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\u00a0 suppliers which represented\u00a0 the purchase price of\u00a0 the software. The AO\u00a0 held that the payment made to \u00a0the suppliers constituted royalty as the sale of\u00a0 software included a\u00a0 license to\u00a0 use which was deemed to accrue or arise in India and\u00a0 held that tax\u00a0 at\u00a0 source\u00a0 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\u00a0\u00a0 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), <\/em><\/strong>where unless the payer made an applicationto the AO under section 195(2) of the Act and obtained\u00a0\u00a0 \u00a0a permission for non-deduction of tax it would not be permissible for the payer\u00a0\u00a0\u00a0\u00a0\u00a0 to contend that the payment made to the non-resident did not result in \u2018income\u2019 taxable in India and therefore there was noneed to deduct tax at source.<\/p>\n \u00a0<\/p>\n 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?<\/p>\n \u00a0<\/p>\n The decision of CIT v.\u00a0 Cooper Engg. Ltd [1968] 68 ITR 457 (Bom HC) <\/em><\/strong>held that\u00a0\u00a0\u00a0\u00a0 if the payment made to a non-resident is\u00a0 not\u00a0 chargeable to tax\u00a0 in\u00a0 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)].<\/p>\n The decision of Vijay Ship Breaking Corpn. v. CIT [2008] 314 ITR 309 (SC) <\/em><\/strong>held that the assessee was not bound to deducttax at source once Explanation 2 <\/em>to<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n section 10(15)(iv)(c) stood inserted as tax deduction at source arises only if the\u00a0\u00a0\u00a0 tax is assessable in India.<\/p>\n In Eli Lilly & Co (India) (P.) Ltd [2009] 312 ITR 225 (SC)<\/em><\/strong>, 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.<\/p>\n The decision of PILCOM v. CIT [2020] 271 Taxman 200 (SC) <\/em><\/strong>held that the obligation to deduct tax at source under section 194E is not affected\u00a0 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\u00a0\u00a0\u00a0\u00a0 the Act.<\/p>\n \u00a0<\/p>\n 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\u00a0\u00a0 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 \u2018chargeable under the provisions of the Act\u2019 which\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 is of utmost importance. Therefore, a person paying interest or any other sum to\u00a0\u00a0\u00a0\u00a0 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.<\/p>\n The language used in section 195(1) of the Act is identical to\u00a0 the language\u00a0 used in section 18(3B) of the 1922 Act.\u00a0 The\u00a0 Supreme Court pointed out\u00a0 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\u00a0\u00a0\u00a0 in respect of some part of the amount to be remitted to the non-resident but is\u00a0\u00a0\u00a0\u00a0\u00a0 not sure as to what should be such portion of the amount on which tax should\u00a0\u00a0\u00a0\u00a0\u00a0 be deducted. In such circumstances, an application under section 195(2) of the\u00a0\u00a0 Act would be made to the AO\/ITO(TDS) for determining the amount of tax to\u00a0\u00a0\u00a0\u00a0\u00a0 be deducted. Therefore, while deciding the scope of section 195(2) of\u00a0 the\u00a0 Act\u00a0 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\u00a0 91\u00a0 of\u00a0 the\u00a0 Act\u00a0 as\u00a0 well as the provisions of the DTAA arerelevant while applying the provisions of tax<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n 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<\/p>\n A.P. Ltd (supra). Thus, where a person responsible for deduction is fairly certain then he can make his own determination\u00a0 as to whethertax is deductible\u00a0 at source or not along with what the amount should be thereof.<\/p>\n 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\u00a0 the expression \u2018sum chargeable under the provisions of the Act\u2019 is used only in section 195 of the Act. Similar sections being section 194C, 194EE and 194F of\u00a0\u00a0\u00a0 the Act provide for deduction of tax in respect of \u2018any amount\u2019 and do not use\u00a0\u00a0 \u00a0the expression used in section 195 of the Act. Thus, the SC had to give meaning\u00a0\u00a0\u00a0 to the expression \u2018sum chargeable under the provisions of the Act\u2019. SC held that\u00a0 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\u00a0\u00a0\u00a0 has not obtained any information per se cannot be a ground to construe section\u00a0 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.<\/p>\n 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 \u2018chargeable under the provisions of\u00a0 the Act\u2019\u00a0 used in\u00a0 section 195(1) of\u00a0 the\u00a0 Act\u00a0 to\u00a0 be\u00a0 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\u00a0\u00a0\u00a0 that Act de hors <\/em>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\u00a0\u00a0\u00a0\u00a0 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.<\/p>\n The Supreme Court observed the similarity between section 192 and 195 of the\u00a0 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\u00a0\u00a0\u00a0 as the department would be entitled to appropriate the\u00a0 money\u00a0 deposited by the payer even if the sum\u00a0 is\u00a0 not\u00a0 chargeable to\u00a0 tax\u00a0 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.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n 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\u00a0\u00a0\u00a0 to deduct tax at source arises. This view of\u00a0 the\u00a0 High Court was\u00a0 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)<\/p>\n Editorial: <\/em><\/strong>Decision of Karnataka High Court in CIT (IT) v. Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 <\/em><\/strong>reversed.<\/p>\n \u201cSatisfaction lies in the effort, not in the attainment, full effort is full victory.\u201d<\/em><\/p>\n – Mahatma Gandhi<\/p>\n","protected":false},"excerpt":{"rendered":" S. 195 : Deduction of tax at source \u2013 Payment to non-resident \u2013 Obligation to deduct tax arises only when a remittance is chargeable to tax under the Act \u2013 No obligation to deduct tax arises the moment a remittance is made [S. 192, 195(1) , 195(2), 237 ]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13439","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3uL","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13439","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13439"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13439\/revisions"}],"predecessor-version":[{"id":13440,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13439\/revisions\/13440"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13439"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13439"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13439"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Issue<\/h3>\n
Views<\/h3>\n
Held<\/h3>\n