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TDS on payment to non-residents : Supreme Court Judgement

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GE India Technology Centre vs. CIT

The  Supreme Court in a recent judgment pronounced on 9th September, 2010 has disposed off a large number of cases including the Karnataka High Court judgment , in respect of tax deduction at source on payments to non-residents. 

Facts of the case 

  • 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 Assessing Office  & CIT (Appeal) 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. This decision was reversed by the Tribunal.
  • On appeal by the department, the High Court reversed the Tribunal order 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
  • In another decision of Van Oord ACZ India (P) Ltd. [323 ITR 130] Delhi High Court held that when the amount payable to non-resident is not taxable in India, there is no question of withholding tax at source. The Delhi High Court clearly dissented from the decision of the Karnataka High Court. 

Background

  • Under section 195, any person responsible for paying to a non-resident or foreign company  any sum chargeable under the Act , must deduct tax at source at the time of payment or credit.
  • Under Section 195(2)  ,a Payer or can approach ITO(TDS) and apply for determination of amount liable for deduction at source.
  • Under section 197 , a Payee can approach Assessing Officer for a certificate of lower/Nil rate.
  • A Payer can suo-moto determine applicability of tax deduction duly  supported by a Chartered Accountant’s certificate .

Decision

  • The Supreme Court reversed the decision of High Court and made the following observations
  • Section 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.
  • Section 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 , he cannot be declared to be an assessee-in-default
  • Section 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 Assessing Officer for determining the amount.

On Karnataka High Court Decision

  • The Karnataka High Court in CIT vs. Samsung Electronics (320 ITR 209)  had held that unless the payer makes an application to the ITO (TDS) under Section 195(2) and has obtained a permission for non-deduction of the tax at source it was not permissible for the payer to contend that the payment made to the non-resident did not give rise to “income” taxable in India and that, therefore, there was no need to deduct any tax. The Karnataka High Court had relied on Supreme Courts decision in Transmission Corporation of AP case (239 ITR 387)
  • Supreme Court observed that the Karnataka High Court  misunderstood the observations in Transmission Corporation case. 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 Section 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

On Departments apprehension about revenue leakage

  • 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 Section. 40(a)(i) which disallows deduction for the expenditure.

Hence ,  the remittance to a non-resident has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at source only if the tax is assessable in India. If tax is not so assessable, there is no question of tax being deducted.


1 Comment

  1. Rasik Patel says:

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