resident but is      not sure as to what should be such portion of the amount on which tax should      be deducted. In such circumstances, an application under section 195(2) of the   Act would be made to the AO/ITO(TDS) for determining the amount of tax to      be deducted. Therefore, while deciding the scope of section 195(2) of  the  Act  tax which is required to be deducted at source only out of such chargeable sum. Hence, the provisions of section 4, 5, 9, 90 and  91  of  the  Act  as  well as the provisions of the DTAA arerelevant while applying the provisions of tax

 

 

deduction at source. The Supreme Court held that section 195(2) and 195(3) are safeguards and based such reasoning on the decision of Transmission Corpn. of

A.P. Ltd (supra). Thus, where a person responsible for deduction is fairly certain then he can make his own determination  as to whethertax is deductible  at source or not along with what the amount should be thereof.

The Supreme Court observed that section 195 of the Act fell in Chapter XVII which dealt with collection and recovery whereas Chapter XVII-B dealt with deduction of tax at source. Further, Chapter XVII uses a different expression and  the expression ‘sum chargeable under the provisions of the Act’ is used only in section 195 of the Act. Similar sections being section 194C, 194EE and 194F of    the Act provide for deduction of tax in respect of ‘any amount’ and do not use    the expression used in section 195 of the Act. Thus, the SC had to give meaning    to the expression ‘sum chargeable under the provisions of the Act’. SC held that  the section 195 had to be read in conformity with the charging provisions, i.e., sections 4, 5 and 9. Therefore, the obligation to deduct tax at source arises only when there is a sum chargeable to tax under the Act. The fact that the revenue    has not obtained any information per se cannot be a ground to construe section  195 widely so as to require deduction of tax at source even in a case where an amount paid is not chargeable to tax in India.

The SC further refused to accept the contention of the department that the moment there is a remittance, the obligation to deduct tax arises as such a contention would mean that on mere payment income would be said to arise or accrue in India. This would cause the words ‘chargeable under the provisions of  the Act’  used in  section 195(1) of  the  Act  to  be  obliterated. While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Act one cannot read the charging sections of    that Act de hors the machinery sections and the Act is to be read as an integrated Code. Thus, the expression in section 195(1) of the Act shows that the remittance has to be of a trading receipt where the whole or part of the amount is liable to     tax in India and the payer would be liable to deduct tax at source only if the amount is assessable in India. Where the amount is not assessable in India there would be no question of deducting tax at source.

The Supreme Court observed the similarity between section 192 and 195 of the  Act. The contention of the department that a payer making payment to a non- resident was necessarily required to deduct tax would lead to absurd consequence    as the department would be entitled to appropriate the  money  deposited by the payer even if the sum  is  not  chargeable to  tax  specially because there is no provision in the Act by which the payer could obtain a refund. Further, section 237 r.w.s 199 provides that it is only the recipient of the sum who could seek a refund.

 

 

The Supreme Court pointed out that the High Court did not go into merits of the case and directly concluded that the moment there is a remittance an obligation    to deduct tax at source arises. This view of  the  High Court was  overruled and the decision of the High Court was set aside for de novo consideration on merits. (CA Nos. 7541 & 7542 of 2010 dt. 9-9-2010)

Editorial: Decision of Karnataka High Court in CIT (IT) v. Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 reversed.

“Satisfaction lies in the effort, not in the attainment, full effort is full victory.”

– Mahatma Gandhi