GE India Technology
Cen. P. Ltd. Vs. Commr. of I.T.& ANR. [2010] INSC 722 (9 September 2010)
Judgment
CIVIL APPELLATE
JURISDICTION CIVIL APPEAL NOs.7541-7542 OF 2010 (Arising out of SLP(C) No.
34306-34307 of 2009) GE India Technology Centre Private Ltd. .... Appellant(s)
Versus Commissioner of Income Tax & Anr. ....Respondent(s) With Civil
Appeal Nos.7543-7544/2010 @ S.L.P. (C) Nos.34310-34311/2009, Civil Appeal
Nos.7545-7548/2010 @ S.L.P. (C) Nos.35340-35343/2009, Civil Appeal
Nos.7549-7758/2010 @ S.L.P. (C) Nos.1392-1601/2010, Civil Appeal
Nos.7759-7764/2010 @ S.L.P. (C) Nos.1620-1625/2010, Civil Appeal Nos.7765-7767/2010
@ S.L.P. (C) Nos.4230-4232/2010, Civil Appeal No.7768/2010 @ S.L.P. (C)
No.4239/2010, Civil Appeal No.7769/2010 @ S.L.P. (C) No.3329/2010, Civil Appeal
No.7770/2010 @ S.L.P. (C) No.5174/2010, Civil Appeal Nos.7771-7772/2010 @
S.L.P. (C) Nos.7821-7822/2010, Civil Appeal No.7773/2010 @ S.L.P. (C)
No.8410/2010, Civil Appeal No.7774/2010 @ S.L.P. (C) No.9701/2010, Civil Appeal
Nos.7775-7776/2010 @ S.L.P. (C) Nos.13440-13441/2010, Civil Appeal No.7777/2010
@ S.L.P. (C) No.13442/2010 and Civil Appeal No.7778/2010 @ S.L.P. (C)
No.16264/2010
S.H. KAPADIA, CJI.
1.
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 Income Tax Act, 1961
(for short "I.T. Act") arises in India? Facts in the leading case of
Sonata Information Technology Ltd.
3.
Appellant(s)
are the distributors of imported pre- packaged 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 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.
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 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 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 Aggrieved by the said decision, the appellant(s) has come to
this Court by way of civil appeal(s).
Analysis of Section
195
5.
At
the outset, we quote herein below the relevant provisions of Section 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 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 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 Assessing Officer 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-section(1)."
6.
At
this stage we may also quote herein below Section 195 (6) as inserted by Finance
Act, 2008 w.e.f. 1.4.2008.
"195(6) The
person referred to in sub-section (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
Section 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 I.T. Act in the case of non-residents 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 Section 276B. Thus, 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 I.T. 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 I.T. Act to which the afore stated requirement of
tax deduction at source applies. The tax so collected and deducted is required
to be paid to the credit of Central Government in terms of Section 200 of the
I.T. Act read with Rule 30 of the I.T. Rules 1962. Failure to deduct tax or
failure to pay tax would also render a person liable to penalty under Section
201 read with Section 221 of the I.T. Act. In addition, he would also be liable
under Section 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 Section
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 I.T. 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 I.T.
Act.
It may be noted that
Section 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 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". It is
for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has
clarified that the tax 7
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
Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act. In
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 Section 18(3B) (now
Section 195(2) of the I.T. Act). The application of Section 195(2) pre-supposes
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 Section 195(2) will
arise. In fact, at one point of time, there was a provision in the I.T. 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 ITR 162(Calcutta)] that an application for NOC cannot be
said to be an application under Section 195(2) of the Act.
While deciding the
scope of Section 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 Section 195. Hence, apart from Section 9(1),
Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant,
while applying tax deduction at source provisions. Reference to ITO(TDS) under
Section 195(2) or 195(3) either by the non-resident or by the resident payer is
to avoid any future hassles for both resident as well as non-resident. In our
view, Sections 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 Section 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
8.
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 Section 195(1).
The said expression in Section 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 is assessable in India. If tax is
not so assessable, there is no question of TAS being deducted. [See : Vijay
Ship Breaking Corporation and
9.
One
more aspect needs to be highlighted. Section 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 Section 195.
For example, Section 194C casts an obligation to deduct TAS in respect of
"any sum paid to any resident". Similarly, Sections 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 Section 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. Section 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, Section 195 has to be read in conformity with the
charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the
words "sum chargeable under the provisions of the Act" in Section
195(1). The fact that the Revenue has not obtained any information per se
cannot be a ground to construe Section 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 Section 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
Section 195(1). While interpreting a Section one has to give weight age to
every word used in that section. While interpreting the provisions of the
Income Tax 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. Section 195
appears in Chapter XVII which deals with collection and recovery. As held in
the case of C.I.T.
provisions for
deduction of TAS which is in Chapter XVII dealing with collection of taxes and
the charging provisions of the I.T. Act form one single integral, inseparable
Code and, therefore, the provisions relating to TDS applies only to those sums
which are "chargeable to tax" under the I.T. Act.
It is true that the
judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act.
However, there is some similarity between the two. If one looks at Section 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,
Section 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 I.T. 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 I.T. 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 I.T. Act by which a payer can obtain
refund. Section 237 read with Section 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, Section 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 Section 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 Section 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, Section 195(1) uses the expression
"sum chargeable under the provisions of the Act." We need to give
weightage to those words. Further, Section 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 Section 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 I.T. Act. When the payer remits an amount to a
non-resident out of India he claims deduction or allowances under the Income
Tax Act for the said sum as an "expenditure". Under Section 40(a)(i),
inserted vide Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty,
fees for technical services or other sums chargeable under the Income Tax 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 I.T. Act. This provision
ensures effective compliance of Section 195 of the I.T. Act relating to tax
deduction at source in respect of payments outside India in respect of
royalties, fees or other sums chargeable under the I.T. Act. In a given case
where the payer is an assessee he will definitely claim deduction under the
I.T. 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 I.T. Act then it would be
open to the AO to disallow such claim for deduction. Similarly, vide Finance
Act, 2008, w.e.f. 1.4.2008 sub-Section (6) has been inserted in Section 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 1.4.2008. 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)
10. 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 Section
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, Section
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 Section 195(1) which in clear terms lays down
that tax at source is deductible only from "sums chargeable" under
the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of
the I.T. Act.
11. 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 Section 195(1) of the Act. The
said finding of the ITO(TDS) was upheld by the CIT(A). However, in second
appeal, the ITAT 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.
12. 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 ITAT 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?
13. 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.
.................................CJI
(S. H. Kapadia)
...................................J.
(K.S. Radhakrishnan)
New
Delhi;
Back