SC gives partial relief on TDS to foreign companies
BS Reporter / New Delhi Sep 10, 2010, 01:37 IST
The issue relates to the obligation of the payer to deduct and deposit TDS in relation to remittances made to foreign parties.
Granting partial relief to foreign companies operating in the country, the Supreme Court today reversed the judgment of the Karnataka High Court that there was an obligation in each and every case of remittance made to foreign payees to deduct tax at source and only the issue of proportionality of the tax could be decided by the revenue department under Section 195 (2) of the Income Tax Act.
A Bench headed by Chief Justice S H Kapadia held that it was not correct to say the moment a remittance was made to a foreign party, tax became deductible under the provisions of Section 195 of the Income Tax Act, dealing with TDS (tax deducted at source) for non-resident companies.
The court heard the appeals of around 15 foreign companies against the high court ruling, including Samsung, GE India Technology, HP and Sonata Software. After deciding the principles, all the cases have been remitted to the high court for deciding on the facts and circumstances of each case of assessment.
The issue relates to the obligation of the payer to deduct and deposit TDS in relation to remittances made to foreign parties who do not have any permanent establishment in India and are, therefore, not taxable under the Income Tax Act. It touches upon the current hot topic, highlighted in yesterday’s Vodafone judgment of the Bombay High Court, involving the issue of extra-territorial operation of the Income Tax Act.
Today’s judgment assumes importance in view of the fact that a large number of remittances are made to foreign parties from India, on which the department has imposed interest and penalty for the payer not having deducted TDS. The companies concerned argued that no part of the payees’ incomes arose in India nor did they have a permanent establishment in the country. More, the income was exempt under double taxation avoidance agreements.
Another issue raised in this batch of appeals was whether such payments made to foreign parties constituted royalties and were taxable under the provisions of the Income Tax Act or whether they were exempt under double taxation avoidance agreements with various countries. This issue has also been remitted to the high court to decide whether the payment made to the foreign suppliers amounted to royalty and whether the same was taxable in India-giving rise to an obligation to deduct tax at source.
Kindly explain, If TDS on foreign expert amount paid by payee side. what will be the tax amount nature. I means amount made for TDS will treat as expenses of payee or it's again the law of the tax. Or any declaration need for foreign expert during exit from India.
It has been said that one the most tedious provisions in the Income-tax Act, 1961 is relating to TDS, especially from remittance to foreign companies and others. In addition to the power under section 195 (2), which is pointed out in the foregoing report, if the tax is eventually found to be deductible and which was not deducted, then the remitter can be ordered to bear tax on tax also (i.e. including the multiplier effect), under section 195A. Such order is appealable, under section 246 (1) (i), read with section 201. However, more importantly, in view of the recent Vodafone episode, it is suggested that the CBDT may constitute a separate/specialized cell to scrutinize all outward foreign remittances, including for import of supply of goods and services, where certain portion of the consideration might include tax deductible element.
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