Wednesday, March 24, 2010

TDS u/s 195(1) if Non Resident Income Taxable in India-Delhi High Court-Samsung Case Not followed


on Wednesday, March 24, 2010

The obligation to deduct the tax at source u/s 195 (1) arises only when the payment is chargeable to tax. Samsung Electronics not followed

Van Oord ACZ India vs. CIT (Delhi High Court)

The assessee, an Indian company remitted mobilization & demobilization charges of Rs. 8.65 crs by way of reimbursement to its parent company, a company based in Netherlands. The assessee applied to the AO u/s 195 (2) for a Nil withholding rate though the AO held that tax had to be deducted at 11%. The assessee deducted tax on sums aggregating Rs. 6.98 crs. In the assessment order the AO took the view that as the assessee had failed to deduct tax at source u/s 195, the expenditure had to be disallowed u/s 40(a)(i). This was upheld by the CIT (A) and the Tribunal (effectively on the balance amount). The Tribunal followed the judgement of the Supreme Court in Transmission Corporation of AP 239 ITR 387 and held that the assessee was duty bound to deduct tax u/s 195 (1) and could not escape liability without obtaining a certificate u/s 195

(2). The Tribunal held that the assessee was not entitled to “step into the shoes of the AO” and examine “whether the receipt was income in the hands of the recipient or not”. On appeal by the assessee, HELD reversing the judgement of the Tribunal:

(i) The observations of the Supreme Court in Transmission Corporation of AP 239 ITR 387 have to be read in the context of the question before the Court i.e. whether tax was deductible on the gross trading receipts or only on the “pure income profits”. The Court was not concerned with a case where the receipt was not chargeable to tax in the hands of the recipient at all. On the other hand the observations of the Court make it clear that the liability to deduct tax at source arises only when the sum payable to the non-resident is chargeable to tax;

(ii) Even the plain language of s. 195 shows that the tax at source is to be deducted on the “sum chargeable under the provisions of the Act”. One can, therefore, reasonably say that the obligation to deduct tax at source is attracted only when the payment is chargeable to tax in India;

(iii) The determination by the AO under s.195(2) of the Act is tentative in nature. In case it is ultimately found in the assessment proceedings relating to the recipient that he was not liable to pay any tax on the sums received, the assessee cannot be treated in “default” inasmuch as s. 195(1) of the Act casts an obligation to deduct the tax at source on the sum ‘chargeable under the provisions of this Act’;

(iii) As regards Samsung Electronics 185 Taxman 313 (Kar), the context was different. The assessees wanted to show in their own assessment proceedings that the amount paid by them was not assessable to tax at the hands of recipient. No doubt, they would be precluded to do so. However, when in the assessment proceedings relating to recipient itself, it is opined by the income tax authorities that the tax is not payable at all on the amounts so received, provision of s. 195 would not be attracted. “Even otherwise, because of the analysis of what Transmission Corporation of AP decides, we, with due respect, are not in agreement with some of the observations made in the aforesaid judgment of the Karnataka High Court”.

Download Van Oord ACZ India vs. CIT (Delhi High Court)

SamSung case was not followed by Delhi High Court ,is Given under Decided By Karnatka High Court

S. 195 / 201 liability cannot be avoided on ground of non-taxability of recipient

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).

Download Complete Karnataka High Court Case
Note: The Supreme Court has fixed the final hearing of the SLP/Appeal against Samsung Electronics on 18.08.2010

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