Payments to Non-residents w

8/8/2019 Payments to Non-residents w..

1/6

Username LogIn Remember Me | Register|Forgot Password

Search

Home

Forums

Communities

Files

Articles

Experts

Blogs

Activity

News

Classifieds

More

Blog Posts

About

ADVERTISE

BUDGET

Service Tax

Pollsarchive

Income Tax

ITRWealth Tax

Partnership

Privacy

Payments to non-residents would be subject to withholding tax only if the income is chargeable to tax- SC

Submitted by : admin on dated Saturday, October 2nd, 2010

Court : Supreme Court

Brief : Appellant(s) are the distributors of imported prepackaged shrink wrapped standardized software from Microsoft and otherSuppliers 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 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 Centre Private Ltd. Civil Appeal Nos. 7541-7542 of 2010 dated 9 September March 2010

Judgement :

Facts

The appellant(s) are the distributors of imported pre-packaged shrink wrapped

standardized software from Microsoft and other Suppliers outside India. Theappellant(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

TaxGuru.in

Log In

Sign Up

Visit

Random Member

Random Communities

Random Blog

ents to non-residents would be subject to withholding tax only if the ... http://taxguru.in/judiciary

04/10/2010


2/6

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 emphasised 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


04/10/2010


3/6

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 Corporation

1

, on which the HChad 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,


04/10/2010


4/6

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 taxability 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

Tags : GE India Technology Centre , section 195, withholding tax

Comments

Login to Post Comment

Judiciary

Popular| Recent | comments

Penalty u/s 271 on disallo

Service Tax on Software -

Delay in filing Return of

Income deemed to accrue or

Supreme Court of India rul

Quick Links

Submit Judiciary

Supreme Court Judgements

Search Judiciary

Blog Posts

Popular| Recent |

CPT Online Examination date, Center, Registration date, Eligibility date, last date announced

All about deduction under section 80C and tax planning

Public Provident Fund (PPF) scheme : Investment Limit, Income tax benefit, Features

Bangalore Income Tax department, Central Processing Center (CPC) Helpline Number

Download ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, ITR 7, ITR 8, and ITR V in Excel Format for A.Y. 2009-10

Members

Newest | Active | Popular

Bevin Thomas

registered 8 minutes ago


04/10/2010


5/6

Kunal Badgujar


trofimenkoaleksey


Ritesh Vimal


Communities

Newest | Active | Popular

Income Tax

82 members

Accountant

40 members

Corpoarate Laws

38 members

T.D.S

38 members

Bookmarks

Add To Favorites

Online Users

0 users online

Subscribe to feed

Subscribe to News Feed


04/10/2010

Documents

Payments to Non-residents w