The
Superintending Engineer Upper
Sileru & ANR Vs.
The Commissioner of Income Tax, A.P [1999] INSC 280 (17 August 1999)
D.P.Wadhwa,
M.B.Shah Shah, J.
These
appeals are filed by the Assessee against the judgment and order dated 2nd
July, 1984 passed by the Andhra Pradesh High Court in deciding three income tax
references Superintending Engineer, Upper Sileru [(1985) 152 ITR 753].
The
Court held that provisions of Section 195 relating to deduction of tax at
source come into operation in respect of sums paid to a non-resident, whether
or not such sum represents only income or profits if such sums are paid to non-
residents during the course of regular trading operation. That finding is
challenged in these appeals.
Before
deciding the question involved, we would refer to a few facts of the matter: -
The appellant the Andhra Pradesh State Electricity Board (hereinafter referred
to as the Board) made certain payments to non-residents against the purchase of
machinery and equipment and also against the work executed by the non-residents
in India of erecting and commissioning the
machinery and equipment. The Board entered into two separate agreements with
M/s. Charmilles Engineering Works Ltd., Geneva, Switzerland, one for the purchase of Nos.
95,000 BHP Francis Turbines and another for purchase of 2 Nos. Butterfly
Valves. There were two other contracts of the assembly, erection and testing
and commissioning of the aforesaid equipments. The payments were made to the
non- resident company for the financial year 1966-67 to 1972-73. The Board also
entered into an agreement with Oerlikon Engineering Co., Zurich, Switzerland, for the purchase of 2 Nos. 60 MW generators and Indoor
Switchgear for the Sileru Hydro Electric Scheme.
Another
contract was executed for the assembly, erection and testing and commissioning
of the above equipments. The payments were made in the financial year 1966-67,
1967-68 and 1968-69. Third contract was entered by the Board with M/s. Sacheron
Works Ltd., Geneva, Switzerland for the purchase and erection of 7 nos. power transformers
for the Sileru Hydro Electric Scheme. On the basis of the said contract in the
financial year 1966-67, the amount was paid to the non-resident company. For
the aforesaid payments, the question arose whether the Electricity Board was
under an obligation to deduct tax at source from these payments under Section
195 of the Income Tax Act, 1961 (hereinafter referred to as the Act). These
payments were made by the Electricity Board without deduction of tax at source.
Owing to the failure of the Electricity Board to deduct such tax, it was deemed
to be an assessee in default in respect of the tax deductible at source. Hence,
Income Tax Officer passed orders determining the tax which, according to him,
was deductible at source under Section 195 and the Electricity Board was
required to pay such amounts. Against the order of the Income Tax Officer,
appeals were filed by the assessee which were allowed by the Appellate
Assistant Commissioner with the observation that the words any other sum
chargeable under the provisions of this Act occurring in Section 195 of the Act
do not contemplate inclusion of trade receipts in their ambit and that Section
195 applies only to cases where the sums paid are pure income profits.
The
Appellate Assistant Commissioner, therefore, allowed the appeals and set aside
the orders passed by the Income Tax Officer. Against the said orders, Revenue
preferred appeals before the Income Tax Appellate Tribunal. The Income Tax
Appellate Tribunal also dismissed the appeals filed by the Income Tax Officer
on the ground that the provisions of Section 195 of the Act are not applicable
to payments of sums to a non-resident, which are not pure income profits.
Thereupon,
on the reference applications filed by the Commissioner of Income Tax under
Section 256(1) of the Act the Tribunal referred the following question of law
for the decision of the High Court for the payments made to the non-resident
company: - R.C. No. 205 of 1978:
Whether
on the facts and in the circumstances of the case, the Superintending Engineer,
Civil Circle, Upper Sileru, is liable to deduct income-tax u/s. 195 of the
Income-tax Act, 1961 on the payments made to the non- resident company for the
assessment years 1966-67, 1967-68, 1968-69 and 1969-70? Similar questions with
regard to payments made to two other non-residents as stated above were also
referred in R.C. Nos. 203 and 204 of 1978.
At the
time of hearing of the matter, the High Court stated that two fundamental
questions arise for consideration and they were:
(a)
whether the provisions of Section 195 of the Act are applicable to cases where
the sum paid to the non-resident does not wholly represent income; and
(b) if
Section 195 is applicable in such cases, whether the Income-Tax Officer could
enforce deduction of tax at source on the gross amount of trading receipts or
only in respect of that portion of the trading receipts which may be chargeable
as income under the Act? The Court observed that the question referred to deals
with only first aspect mentioned above but the second aspect is an integral
part of the first aspect and, therefore, it was necessary to reframe the
question in order to bring real controversy between the parties. Thereafter,
the Court re-framed and decided the following question: - Whether, on the facts
and in the circumstances of the case, the Superintending Engineer, Civil
Circle, Upper Sileru, is liable to deduct income-tax under Section 195 of the
Income-Tax Act, 1961 in respect of payments made to non-residents viz., M/s. Charmilles
Engineering Works Ltd., M/s. Sacheron Works Ltd., and M/s. Oerlikon Engineering
Company and, if so, whether the tax deductable is liable to be determined on
the gross sum of money paid to the non-residents? Dealing with the contentions
raised by the assessee and interpreting Section 195, the High Court held that
it should be borne in mind that whatever tax is deducted at source under
Section 195 from out of the gross sum is not irretrievably lost to the
recipient; it is only a provisional payment which will be made to the Central
Government to the credit of the recipient; the provisions of the Act enable the
recipient, whether such recipient is a resident or non-resident, to file a
return of income in the regular course and prove to the satisfiction of the ITO
the income chargeable under the Act. The Court answered the reframed quesion as
under: - 1. The respondent-assessee, who made the payments to the three
non-residents above referred, was under an obligation to deduct tax at source
under Section 195 of the Act in respect of the sums paid to them under the
contracts entered into. 2. The obligation of the respondent-assessee to deduct
tax under Section 195 is limited only to the appropriate proportion of the
Income chargeable under the Act forming part of the gross sums of money paid to
the three non-residents above referred. 3.
While
the Income Tax Officer was correct in the determination of tax under Section
195 in respect of the payments made to M/s. Sacheron Works Ltd., in R.C. No.
204,
he was in error in determining the tax deductible under Section 195 in respect
of the gross sums of money paid to M/s. Charmilles Engineering Works Ltd. in
R.C. No. 203 and M/s. Oerlikon Engineering Company in R.C. No. 205.
Against
the said judgment and order, the appellant- Superintending Engineer (assessee)
has filed these appeals.
At the
time of hearing of these appeals, learned counsel for the appellant submitted
that Section 195 would be applicable where payment to non-resident is wholly
income chargeable to tax as it provides that any person responsible for paying
to a non-resident any sum chargeable under the provisions of this Act, shall,
at the time of payment, deduct income tax thereon at the rates in force. It is
his contention that under the Income Tax Act, tax can be levied and collected
on the income but when the payments made to the non- resident were not entirely
income, but a trading receipt, there is no question of deduction of income tax
at the source as the section does not provide for it. He submitted that the
expression any other sum chargeable under the provisions of the Act occurring
in Section 195 of the Act conveys only one meaning that tax at the source could
be deducted when the sum paid is total income chargeable under Section 5 of the
Act. If the payment is anything more than or other than income, it does not
answer the definition of the total income under Section 5 of the Act. The
substance of the contention is what is taxable under the Income Tax Act is pure
income or profit and not the gross sum which would include cost of materials
and other expenses and hence Section 195 would not be applicable in such cases.
For appreciating the contention raised by the learned Counsel, we would first
refer to relevant parts of Sections 190, 195(1), 195(2), 195(3) and 197, as
they stood at the relevant time, which are as under: - 190.
(1)
Notwithstanding that the regular assessment in respect of any income is to be
made in a later assessment year, the tax on such income shall be payable by
deduction at source or by advance payment, as the case may be, in accordance
with the provisions of this Chaper.
(2)
Nothing in this section shall prejudice the charge of tax on such income under
the provisions of sub- section (1) of section 4.
195.
(1) Any person responsible for paying to a non- resident, not being a company,
or to a foreign company which is neither an Indian company nor a company which
has made the prescribed arrangements for the declaration and payment of
dividends within India, any interest not being Interest on securities or any
other sum, not being dividends, chargeable under the provisions of this Act,
shall, at the time of payment, unless he is himself liable to pay any
income-tax thereon as an agent, 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 including interest on securities, dividends 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
Income Tax Officer to determine, in the prescribed manner the appropriate
proportion of such sum so chargeable, and upon such determination, tax shall be
deducted under sub-section (1) 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
(1) may make an application in the prescribed form to the Income Tax 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).
197.
Where, in the case of any income of any person other than a company- (a)
income-tax is required to be deducted at the time of credit or, as the case may
be, at the time of payment at the rates in force under the provisions of
sections 192, 193, 194A, 194D and 195, (b) being a non-resident, income-tax is
required to be deducted at the time of payment at the rates in force under the
provisions of Section 194, the Assessing Officer is satisfied that the total
income of the recipient justifies the deduction of income-tax at any lower
rates or no deduction of income-tax, as the case may be, the Income Tax Officer
shall, on an application made by the assessee in this behalf, give to him such
certificate as may be appropriate.
(2)
Where any such certificate is given, the person responsible for paying the
income shall, until such certificate is cancelled by the Income-tax Officer,
deduct income-tax at the rates specified in such certificate or deduct no tax,
as the case may be.
(2A) Before
considering Section 195, it is to be stated that the said section is in Chapter
XVII containing provisions for collection and recovery of tax. Said chapter is
divided into various parts as (A) to (F). Part A General deals with deduction
at source and advance payment. Section 190, inter alia, provides that
notwithstanding that the regular assessment in respect of any income is to be
made in a later assessment year, the tax on such income shall be payable by
deduction or collection at source or by advance payment, as the case may be, in
accordance with the provisions of the Chapter. Hence, before a regular
assessment is made, tax on income shall be payable by deduction or collection
at source or by advance payment in accordance with the other provisions.
Section 191 provides for direct payment of income-tax by the assessee where
provision is not made under the chapters for deducting income tax at the time
of payment. Thereafter, Part (B) of the said Chapter contains group of sections
which provides for deduction of tax at source. Section 192 provides for
deduction of income tax on the income chargeable under the head Salaries by any
person responsible for paying such salaries. Section 193 provides for deduction
of income tax by the person responsible for paying any income by way of
interest on securities.
Similarly,
Section 194 provides for deduction of income-tax by the company paying
dividends. Section 194(A), Section 194(B), Section 194(BB) provides for
deduction of income-tax on the income of interest other than interest on
securities, winning from lotteries or crossword puzzle and winning from horse
race respectively. Even with regard to the payments to contractors and
sub-contractors, specific provision is made for deducting the tax specified on
the basis of payment thereof in cash or by issue of cheque or draft or by any
other mode at the rate of 1% or 2% as the case may be of such sum as income tax
on income comprised therein. Section 194(c) reveals the intention of the
Legislature to enforce tax deduction at source even in respect of gross sums,
the whole of which do not represent income chargeable under the Act. Similar
provisions are made in Section 194(D), Section 194(E), Section 194(EE), Section
194(F), Section 194(G), Section 194(H), Section 194(I), Section 194(J) and
Section 194(K) which cast an obligation to deduct tax on the person responsible
for paying such sum which may not represent income. In all these cases, what is
deducted is the amount specified in the said sections without their being any
actual assessment. Thereafter, Section 195 deals with deduction of tax in cases
where payment is to be made to a non-resident which inter alia provides: - (a)
Any person responsible for paying to a non-resident, any interest, or any sum,
chargeable under the provisions of this Act(other than interest on securities
and salary), shall, at the time of payment, deduct income-tax thereon at the
rates in force.
Sub-Section(1)
of Section 195 excludes from its operation the sum which is to be paid as
interest on securities or the sum which is chargeable under the head Salaries as
the deduction on such sum would be governed by other sections, namely, Section
192 and 193. (b) Where the person responsible for paying any sum chargeable
under the Act to a non-resident considers that the whole or such sum would not
be chargeable in the case of the recipient, he may make an application to the
Assessing Officer to determine the appropriate proportion of such sums so
chargeable; upon such determination, tax shall be deducted under sub-Section
(1) only on that portion of the sum which is so chargeable.
(c)
Not only this, but sub-Section (3) provides that any person entitled to receive
any interest or other sum on which income-tax is to be deducted under sub-Sectin
(1) may make an application in the prescribed form to the Assessing Officer for
the grant of certificate authorising him to receive such interest or other sum
without deduction of tax under the sub- section. (d) Further, section 197
provides that recipient can file an application to the Assessing Officer for a
certificate that the total income of the recipient justify the deduction of
income- tax at any lower rates or no deduction of income tax and the Assessing
Officer, if satisfied, can grant such certificate as may be appropriate.
The
scheme of sub-sections (1), (2) and (3) of Section 195 and Section 197 leaves
no doubt that the expression any other sum chargeable under the provisions of
this Act would mean sum on which income-tax is leviable. In other words, the
said sum is chargeable to tax and could be assessed to tax under the Act.
Consideration would be whether payment of sum to non- resident is chargeable to
tax under the provisions of the Act or not? That sum may be income or income
hidden or otherwise embedded therein. If so, tax is required to be deducted on
the said sum what would be the income is to be computed on the basis of various
provisions of the Act including provisions for computation of the business
income, if the payment is trade receipt. However, what is to be deducted is
income tax payable thereon at the rates in force. Under the Act, total income
for the previous year would become chargeable to tax under Section
4.
Sub-Section (2) of Section 4 inter alia, provides that in respect of income
chargeable under sub- Section (1), income tax shall be deducted at source where
it is so deductible under any provision of the Act. If the sum that is to be
paid to the non-resident is chargeable to tax, tax is required to be deducted.
The sum which is to be paid may be income out of different heads of income
provided under Section 14 of the Act, that is to say, income from salaries,
income from house property, profits and gains of business or profession,
capital gains and income from other sources.
The
scheme of tax deduction at source applies not only to the amount paid which
wholly bears income character such as salaries, dividends, interest of
securities etc., but also to gross sums, the whole of which may not be income
or profits of the recipient, such as payments to contractors and sub-
contractors and the payment of insurance commission. It has been contended that
the sum which may be required to be paid to the non-resident may only be a
trading receipt, and, may contain a fraction of sum as taxable income. It is
true that in some cases, a trading receipt may contain a fraction of sum as
taxable income, but in other cases such as interest, commission, transfer of
rights of patents, goodwill or drawings for plant and machinery and such other
transactions, it may contain large sum as taxable income under the provisions
of the Act.
Whatever
may be the position, if the income is from profits and gains of business, it
would be computed under the Act as provided at the time of regular assessment.
The purpose of sub-section (1) of Section 195 is to see that the sum which is
chargeable under Section 4 of the Act for levy and collection of income tax,
the payee should deduct income tax thereon at the rates in force, if the amount
is to be paid to a non-resident. The said provision is for tentative deduction
of income tax thereon subject to regular assessment and by the deduction of
income-tax, rights of the parties are not, in any manner, adversely affected.
Further,
the rights of payee or recipient are fully safeguarded under Sections 195(2),
195(3) and 197. Only thing which is required to be done by them is to file an
application for determination by the Assessing Officer that such sum would not
be chargeable to tax in the case of recipient, or for determination of
appropriate proportion of such sum so chargeable, or for grant of certificate authorising
recipient to receive the amount without deduction of tax, or deduction of
income-tax at any lower rates or no deduction. On such determination, tax at
appropriate rate could be deducted at the source. 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 of tax deduction at
source.
The
High Court of Calcutta considered and interpreted similar provision Section
18(3B) of the Income Tax Act, 1922, in the case of Ray and Co. (India) Private
Limited if chargeable under the provisions of this Act means actually liable to
be assessed to tax, in other words, if the sum contemplated is taxable income,
a difficulty is undoubtedly created as to complying with the provisions of the
section.
The
High Court further held that section 18(3B) contemplated not merely amounts,
the whole of which was taxable without deduction, but amounts of a mixed
composition, a part of which only might turn out to be taxable income, as well;
and the disbursements, which were of the nature of gross revenue receipts, were
yet sums chargeable under the provisions of the Income Tax Act and came within
the ambit of Section 18(3B) of the Act.
Hence,
in our view there is no substance in the contention of the learned Counsel for
the Appellant that the expression any other sum chargeable under the provisions
of this Act would not include cases where any sum payable to the non-resident
is a trading receipt which may or may not include pure income. The language of
Section 195(1) for deduction of income tax by the payee is clear and
unambiguous and casts an obligation to deduct appropriate tax at the rates in
force. We make it clear that the learned counsel for the parties have not
advanced any submissions with regard to other findings given by the High Court.
In this view of the matter, the answer given by the High Court that (i) the assessee
who made the payments to the three non-residents was under obligation to deduct
tax at source under Section 195 of the Act in respect of the sums paid to them
under the contracts entered into; and (ii) the obligation of the respondent- assessee
to deduct tax under Section 195 is limited only to appropriate proportion of
income chargeable under the Act, are correct.
In the
result these appeals fail and are dismissed, accordingly with costs.
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