CASE LAWS DETAILS
DECIDED BY: HIGH COURT OF KARNATAKA,
IN THE CASE OF: CIT (Int’l Taxation) Vs. Sonata Information Technology Ltd.,
APPEAL NO: ITA NOS. 351 OF 2007 & 614-619 OF 2009 etc.,
DECIDED ON SEPTEMBER 25, 2009
Income Tax Appeal Nos. 351 of 2007 & No. 614-649 of 2009, 901 of 2008, 936 of 2008, 941 of 2008, 945 of 2008, 954 of 2008, 963 of 2008, 964 of 2008, 972 of 2008, 974 of 2008, 975 of 2008, 995 of 2008, 996 of 2008, 998 of 2008 and Income Tax Appeal Nos. 932 of 2008 c/w 903 of 2008, 949 of 2008, 950 of 2008, 968 of 2008, 971 of 2008, 985 of 2008 had been heard and received for pronouncement of Judgment in terms of our earlier orders dated 17.08.2009 and 20.08.2009 respectively.
2. Income Tax Appeal Nos. 898 of 2008, 906 of 2008, 908 of 2008, 911 of 2008, 913 of 2008, 916 of 2008, 917 of 2008, 919 of 2008, 9*21 of 2008, 925 of 2008, 930 of 2008, 934 of 2008, 935 of 2008, 937 of 2008, 938 of 2008, 942 of 2008, 943 of 2008, 946 of 2008, 947 of 2008,-948 of 2008, 951 of 2008, 952 of 2008, 953 of 2008, 955 of 2008, 959 of 2008, 960 of 2008, 966 of 2008, 967 of 2008, 969 of 2008, 970 of 2008, 973 of 2008, 977 of 2008, 980 of 2008, 981 of 2008, 983 of 2008, 984 of 2008, 986 of 2008, 988 of 2008, 997 of 2008, 999 of 2008, 1000 of 2008, 1001 of 2008, 1002 of 2008 have also corne up for hearing which are heard along will) the above mentioned appeals.
3. While the main batch of cases involving the question of the nature of obligation on the part of a resident payer who is making payment to a non-resident recipient as envisaged in terms of section 195 of the Income Tax Act, 1961 [for short, the Act’) which is a provision for deduction of an amount in advance at a percentage of the remittance, extent of percentage, having been provided by the Finance Act, the deduction is towards the possible future tax liability of the nonresident recipient under the provisions of the Act on the premise that the non-resident recipient will be liable to pay tax in India, as the receipt in the hands of the nonresident recipient comprises of an element of taxable income and on the scope and the nature of the obligation in terms of sub-section [lj of section 195 of the Act, the extent upto which, rigor of the obligation can in any way be reduced and can even be totally avoided etc., have all been discussed in the judgment rendered in the main batch of cases pronounced in ITA No.2808 of 2005 and connected matters on 24.09.2009.
4. Common questions arising for our answer in these appeals, while are governed by the answers given in our Judgment dated 24.09.2009 in respect of ITA No.2808 of 2005 -and connected matters, we notice that the present, appeals involve a further question, namely, that the respondents in the present appeals, who are the resident payers of the amount, had, in fact, deducted the amount and had remitted the amount, but had later disputed their liability for making such payment and for such purpose had preferred appeals under section 248 of the Act.
5. It is in such appeals, the first appellate authority, namely, the Commissioner of Income Tax Appeals in some cases has dismissed the appeals and in some other cases has allowed the appeal and depending upon the appeal being allowed by the first appellate authority, the revenue, was in further appeal before the Income Tax Appellate Tribunal and wherever the first appellate authority had dismissed the appeals, the assessee was before the Income Tax Appellate Tribunal, but the Appellate Tribunal having taken an uniform view that there was no obligation on the part of the resident payer to deduct any amount for the simple reason that the obligation for deduction as indicated by the assessing authorities was on the erroneous premise that the payment constituted payment in the nature of ‘royalty’ payment and therefore falls within the scope of “income chargeable to tax” under section 4 of the Act read with sections 5, 6 and 9 of the Act and when such premise was knocked off by the Tribunal opining that it was not `royalty’, it was not income and therefore no obligation on the part of resident payer for deduction, and it is the* revenue which has carried the matter now to this court in further appeals under section 260-A of the Act, and contending that the obligation under section 195 of the Act was very much present on the resident payers and also by contending that the payment was very much in the nature of a royalty payment and therefore deduction was envisaged and failure on the part of the resident payer by either not deducting the amount or even alter deducting not remitting the amount etc. and therefore the consequential action under section 201 of the Act conies into play and that again having been questioned, the further appeals were examined by us.
6. In so far as the present appeals are concerned, Sri. G Sarangan, learned senior counsel appealing on behalf of the respondents has tried to draw a distinction of the present situation by submitting that the situation that prevailed in the case of the present respondents is slightly different, in the sense, that the resident payer having deducted the amount and having remitted, was unable to prefer appeal under section 248 of the Act and in fact, if had preferred such appeals by not deducting any amount by disputing the liability to deduct, could have succeeded in the appeal and in such circumstances, there is no need for this court to upset the orders passed by the tribunal which has very correctly held that the amount, i.e., the remittance made by the resident payers is not having any diameter of income in the hands of the non-resident recipient and therefore there is no obligation.
7. With the revenue having preferred appeals even in such situations, we are required to examine the consequences on the resident payers, who could have/have gone through the procedure of appeal under the provisions of section 248 of the Act and if so as to whether filing of such appeal can make a difference to the outcome of the proceedings ultimately.
8. In support of the submissions that, an appeal under section 248 of the Act can take within its scope of examination by the appellate authority the question as to whether there was an obligation on the part of the resident payer in the first instance, as is envisaged under section 195(1] o£ the Act and that the question being not necessarily confined to failure on the part of a resident payer to have not invoked the provisions of section 195|2| of the Act reliance is placed on the authority of the Judgment of the Supreme Court in the case of ‘COMMISSIONER OF INCOME TAX vs, WESMAN ENGG. CO. P LTD9 reported in 188 JTR 327, and it is urged that the appellate authority was competent to examine the liability or obligation on the part of the resident payer to deduct or not to deduct at all and if so on the authority of this Judgment of the Supreme Court, the appellate authorities having examined such questions and having opined that there was no obligation because of the non-taxability of the receipt, there is no need for this court to interfere in the present appeals.
9. Submission of Sri. G Sarangan, learned senior counsel appealing for the respondents is that an appeal under section 248 of the Act envisages within its scope the question of examining the obligation on the part of a resident payer within vhe scope of section 195[1| of the Act.
10. It is this contention which is required to be examined in the present batch of appeals and as to whether it can make a difference to the ultimate outcome.
11. We have already indicated that a result which could be achieved by resort to the provisions of section 195 of the Act is not a result which can be arrived at by a resident payer even without recourse to this provision.
12. In fact, if one should look into the language of section 195 of the Act which reads as under,
195. Other sums. – (2) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other awn chargeable under the provisions of this Act (not being income chargeable under the head ‘Salaries* shall at the time of credit of such income to the account of the payee or at the: time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force:
Provided that in the case of interest payable by the Government or a public sector bank the meaning of clause (23-D) of Section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode;
Provided further that no such deduction shall be made in respect of any dividends referred to in Section 1IS-O.
Explanation. – For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “interest payable account” or ‘Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, to may make 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, tax shall be deducted under subsection (i) only on that proportion of the sum which is so chargeable:
(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income tax has to be deducted under sub-section (]) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).
(6) A certificate granted under subsection (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.
(7) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. it is obvious that in a situation where an application is made by the resident payer under section 195 of the Act the charge ability of the receipt is conceded and it is only in such a situation, an application is envisaged under section 195]pf the Act If the charge ability itself is in dispute that undoubtedly and as very correctly submitted by Sri. Sarangan, learned senior counsel appearing for the respondents is a question which is within the scope of sub-section  of section 195 of the Act and does not. travel to sub-section [2 of section 195 of the Act]
13. While the Judgment of the Supreme Court, in WBSMAN’s case [supra] is definitely an authority to hold that a resident payer under section 19512] of the Act can also maintain an appeal under section 248 of the Act and pursue the matter, but the further proposition that therefore the argument on behalf of the resident payer that it envisages within its scops a situation contemplated under section I95[ i j of the Act and it is a very correct and proper argument available on the authority of the Supreme Court in WESMAITs case |supra], does nor necessarily How from the Judgment of the Supreme Court in so for as this aspect of the matter is concerned. One should bear in mind that a judgment is an authority only for what it decides and definitely not an authority for what it actually does not decide.
14. We have already indicated in the earlier batch of appeals in terms of the Judgment, pronounced on 24.09.2009 in ITA No.2808 of 2005 and connected matters, the scope of the provisions of sections 195j and 19512] of the Act or even in a situation of procedure contemplated under section 195[3J of the Act. etc., is not a procedure for assessment of the tax liability of a nonresident recipient. It is a provision contemplated for ensuring a resident payer deducts certain amount at the threshold at the time of the payment and remits it to the account of the revenue for covering a possible income tax liability of the non-resident recipient.
15. If in a given case a non-resident recipient does not have any tax liability at all, such a non-resident recipient can definitely tile a return of income under the provisions of the Act and seek for refund of the entire amount, Under the provisions of the Act, particularly, having regard to the scheme of advance payment of tax etc., a person who deducts such amount in advance and remits it to the account of the Income Tax Department is not a person in whose hands is assessed the income of the other person i.e. the non recipient, akin to a representative assessee, as envisaged in Sections 159, 163, 168, 172 of the Act etc., and there is no procedure of assessing such income in the hands of a person who is obliged to deduct and remit the amount. Assessment of income or the determination of the tax liability is only in the hands of the non resident recipient of the income and not in the hands of this remitter resident. Though the Act may contemplate many situations such as representative assessees or deemed assessees who are roped in for assessing the income of other person, Section 195 of the Act is not one such provision and the resident, payer is roped, only for the purpose of advance recovery of tax, from availability angle and from the convenience point of view.
16. Section 195 of the Act is no different, it is a provision of convenience from the revenue’s point of view and definitely not from the assessee’s point of view or even from the point of convenience of a resident payer on whom is cast the obligation to deduct the amount and remit the same to the Income-tax Department.
17. When such is the legal position and the statutory scheme in so far as the scope of appeal under section 248 of the Act is concerned and even on the authority of the Supreme Court in WESMATs case [supra], it does not follow that the just appellate authority has jurisdiction to assess the income of the non resident recipient in the hands of the resident remitter, as that is neither the object of the provisions of Section 195 nor the assessing authority can be said to have been conferred with the power to assess the income of the non resident assessees, in the course of examination of an application under sub section  of Section 195, for the purpose of determining, the extent upto which, the amount, required to be deduction under Sub-section  of Section 195, can be reduced, as a procedure of assessment of the income of the non resident in the hands of the resident is not even contemplated in Sub-section |1| of Section 195 of the Act itself and therefore if the original authority itself is not having the power or jurisdiction to assess the income of the non resident under Section 195 of the Act, the question of reading in such a power under Sub-section |2| of Section 195[1), is not possible in law, nor such a jurisdiction can be independently found with the appellate authority, as the appellate authority exercising appellate power and jurisdiction can at the best have such power and jurisdiction, coextensive with the power and jurisdiction of the original authority and cannot be over and above it. The appellate authority exercises power only for the purpose of correcting any mistake or errors, illegality committed by the original authority and nothing beyond. The extent of the power, authority and jurisdiction of an appellate authority at the best can be said to be co-extensive with that of the original authority and can never be put on a higher level or on a higher pedestal as the appellate authority cannot assume such powers which the original authority did not have while disposing of the appeal directed against the order passed by the original authority, the purpose of which is only to correct the errors of the original authority.
18. This fundamental principle o law is very much imbedded in WESMAJs case supra] though the Supreme Court may not have elaborated on this principle or may not have expressly indicated that to be so.
19, The principle of law which we have already indicated in the Judgment, rendered on 24.09.2009 in ITA No.2808 of 2005 and connected matters, while is only to be followed and applied to the present appeals also and when done so, it becomes obvious that the scope of appeal under section 248 of the Act can never be beyond the scope of examination of the nature of obligation under section 195  of the Act cast on a resident payer and as we have already indicated the scope of rather the lack of it, for assessing the dispute relating to a income of the non resident in the hands of a resident payer, while considering the question of charge ability or otherwise in terms of section 19511] of the Act and therefore we conclude that in an appeal under section 248 of the Act, the dispute relating to the charge ability alone can be subject matter and not a possibility of assessing the income of the non resident in the hands of the resident payer.
20. In the present appeals, we find such a situation does not arise end though Sri. Sarangan, learned senior counsel appearing for the respondents does not dispute that the respondents are contesting the charge ability etc., on the conceded and undisputed position and having considered the ruling of the Supreme Court in WESMAN’s case [supra]I the remittances being in the nature of trading receipt and commercial transaction and the amount paid being a price to the goods purchased by the resident payer, it undoubtedly bears the character of income receipt in the hands of the non-resident recipient and chargeataility of the receipt, amount is virtually conceded.
21. However, the extent, of charge ability is a matter which can be and has to be verified on relevant considerations and on the authority of the Supreme Court in the case of ‘TRANSMISSION CORPORATION OF A.P. LTD., vs. THE COMMISSIONER OF INCOME TAX9 reported in [1999} 239 JTR 887 [SCJ and as already indicated in the Judgment of this court rendered on 24.09.2009 in ITA No.2808 of 2005 and connected matters.
22. On applying such tests, we find that the questions posed in ITA No.351 of 2007, have to be answered as under:
1. Whether the Tribunal was correct in holding that the assessee is not liable to deduct TDS in respect of payments made for purchase of software as the same cannot be treated as income liable to tax in India as Royalty or Scientific Work under section 9 of the Act read with Double Taxation Avoidance Agreements and treaties. Not correct, in the negative, against the assessee and in favour of the revenue
2 Whether the Tribunal was correct in holding that since the assessee had purchased only a right to use the copyright i.e. the software and not the entire copyright itself, the payment cannot be treated as Royalty as per the Double Taxation Avoidance Agreement and Treaties which is beneficial to the assessee and consequently section 9 of the Act should not take into consideration
The question did not arise for examination as indicated in our Judgment dated 24-9-2009 in ITA No. 2808 of 2005 and connected matters and therefore answered in the negative, against the assessee and in favor of the revenue.
3 Whether the Tribunal should have recorded a finding that it is under section The Tribunal should have recorded a finding that the Judgment of the Supreme Court in Transmission Corporation of A. P. Ltd.,’s case [supra] concludes the issue against the assessee and to this extent the answer given by the tribunal is erroneous, the question is answered in the negative
4 Whether the Tribunal was correct in holding that the payment partakes the character of purchase and sale of goods and therefore cannot be treated as royalty payment liable to Income tax
The Tribunal was not correct in opining so. Answered in the negative, against the assessee and in favor of the revenue, and particularly as the Tribunal was not required to go into these questions in an appeal of the nature before it and we have discussed above on the authority of the binding Judgment of the Supreme court in the case of Transmission Corporation of A. P. Ltd., case [supra]
The question in all other appeals are answered a like and in favor of the revenue and against the assessee.
23. Accordingly, these appeals are allowed. Parties to bear their own costs.
24. We place on record our appreciation for the guidance and assistance rendered to us by the learned counsel for the assessee and the learned standing counsel for the revenue, in understanding the intricacies of the provisions of section 195 of the Act which was very efficiently and elaborately elucidated by Sri G. Sarangan, learned senior counsel appearing for the assessee who had made very fair submissions even while appearing on behalf of the assessee.