The assessee made payments to a foreign company for purchase of ‘shrink-wrapped’/ready-made software without deduction of tax at source u/s 195 (1). The AO held that the payments were chargeable to tax in the hands of the foreign company as “royalty” u/s 9 (1) (vi) and that the assessee was liable u/s 201 for non-deduction of tax and interest thereon.
On appeal, this view was confirmed by the CIT (A) though the Tribunal (94 ITD 91) held that the payments for software, being a purchase of a ‘copyrighted article’ and ‘goods’ as held by in Tata Consultancy Services 271 ITR 401 (SC), was not liable to tax in India and consequently there was no obligation on the assessee to deduct tax at source u/s 195 (1). On appeal by the Revenue, HELD reversing the Tribunal:
(i) The effect of the judgement of the Supreme Court in Transmission Corporation of India 239 ITR 587 is that the moment there is a payment to a non-resident, there is an obligation on the payer to deduct tax at source u/s 195 (1). The only way to escape the liability is for the payer to make an application to the AO u/s 195 (2) for non-deduction or for deduction at a lower rate. If the payer does not make an application and obtain an order u/s 195 (2), it is not open to him to argue that the payment has not resulted in taxable income in the hands of the non-resident recipient and that, therefore, there is no failure on the part of the payer to deduct tax u/s 195 (1);
(ii) In an appeal by the payer against an order u/s 201 imposing liability on the payer for failure to deduct tax u/s 195 (1), there is absolutely no scope for the appellate authority to adjudicate whether the non-resident recipient was chargeable to tax or not and the rate at which it was so chargeable. If the appellate authority in the payer’s case determines the tax liability of the recipient, there may arise conflicts if in the assessment of the recipient a different view is taken as to its taxable status;
(iii) The Tribunal committed an error in determining in the appeals filed by the payer that the payment to the non-resident was not liable to tax and thereby holding the payer was not liable u/s 201 for non-deduction u/s 195 (1).
Note: The Special Bench has taken the contrary view in Mahindra & Mahindra 122 TTJ (Mum) (SB) that the underlying principle behind tax deduction at source is the presumption that the amounts paid are chargeable to tax in the hands of the payee. The SB went to the extent of holding that if steps to assess the payee have not been taken, the payer cannot be held liable u/s 195/ 201. For the law on conflicts between High Court and Special Bench judgements, see A Matter of interest!