Full Judgment Text
IN THE SUPREME COURT OF INDIA
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
1
Civil Appeal No.7778/2010 @ S.L.P. (C) No.16264/2010
J U D G M E N T
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
2
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
3
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
Corporation of A.P. Ltd. Vs. C.I.T. [239 ITR 587(SC)].
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 hereinbelow 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
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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 hereinbelow 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
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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 aforestated 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
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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
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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
CIT Vs. Cooper Engineering [68 ITR 457] it was pointed
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
8
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
Shipping International Joint Stock Company Vs. ITO [81
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
9
(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
Others Vs. CIT 314 ITR 309]
9. One more aspect needs to be highlighted. Section
195 falls in Chapter XVII which deals with collection and
10
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
11
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
weightage 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
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Code. Section 195 appears in Chapter XVII which deals
with collection and recovery. As held in the case of C.I.T.
Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the
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
13
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
14
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.
15
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
16
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.
17
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
18
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
19
‘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
20
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
21
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;
September 09, 2010
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