Supreme Court Of India
GE India Technology Centre (P) Ltd. vs. CIT & Anr.
Section 195
S.H. Kapadia, C.J. & K.S. Radhakrishnan, J.
Civil Appeal Nos. 7541 & 7542 of 2010
9th September, 2010
Counsel Appeared :
Vivek Tankha, Harish N. Salve, F.S. Nariman, S. Ganesh, M.S. Syali, V. Giri & R.P. Bhatt with Ms. Anuradha Dutt, Ms. B. Vijayalakshmi Menon, Pawan Sharma, Kuber Dewan, Subhash Sharma, Siddharth Aggarwal, Senthil Jagadeesan, Atul Y. Chitale, Ms. Suchitra Atul Chitale, Ms. Sunaina Dutta, Satyen Sethi, Ms. Mahua Kalra, Ms. Husnal Syali, Sumit K. Singh, Arta Trana Parda Pd., Rameshwar Prasad Goyal, Mukesh Bhutani, H. Raghavendra Rao, Arijit Prasad, Yashaj Singh Deora, T. Suryanayarayana, Sarva Mitter, M.P. Vinod, Ajay K. Jain, Rustom B. Hathikhanawala, Ms. Anitha Shenoy, A.S. Bhasme, Brajesh Pandey, Vikas Malhotra, Rishabh Sancheti, Vaibhav Srivastava, Pratul Shandilya, Sumeer Sodhi, Kumaran D., B.V. Balaram Das, Abhinav Ashwain, Aunil Agarwal, Shashank Singh & N. Ganpathy, for the Appearing Parties
JUDGMENT
S.H. KAPADIA, C.J. :
Leave granted.
2. The short question which arises for determination in this batch of cases is—whether the High Court was right in holding that the moment there is remittance the obligation to deduct tax at source (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 IT Act, 1961 (for short “IT Act”) arises in India ?
Facts in the leading case of Sonata Information Technology Ltd.
3. 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 abovementioned 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 s. 195 of the IT Act. The said finding of the ITO(TDS) was upheld by the CIT(A). In second appeal, the Tribunal, 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.
4. The Department appealed to the Karnataka High Court. Before the High Court, the Department for the first time raised the contention that unless the payer makes an application to the ITO(TDS) under s. 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 non-resident did not give rise to “income” taxable in India and that, therefore, there was no need to deduct any TAS. This argument of the Department was accepted by the High Court vide the impugned judgment. For reaching this conclusion, the High Court placed strong reliance on the judgment of this Court in Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC). Aggrieved by the said decision, the appellant(s) has come to this Court by way of civil appeal(s). Analysis of s. 195
5. At the outset, we quote hereinbelow the relevant provisions of s. 195, as it stood at the relevant time : “195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum 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 : (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-s. (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-s. (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-s. (1) may make an application in the prescribed form to the AO for the grant of a certificate authorizing 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-s. (1).”
6. At this stage we may also quote hereinbelow s. 195(6) as inserted by Finance Act, 2008 w.e.f. 1st April, 2008 : “195(6) The person referred to in sub-s. (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.”
7. Under s. 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the IT Act in the case of nonresidents only and not in the case of residents. Failure to deduct the tax under this section may disentitle the payer to any allowance apart from prosecution under s. 276B. Thus, s. 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 IT Act, to deduct income-tax at the rates in force unless he is liable to pay income-tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the IT Act to which the aforestated requirement of TDS applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of s. 200 of the IT Act r/w r. 30 of the IT Rules 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under s. 201 r/w s. 221 of the IT Act. In addition, he would also be liable under s. 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. The most important expression in s. 195(1) consists of the words “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 IT Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the IT Act. It may be noted that s. 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the nonresident. This obligation being limited to the appropriate proportion of income flows from the words used in s. 195(1), namely, “chargeable under the provisions of the Act”. It is for this reason that vide Circular No. 728, dt. 30th Oct., 1995 [(1995) 129 CTR (St) 1] the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that s. 195(1) is in identical terms with s. 18(3B) of the 1922 Act. In CIT vs. Cooper Engineering Ltd. (1968) 68 ITR 457 (Bom) it was pointed out that if the payment made by the resident to the non-resident 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 under s. 18(3B) [now s.
195(2) of the IT Act)]. The application of s. 195(2) presupposes that the person responsible for making the payment to the non-resident is in no doubt 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 is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under s. 195(2) will arise. In fact, at one point of time, there was a provision in the IT Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Co. vs. ITO (1971) 81 ITR 162 (Cal) that an application for NOC cannot be said to be an application under s. 195(2) of the Act. While deciding the scope of s. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of s. 195. Hence, apart from s. 9(1), ss. 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying TDS provisions. Reference to ITO(TDS) under s. 195(2) or 195(3) either by the nonresident or by the resident payer is to avoid any future hassles for both resident as well as nonresident. In our view, ss. 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this Court in Transmission Corporation (supra) in which this Court has observed that the provision of s. 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in s. 195(1). The said expression in s. 195(1) shows that the remittance 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 TAS only if the tax (sic-income) is assessable in India. If tax (sic-income) is not so assessable, there is no question of TAS being deducted. [See : Vijay Ship Breaking Corpn. & Ors. vs. CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74 : (2009) 314 ITR 309 (SC) ].
One more aspect needs to be highlighted. Sec. 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in s. 195. For example, s. 194C casts an obligation to deduct TAS in respect of “any sum paid to any resident”. Similarly, ss. 194EE and 194F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in s. 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Sec. 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, s. 195 has to be read in conformity with the charging provisions, i.e., ss. 4, 5 and 9. This reasoning flows from the words “sum chargeable under the provisions of the Act” in s. 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe s. 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read s. 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “sum chargeable under the provisions of the Act” from s. 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the IT Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Sec. 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly & Company (India) (P) Ltd. (2009) 223 CTR (SC) 20 : (2009) 21 DTR (SC) 74 : (2009) 312 ITR 225 (SC) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the IT Act form one single integral, inseparable code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeabl to tax” under the IT Act. It is true that the judgment in Eli Lilly (supra) was confined to s. 192 of the IT Act. However, there is some similarity between the two. If one looks at s. 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly,
s. 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “chargeable under the provisions of the Act”, which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the IT Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the IT Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Sec. 237 r/w s. 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, s. 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that s. 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department s. 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non-residents by which the Department is able to keep track of the remittances being made to non- residents outside India. We find no merit in these contentions. As stated hereinabove, s. 195(1) uses the expression “sum chargeable under the provisions of the Act.” We need to give weightage to those words. Further, s. 195 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 under s. 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the IT Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the IT Act for the said sum as an “expenditure”. Under s. 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1st April, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the IT Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the IT Act. This provision ensures effective compliance of s. 195 of the IT Act relating to TDS in respect of payments outside India in respect of royalties, fees or other sums chargeable under the IT Act. In a given case where the payer is an assessee he will definitely claim deduction under the IT Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1st April, 2008 sub-s. (6) has been inserted in s. 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1st April, 2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage.
Applicability of the judgment in the case of Transmission Corporation (supra) In Transmission Corporation case (supra) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigilble to tax in India. 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 or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented “income chargeable to tax in India”, then it was necessary for him to make an application under s. 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, s. 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the IT Act, i.e., chargeable under ss. 4, 5 and 9 of the IT Act.
Before concluding we may clarify that in the present case on facts the ITO(TDS) had taken the view that since the sale of the concerned software, included a license to use the same, the payment made by appellant(s) to foreign suppliers constituted “royalty” which was deemed to accrue or arise in India and, therefore, TAS was liable to be deducted under s. 195(1) of the Act. The said finding of the ITO(TDS) was upheld by the CIT(A). However, in second appeal, the Tribunal held that such sum paid by the appellant(s) to the foreign software supplier was not a “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct TAS. However, the High Court did not go into the merits of the case and it went straight to conclude that the moment there is remittance an obligation to deduct TAS arises, which view stands hereby overruled.
Since the High Court did not go into the merits of the case on the question of payment of royalty, we hereby set aside the impugned judgments of the High Court and remit these cases to the High Court for de novo consideration of the cases on merits. The question which the High Court will answer is—whether on facts and circumstances of the case the Tribunal was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source ? Subject to what is stated hereinabove, we set aside the impugned judgment(s) and remit these cases to the High Court to answer the question framed hereinabove. Accordingly, the appeal(s) filed by the appellant(s) stands allowed with no order as to costs.
[Citation : 327 ITR 456]
