Section 195 casts an obligation to withhold tax on payments to non- residents if it is chargeable to tax; otherwise, there is need to seek a suitable NIL or reduced withholding certificate from the Revenue. The debate is weather tax should be withheld on all forms of remittance, irrespective of its charge ability to tax.
The Delhi HC in a recent ruling has held that the Income tax Law does not fasten an obligation on the payer to withhold tax if such payments (to non-residents) are not chargeable to tax. In a departure from Karnataka HC decision, Delhi has held that the withholding provisions cannot be given effect if the charging provisions fail. The ruling is a significant relief to companies making cross-border payments as seeking NIL withholding certificate was clearly proving to be an onerous compliance. Further, given the nature and complexity of debate on host of cross-border tax matters, particularly on offshore transfer of shares, withholding obligations were proving to be cumbersome, impractical and unwieldy. In defense to tax administrations claim, an un-codified policy dictated ‘deduct when in doubt or you are welcome to my home (to seek a NIL withholding certificate)’. The choice is really between deep sea and the devil – not necessarily in the same order ! Deducting tax would mean strain on business cash flows besides uncertainty or most likely punitive action for failure to withhold tax. Seeking a NIL withholding certificate on the other hand meant minimalistic probability, if not impossible.
Facts of the case
Van Oord (VO) a Dutch Marine Contracting firm engaged in dredging activities was reimbursed mobilization/ demobilization charges by its Indian subsidiary, VO India.
An application by VO India was made for issuing a NIL withholding certificate. The Revenue taking a preliminary view directed that taxes should be withheld on such payments. It logically followed that VO claimed refund of taxes in its filings to which the Revenue granted a refund. VO India claimed an expenditure for such reimbursement in its tax filings. The Revenue disallowed such reimbursement (under section 40(a)(i)) on the ground that it ( VO India ) failed to withhold tax. The Tribunal relying on the decision of Supreme Court in Transmission Corporation case held in favour of the Revenue and confirmed the dis allowance.
The question of law that was raised before the Delhi HC was whether VO India was liable to withhold tax on reimbursement of mobilization cost which was not chargeable to tax.
Taxpayer argues on merits:-VO India contended that an obligation to withhold tax would arise only if VO was chargeable to tax in India. The fact that the Revenue had accepted tax filings for VO, granted refund of taxes withheld by VO India evidenced that reimbursements was not chargeable to tax and hence dis allowance should be deleted.
Revenue’s arguments misplaced
The Revenue hinged its case on Karnataka HC ruling and argued that liability for withholding tax is an absolute obligation. The Revenue further contended that the payer did not have a prerogative to sit in judgement and decide whether or not payments to non-residents comprised any element of income.
Firstly, the reliance placed on the Apex Court’s decision was misplaced as the Revenue failed to appreciate that the context in which the SC rendered the ruling is different. The legal ratio of Transmission decision could be applied, if at all, only to buttress VO India’s case and not the Revenue’s contentions. More importantly, Revenue’s attempt to apply the Karnataka HC ruling is untenable as the ruling itself is subjudice since the apex court has stayed its application; albeit for the aggrieved petitioners.
Delhi HC charts the path
The HC rationalizing the principles held that in the Transmission case, the Apex Court had ruled on whether tax withholding was to be made on the entire payment or only pure income profits embedded therein. Further, it was not concerned with a situation in the present case where the recipient was not taxable on the entire payment.
The HC held that once income is held chargeable to tax, it is not the payer’s discretion to decide as to what proportion of such payment comprise ‘pure income profits’; liability of payer thereafter is to withhold tax on the entire payment unless a determination is made by the Revenue. In the absence of such determination, eventually if the income is held to be chargeable to tax, the payer would be liable for withholding tax default. The later part of the decision, in my view partly nullifies the impact.
HC decision not a panacea:- The Delhi HC ruling unambiguously underscores Karnataka decision in Samsung case. The ruling has put in perspective the debate on how the Apex Court’s ruling in Transmission case should be construed. Ironically, the decision does not appear to follow ‘cure-all’ remedy principle as any subsequent judgement by the Revenue on charge ability (in hands of the recipient) would make the payer liable. Further, the decision didn’t take into account procedure for electronic filings in cases of non-resident remittance (notified vide June 2009 CBDT guidelines) substituting a CA certificate requirement. Whilst the Karnataka HC decision rendered the CA certificate route redundant, the Delhi HC decision does not vehemently militate against Karnataka decision.
Validity of HC orders
In light of apparently conflicting decisions of two jurisdictional Courts and one awaiting Supreme Court adjudication, what is the present law of the land? Guided by rules of interpretation of statutes, principles enunciated by Delhi should be followed since they are beneficial to the tax payers and bear a more harmonious construction of the charging and machinery provisions.
Need of the hour is for the tax administration to clarify the applicability of its guidelines, issue directives to field officers to exercise restraint in applying the Karnataka principles until at least the debate is settled by the Apex Court. It would be apt for the administration to re look and reflect upon how we can simplify this part of the law, which the international tax fraternity is most critical about.