Case Law Details
Brief: Appellant(s) are the distributors of imported prepackaged shrink wrapped standardized software from Microsoft and other Suppliers outside India. During the relevant assessment year(s) appellant(s) made payments to the said software Suppliers which according to the appellant(s) represented the purchase price of the above mentioned software. The ITO (TDS) held that since the sale of software included a license to use the same, payments made by the appellant(s) to the foreign Suppliers constituted royalty, which was deemed to accrue or arise in India. Therefore, TAS was liable to be deducted under Section 195 of the I.T. Act. The said finding of the ITO(TDS) was upheld by the Commissioner (A). In second appeal, the ITAT, however, held that the amount paid by appellant(s) to the foreign software Suppliers was not “royalty” and the same did not give rise to any income taxable in India, and therefore, the appellant(s) was not liable to deduct TAS.
Citation : GE India Technology Center Private Ltd. Civil Appeal Nos. 7541- 7542 of 2010 dated 9 September March 2010
Court : Supreme Court
Facts
· The appellant(s) are the distributors of imported pre- packaged shrink wrapped standardized software from Microsoft and other Suppliers outside India. The appellant(s) effected payments to the said software Suppliers which according to them represented the purchase price of the software
· The tax officer held that since the sale of software included a license to use the same, payments made by the appellant(s) to the foreign Suppliers constituted royalty, which was deemed to accrue or arise in India and hence was liable to deduct tax at source (TAS) on the payments
· The Tribunal on an appeal by the appellant, held that held that the amount paid by appellant(s) to the foreign software Suppliers was not “royalty” and the same did not give rise to any income taxable in India, and therefore, the appellant(s) was not liable to deduct TAS
· On an appeal to the High Court (HC), the revenue authorities, raised an additional contention that unless the payer makes an application to the tax officer under Section 195(2) and has obtained a permission for non-deduction of the TAS, it was not permissible for the payer to contend that the payment made to the nonresident did not give rise to “income” taxable in India and that, therefore, there was no need to deduct any TAS
· The High Court, without addressing the question of taxability of the payments, accepted the contention of the revenue authorities. Hence, the appellant(s) preferred the appeal to the SC
Issue:
· Whether the HC was right in holding that the moment there is remittance the obligation to TAS arises?
· Whether merely on account of such remittance to the non-resident abroad by an Indian company per se, could it be said that income chargeable to tax under the Income Tax Act, 1961 („the Act?) arises in India?
Ruling of the SC
· The SC outlined the provisions relevant to the case, to state that Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the Act, to deduct income tax at the rates in force.
· The SC emphasized that the most important expression in Section 195(1) consists of the words “sums chargeable under the provisions of the Act”. 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 under the Act. The phrase “Sums chargeable” under the provisions of the Act would refer to such amounts, which should have an element of income in them as required under the provisions of the Act, and the treaty provisions, and hence would be liable to tax under the Act
· In other words, the SC indicated that the remittance has got to be a receipt, the whole or part of which is liable to tax in India.
· Section 195 contemplates not merely amounts, the whole of which are pure income payments, but also covers composite payments which has an element of income embedded or incorporated in them
· Comparing the various provisions on TAS under the Act, the SC observed that there are different expressions used. However, the expression “sum chargeable under the provisions of the Act” is used only in Section 195 and hence has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9
· The SC while referring to some other judicial pronouncements, reiterated that where the payment made by the resident to the nonresident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application. Further an application for an NOC (under para materia provisions of the earlier Act) could not be considered as an application for determining the tax payable on the income to be remitted by the payer
· Explaining the provision further, the SC stated that the application of Section 195(2) pre-supposes that where the person responsible for making the payment to the non-resident considers that tax is payable in respect of some part of the amount to be remitted to a non-resident, but is not sure as to what should be the portion so taxable or the amount of tax to be deducted
· The obligation to deduct TAS is limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, “chargeable under the provisions of the Act”
· The SC rejected the contention of the department, that the assessee make an application in every case of remittance even when the income has no territorial nexus with India or is not chargeable in India., The SC also observed that accepting the contention of the revenue authorities would mean obliteration of the expression “sum chargeable under the provisions of the Act” from Section 195(1)
· Explaining an earlier judgment in the case of Transmission Corporation1 , on which the HC had relied to give its finding, the SC explained that the ratio of the decision was in the context of payer wanted to deduct TAS not on the gross amount but on the lesser amount as the payment represented „Income Chargeable to tax in India”
· Further, the SC held that while explaining Transmission judgment observed that the plain words of Section 195(1) which in clear terms laid down that tax at source is deductible only from “sums chargeable” under the provisions of the Act, i.e., chargeable under Sections 4, 5 and 9 of the Act
· After concluding that the provisions of section 195(1) and 195(2) the SC remitted the matter back to the HC to decide the question on tax ability of the payments made for the software and consequently the obligation to deduct tax at source as the HC has not addressed the issue on merits.
Conclusion:- The ruling has laid down an important principle which has to be considered for TAS on payments made to non-residents i.e. only where the payments are chargeable as income would there be an obligation on the payer to TAS. It thus provides much clarity on the obligation of the payer to deduct tax when effecting payments to a non-resident. A payer making a remittance to a non-resident, could make an application to the tax officer, where he not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted
