Section 195 casts an obligation on the person responsible for payment to non-resident to deduct tax at source at the time of payment or at the time of credit of the sum to the account of the non-resident.
A dispute often arises when the payer of the amount to the non-resident feels that the amount to be remitted by him is not recipient’s income chargeable under the Indian Income-tax Act. Should the payer in such a case deduct tax at source?
It was believed that the above controversy stands resolved after the decision of the Hon’ble SC in the case of Transmission Corporation of A. P. Ltd. v CIT 239 ITR 587.
But even after the above decision, several judgments were pronounced holding that whenever payment is to be made to a non-resident tax has to be deducted at source irrespective of whether the amount payable to non-resident is chargeable to tax in India or not (Samsung Electronic Co Ltd, 320 ITR 209). On the other hand, in the recent decision of Van Oord ACZ India (P) Ltd. [323 ITR 130] Delhi High Court held that when the amount payable to non-resident is not taxable in India, there is no question of withholding tax at source. The Hon’ble Delhi High Court clearly dissented from the decision of the Karnataka High Court.
The Hon’ble SC in a recent judgment pronounced on 9th September, 2010 has disposed off a large number of cases including the Karnataka High Court judgment. The question before the Apex Court was 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, arises in India?
The Apex Court observed that the Department raised the contention before the Karnataka High Court 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.
The Apex Court observed that 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 Others vs. CIT 314 ITR 309]
The SC has clearly held that the Karnataka High Court misunderstood the earlier decision of the SC.
The Court also held: “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.
Thus, where the amount to be remitted is not liable to tax in India, there is no question of making an application under section 195(2).
The author is a Sr. Partner in S. S. Kothari Mehta & Co.