1.1 S. 195 of the Income-tax Act provides for tax deduction
at source from payment of interest or any other sum chargeable under the
provisions of the Income-tax Act (other than salaries or dividend specified in
S190) to a non-resident or a foreign company at the prescribed time at the rates
in force.
1.2 U/s.195(2), where the payer considers that the whole of
such sum so payable to a non-resident would not be income chargeable of the
recipient, he can make an application to the Assessing Officer to determine the
appropriate proportion of such sum chargeable to tax, and thereupon shall deduct
tax u/s.195(1) only on that proportion of the sum chargeable to tax. Similarly,
sections 195(3) and 197 provide for the payee making an application to the
Assessing Officer for issue of a certificate that income-tax may be deducted at
lower rates of tax or not deducted on payment to be received by him, where such
lower rate or non-deduction is justified.
1.3 The issue has arisen before the courts as to whether, in
a case where the payment to the non-resident or a foreign company does not
comprise any income chargeable to tax in India at all (for example, in case of
payment for purchase of goods imported from the non-resident), whether the payer
has necessarily to apply to the tax authorities for a certificate u/s.195(2) or
whether the payment can be made to such non-resident or foreign company without
any deduction of tax at source, and without obtaining any such certificate
u/s.195(2) or u/s.195(3) or u/s.197.
1.4 While the Karnataka High Court has taken the view that it
is mandatory to obtain such a certificate from the tax authorities, the Delhi
High Court has taken a contrary view that in such cases, the payer can make the
payment without the need for such certificate.
2. Samsung Electronics’ case :
2.1 The issue came up before the Karnataka High Court in the
case of CIT v. Samsung Electronics Co. Ltd., 320 ITR 209. Various other appeals
of different resident payers were also decided vide this judgment.
2.2 In this case, the assessee payer was a branch of a Korean
company engaged in the development, manufacture and export of software for use
by its parent company. The software developed by it was for in-house use by the
parent company. During the relevant years, the assessee imported ready-made
software products from US and French companies for its own use. It did not
deduct tax at source from payments made to the US and French companies on the
ground that the payment to the foreign companies was for purchase of products,
and was not in the nature of royalty, and was not chargeable to tax in India.
2.3 The Assessing Officer held that the payment was in the
nature of royalty, that the assessee was bound to deduct tax at source on the
payments, and accordingly treated the assessee as an assessee in default
u/s.201(1), and also levied interest u/s.201(1A). The Commissioner (Appeals)
dismissed the assessee’s appeals against this order.
2.4 The Tribunal held that the payment was not in the nature
of royalty in terms of the relevant provisions of the Double Taxation Avoidance
Agreements. It also held that it was not incumbent on the assessee to deduct any
amount u/s.195.
2.5 Before the Karnataka High Court, it was argued on behalf
of the Department that the payment was in the nature of royalty on which tax was
required to be deducted at source u/s.195. It was argued that the transaction
was a licence and was therefore in the nature of royalty. It was further claimed
that the assessee was bound to deduct tax u/s.195 and that it could not contend
that it was not the income of the recipient. Reliance was placed on the decision
of the Supreme Court in the case of Transmission Corporation of A.P. Ltd. v.
CIT, 239 ITR 587.
2.6 It was argued by the assessee that the nature of payment
was not royalty even u/s.9(1)(vi), on account of the fact that the non-resident
supplier had merely sold a copyrighted article and not the copyright itself,
relying on the decision of the Supreme Court in the case of Tata Consultancy
Services v. State of Andhra Pradesh, 271 ITR 401. It was therefore claimed that
the payment was for purchase of articles/goods in connection with the business
carried on by the assessee. It was further claimed that under the Double
Taxation Avoidance Agreements, since the non-resident recipients had no
permanent establishments in India, the entire income of the non-residents
attributable to the payments was not taxable in India. It was therefore claimed
that there was no obligation on the part of the payer to deduct any amount.
2.7 It was also contended by the other assessees that there
was no obligation on their part to deduct any amount from the payments, as they
were fully and bona fide satisfied that the amount was not taxable in the hands
of the non-resident in India. They had therefore not chosen to apply for any
relief or concession in terms of S. 195(2) and (3). It was further argued that
the words used in S. 195 are ‘chargeable to tax’ and hence a person deducting
tax u/s.195 would have to necessarily first see whether the same was chargeable
to tax and then only, if it was so chargeable, he was to deduct tax. It was
contended that if a person was not liable to be charged to tax, then the payer
could not be held to be a person in default u/s.201.
2.8 The Karnataka High Court considered the decision of the
Supreme Court in Transmission Corporation of AP’s case (supra) and of the
Calcutta High Court in P. C. Ray & Co. (India) Private Limited v. ITO, 36 ITR
365, wherein the Calcutta High Court had held that if the term ‘chargeable under
the provisions of this Act’ means actually liable to be assessed to tax, in
other words, if the sum contemplated was taxable income, a difficulty is
undoubtedly created as to complying with the provisions of the Section.’ The
High Court in that case had held that what was contemplated was not merely
amounts, the whole of which were taxable without deduction, but amounts of a
mixed composition, a part of which only might turn out to be taxable income as
well; and the disbursements, which were of the nature of gross revenue receipts,
were yet sums chargeable under the provisions of the Income-tax Act and came
within the ambit of the Section.
2.9 The Karnataka High Court therefore rejected the arguments
of the assessees that the expression ‘any other sum chargeable under the
provisions of this Act’ would not include cases where any sum payable to
non-resident was trading receipts, which may or may not include ‘pure income’.
According to the Karnataka High Court, the language of S. 195(1) was clear and
unambiguous and cast an obligation to deduct appropriate tax at the rates in
force.
2.10 The Karnataka High Court observed that S. 195 was not a charging Section, nor a Section providing for determination of the tax liability of the non-resident receiving the payments from the resident. The amount deducted by the resident was only a provisional tentative amount, which was kept as a buffer for adjusting this amount against the possible tax liability of the non-resident. Deduction of the amount u/s.195 was not the same as determination of the liability of the non-resident, who may be or may not be liable to pay any tax. Determination of tax liability could only be on the basis of the return of income filed by the non-resident. According to the Karnataka High Court, the only scope and manner of reducing the obligation for deduction imposed on a resident payer in terms of S. 195(1) was by the method of invoking the procedure u/s.195(2) of making an application to the Assessing Officer to determine by general or special order the appropriate proportion of such sum so chargeable, and upon such determination alone, being allowed the liberty of deducting the proportionate sum so chargeable to tax to fulfil the obligations u/s.195(1).
2.11 The Karnataka High Court therefore held that in the absence of an application u/s.195(2), the payer was obliged to deduct tax at source u/s. 195(1), even though the payment did not contain any element of income of the non-resident chargeable to tax in India.
Van Oord’s case :
3.1 The issue again recently came up before the Delhi High Court in the case of Van Oord ACZ India (P) Ltd. v. CIT, (unreported — ITA No. 439 of 2008 dated 15th March 2010, available on www.itatonline.org).
3.2 In this case, the assessee was an Indian subsidiary of a Netherlands company, and was engaged in the business of dredging, contracting, reclamation and marine activities. During the relevant year, the assessee reimbursed mobilisation and demo-bilisation cost to its parent company. This cost related essentially to transportation of dredger, survey equipment and other plant and machinery from countries outside India to the site in India and the transportation of such plant and machinery on com-pletion of the contract, including fuel cost incurred on transportation. These services were contacted by the parent company and were provided by vari-ous non-resident entities. The assessee reimbursed such cost to the parent company on the basis of invoices received by the parent company from the non-resident entities.
3.3 The assessee filed an application to the As-sessing Officer for issue of nil tax withholding certificate in respect of reimbursement of various costs to the parent company. The Assessing Officer issued a certificate of deduction of tax at source at 11%, and the assessee deducted tax at source accordingly on Rs.6.98 crore. In the course of assessment proceedings, the Assessing Officer disallowed payments of Rs.8.66 crore made to the parent company u/s.40(a) (i), on the ground that the assessee had defaulted in deducting tax at source u/s.195.
3.4 The Commissioner (Appeals) upheld the disal-lowance made by the Assessing Officer. The Tribu-nal confirmed the addition, stating that the asses-see was mandatorily liable to deduct tax at source u/s.195, and that it was not necessary to determine whether such payment was chargeable to tax in In-dia in the hands of the non-resident. The Tribunal further held that the assessee was a dependent agent permanent establishment of the parent foreign company and therefore the reimbursement of expenses to the foreign parent company was to be subjected to tax.
3.5 Before the Delhi High Court, it was argued on behalf of the assessee that the amount reimbursed to the parent company was not chargeable to tax in India in the hands of the parent company, and that the assessee was consequently not liable to deduct tax at source u/s.195. It was argued that the obligation to deduct tax at source u/s.195 was predicated on the condition that tax was payable by the non-resident on the payments received by it, and once it was established that no such tax was payable by the non-resident, the assessee could not be treated to be in breach of its obligations.
3.6 It was pointed out that the reason for fastening the obligation to deduct tax at source of the payment to non-resident only in a situation where such payment was chargeable to tax in India was that it was not the intention of the law to fasten an absolute liability on the remitter to deduct tax at source from the payment to the non-resident, and then subject the non-resident to the rigorous process of filing return and seeking refund and assessment on the basis of such return. Where the remitter was of the opinion that some part of the income may be chargeable to tax in India, the remitter could approach the Assessing Officer to determine the ap-propriate portion of the income that would be sub-ject to tax in India and the rate on which tax was to be deducted at source. Reliance was placed on the observations of the Supreme Court in the case of Transmission Corporation of AP Ltd. (supra) and various other cases for the proposition that the obligation to deduct tax at source is triggered only when the payment to be made to the non-resident is chargeable to tax in India in the hands of the non-resident recipient.
3.7 On behalf of the Department, it was argued that S. 195 only determines the proportion of liability and presupposes the existence of liability. It was pointed out that the assessee itself had applied for determination of extent of liability. The statutory obligation of the assessee with regard to deduct tax at source was fully crystallised, and therefore there was no justification on the part of the assessee not to deduct tax at source, particularly when the order passed u/s.195(2) had attained finality.
3.8 The Delhi High Court noted that the issue before the Supreme Court in the case of Transmission Corporation of AP (supra) was whether tax at source was to be deducted by the payee on the entire amount paid by it to the recipient or whether it was to be deducted only on the component of pure income profits. It was therefore in the context of whether tax deductible was to be on the gross sum of trading receipts paid to non-residents or whether only on the income component. It was in that context that the Supreme Court held that “any other sum chargeable under the provision of this Act” would include the entire amount paid by the assessee to non-residents. The observations of the Supreme Court therefore needed to be read in that context. The Delhi High Court noted that the Su-preme Court was not concerned in that case with a situation where no tax in the hands of the recipient was payable at all. The Delhi High Court noted that certain observations in the judgment clearly depicted the mind of the Supreme Court that liability to deduct tax at source arose only when the sum paid to the non-resident was chargeable to tax. Once that is chargeable to tax, it was not for the assessee to find out how much of the amount of the receipts was chargeable to tax, but it was its obligation to deduct tax at source on the entire sum paid by the assessee to the recipient.
3.9 The Delhi High Court relied on certain other decisions of the High Courts, including that of the Delhi High Court in the case of CIT v. Estel Communications (P) Ltd., 217 CTR 102 and the Karnataka High Court in the case of Jindal Thermal Power Company Limited v. Dy. CIT, 182 Taxman 252, where Courts had taken the view that there was no obligation to deduct tax at source since there was no tax liabil-ity of the non-resident in India. The Delhi High Court noted the decision of the Karnataka High Court in the case of Samsung Electronic Co. Ltd. (supra), and observed that the context in that case was different. The Delhi High Court expressed its disagreement with some of the observations made in that judgment of the Karnataka High Court.
3.10 The Delhi High Court therefore held that the obligation to deduct tax at source arises only when the payment was chargeable under the provisions of the Income-tax Act. The Delhi High Court noted that in the case before it, the income-tax authorities had accepted that the foreign company was not liable to pay any tax in India by accepting the foreign company’s tax return u/s.143(1) and refunding the tax deducted at source. Therefore, the assessee could not be regarded as having defaulted in deduction of TDS u/s.195.
Observations :
4.1 This issue was also again very recently considered by the Special Bench of the Income-tax Appellate Tribunal at Chennai, in the case of ITO v. Prasad Production Ltd., (ITA No. 663/Mds/2003, dated 9th April 2010 — unreported, available on www.itatonline.org).
4.2 The Tribunal in this case considered the decision of the Karnataka High Court in Samsung’s case (supra) as well as that of the Supreme Court in the case of Transmission Corporation of AP (supra). The Tribunal noted that both the Department as well as the assessee were relying upon the Supreme Court decision in the case of Transmission Corporation of AP. It therefore focussed on the observations in that judgment. It noted the provisions of the follow-ing paragraph on page 588 :
“The consideration would be — whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act or not ? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum, what would be the income is to be computed on the basis of various provisions of the Act including provisions for computation of the business income, if the payment is a trade receipt. However, what is to be deducted is income-tax pay-able thereon at the rates in force. Under the Act, total income for the previous year would become chargeable to tax u/s.4. Ss.(2) of S. 4, inter alia, provides that in respect of income chargeable U/ss.(1), income-tax shall be deducted at source where it is so deductible under any provision of the Act. If the sum that is to be paid to the non-resident is charge-able to tax, tax is required to be deducted.”
4.3 The Tribunal also noted the observations of the Supreme Court in the case of Eli Lilly & Co., 312 ITR 225, as under :
“To answer the contention herein we need to examine briefly the scheme of the 1961 Act. S. 4 is the charging Section. U/s.4(1), total income for the previous year is chargeable to tax. S. 4(2), inter alia, provides that in respect of income chargeable U/ss.(1), income-tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which, inter alia, brings in the TDS provisions contained in Chapter XVII-B. In fact, if a particular income falls outside S. 4(1), then the TDS provisions cannot come in.”
4.4 From these two decisions of the Supreme Court, the Tribunal concluded that it was abundantly clear that the charging provisions could not be divorced from the TDS provisions, and that S. 195 would be applicable only if the payment made to the non-resident was chargeable to tax.
4.5 The Tribunal also noted the material difference between the provisions of Ss.(2) and Ss.(3) of S. 195. U/ss.(2), the payer made the application for deduction of tax at lower rates. U/ss.(3), the payee could make an application for deduction of tax at lower rate or without deduction of tax. According to the Tribunal, the reason for such difference was that where the payer had a bona fide belief that no part of the payment bore income character, S. 195(1) itself would be inapplicable and hence there would be no question of going into the procedure prescribed in S. 195(2). Ss.(3) deals with a situation where the payer wants to deduct tax from the payment, but the payee believed that he was not chargeable to tax in respect of that payment. Hence the payee was given an opportunity to seek approv-al of the Assessing Officer to receive the payment without deduction of tax.
4.6 The Tribunal interestingly observed that by deciding whether the payment bore any income character or not, the payer was not determining the tax liability of the total income of the payee, but merely considering the chargeability in respect of the payment that he was making to the payee.
4.7 The tribunal also considered the fact that for the purposes of remittances to non-residents, a chartered accountant’s certificate was prescribed as an alternative to the procedure u/s.195(2). This was evident from the CBDT Circular 767, dated 22-5-1998. It noted that the certification covered all types of payment, whether purely capital or revenue in nature, but exempt either under the act or the relevant Double Taxation Avoidance Agreement or payments bearing pure income character. The Tribunal held that the new format of the CA certificate clearly established the legal position of S. 195 that the payer need not undergo the procedure of S. 195 at all if he was of the bona fide belief that no part of the payment was chargeable to tax in India.
4.8 The Tribunal therefore held that if the asses-see had not applied to the Assessing Officer u/s. 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident was chargeable to tax, then he was not under any statutory obligation to deduct tax at source on any part of the payment.
4.9 When one looks at the provisions of S. 195(1), the language is clear that it applies only to income chargeable to tax, and not to other items at all. As analysed by the Special Bench of the Tribunal, the Karnataka High Court seems to have misapplied the ratio of the decision of the Supreme Court in Transmission Corporation of AP. The better view seems to be that of the Delhi High Court and that of the Special Bench of the Tribunal that if the income is not chargeable to tax in India in the hands of the non-resident recipient, the payer need not obtain a certificate u/s.195(2) for not deducting tax at source.
4.10 In any case, an appeal to the Supreme Court against the decision of the Karnataka High Court has been admitted by the Supreme Court and has been fixed for hearing on 18th August 2010, on which date one hopes that this controversy will ultimately be laid to rest.
