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195
Presentation by: Vispi T. Patel 13 February 2009
Time of deduction
At the time of credit or payment whichever is earlier
United Breweries Ltd. v ACIT (211 ITR 256)(Kar) Flakt (India) Ltd. (267 ITR 727)(AAR)
Even after credit, tax to be deducted when sum becomes unconditionally available to the payee Debatable
Motor Industries Company (249 ITR 141) (Kar) Creation of an enforceable debt essential to trigger tax withholding Ericsson Communication (81 ITD 77) (Delhi)
Rates of deduction
At the rates in force:Section 2(37A) defines rates in force as rates as per Finance Act or Treaty whichever is applicable
Reference to rates as per DTAA included from 1.6.1992 CBDT vide Circular No. 728 dated 30.11.95 , rates as per DTAA to be applied where they are more favorable to the assessee Conditions for applying beneficial rate laid down u/s. 115A
Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587) P.C. Ray & Co. (India) (P) Ltd. v. ITO (36 ITR 365)(Cal) Raymonds Ltd. v. DCIT (80 TTJ 120)(Mum)/MSEB v. DCIT (90 ITD 793)(Mum) CIT v. Samsung Electronics Co. Ltd. (185 Taxman 313)(Kar)
Facts
The assessee made certain payments to nonresidents, without deduction of tax at source, towards purchase of machinery/ equipment and also for erection and commissioning of such machinery/equipment
ITAT Ruling
The provisions of section 195 are not applicable to payments of sums to a non-resident, which are not pure income profits
ITAT Ruling
These observations do give a prima facie impression that, in the esteemed views of the SC, whenever an application under s. 195(2), is not filed, the assessee tax deductor is under a statutory obligation to deduct tax at source computed on the entire payment to nonresident treating the same as income. However, such an interpretation will be fallacious The ratio of SC judgement in the case of Transmission Corporation of A.P. Ltd. do not affect the position that in a case where no portion of payment is exigible to tax, the question of application of s. 195(2) does not arise, because, as the section itself categorically provides that it comes into play where the person responsible for paying any sum chargeable under this Act to a nonresident considers that whole of such sum would not be chargeable in the case of recipient
ITAT Ruling
It is thus a settled position that when an income is outside the scope of income taxable under the Act, the question of application of s. 195, which is in material respects pari materia with s. 18(3B) of the 1922 Act that High Court [P.C. Ray & Co. v. ITO (36 ITR 365)(Cal)]was in seisin of, does not arise. It is neither desirable nor permissible to pick out a word or a sentence from the judgement of the SC, divorced from the context of question under consideration and treat it to be the complete law declared by the SC [CIT v. Sun Engineering Works (P) Ltd. (198 ITR 297)(SC)]
ITAT Ruling
It was not even the case of the Revenue, in the matter of Transmission Corpn. that tax at source was also required to be deducted from the payments made to non-residents were not exigible to tax in India, their Lordships concern was confined to two categories of payments : first, which are in the nature of payment of income simpliciter, and, second ,in the nature of amounts of a mixed composition, a part of which only may turn out to be taxable income on account of income embedded or hidden therein. The observations made in this context, in our considered view, cannot be applied in the case of sums no part of which are exigible to tax in India
The SC decision should not be used as a blind mans walking stick without examining the facts of the situation
CIT v. Samsung Electronics Co. Ltd. & Others (185 Taxman 313)(Kar)
Facts
The assessee, an Indian branch of the Korean Company, was engaged in development of software for telecommunication system, office appliances, computer system and mobile devices. The software developed by the assessee was for in-house used by the parent company The assessee imported software product which was readily available in the market The assessee made the payment for import of software without deduction of tax at source and also without making an application u/s. 195(2) AO initiated proceedings u/s. 201 for non-withholding of tax
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
ITAT Ruling
It was not incumbent on the assessees to deduct tax u/s. 195 as payments were not in the nature of royalty in terms of respective DTAAs Consequently, proceedings u/s. 201 would not arise
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
Revenues Contention
Payments made by the assessees to the supplier of the software were in the nature of royalty u/s. 9(1)(vi) of the Act and as such, the assessees were required to deduct tax at source as per s. 195 Definition of royalty under the Act and as per the DTAAs with USA and Sweden were one and same and therefore, the payments were in the nature of royalty and not out-right sale Reliance was placed on the Amex Ruling (238 ITR 296)(AAR) The SC Ruling in the case of Tata Consultancy was in the different context and therefore, interpretation therein has no relevance for the Income tax purpose The assessee was bound to deduct tax at source u/s. 195 (Reliance placed on Transmission Corpn)
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)
Assessees Contention
Application to deduct tax at source u/s. 195 would arise only in the event of chargeable to tax Sale of software is goods and is a trading receipt, thus not chargeable to tax in India If a person is not liable to be charged to tax, the assessee cannot be construed as a person in default u/s. 200 The SC Ruling in Transmission Corpn. does not restrict the right of the assessee to challenge the liability /demand based on chargeability
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
Assessees Contention
Charging provision u/s. 4 will have to be borne in mind while reading s. 195 [CIT v. Eli Lilly (312 ITR 225)(SC)] Prior to amendment to s. 201, the assessees did not come within the ambit of deemed defaulter Consequential order passed u/s. 201 is bad in law If the sum is not at all chargeable, what are the consequences is not a question answered in Transmission Corpn. Therefore, the SC Ruling in Transmission Corpn. is not an authority for the present case
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
HC Ruling/Observation
All the assessees are quite aware that it is not actually an exercise for determination of tax liability of a nonresident; but is only in the context of the obligation of a resident assessee making payments to the non-resident as contemplated u/s. 195 This obligation cannot be otherwise got rid of or can be wriggled out Valiant attempts have been made to either distinguish the SC Ruling in Transmission Corpn. or even to contend that the judgement can only be an authority only to the limited extent where some part of payment partakes the character of income
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)
HC Ruling/Observation
Binding nature of the judgement of the SC cannot in any way be diluted or diminished as the SC directly involved in the exercise of interpreting the provision of s. 195. There is absolutely no scope for the HCs even to examine an alternative arguments We cannot lose sight of the fact that section 195(1) of the Act is not a charging section or provided for determination of the tax liability of a non-resident nor as to whether u/s. 9 of the Act; but by simply accepting the operation of the mandate u/s. 195(1) that the payment to the recipient prima-facie bears the character of an income and therefore, the obligation u/s. 195(1) springs up
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)
HC Ruling/Observation
An exercise of determination of tax liability cannot be resorted even for the purpose of determining the extent of obligation on part of the payer and to ascertain as to whether there is any scope for relieving the payer totally from the obligation to deduct. An answer for this can be obtained only by going through procedure envisaged u/s. 195(2) In the absence of such application u/s. 195(2), the appellate authorities are precluded from going to the question or exercising its appellate powers to decide the question whether the sum is chargeable to tax; especially in the wake of the binding judgement of the SC in the case of Transmission Corpn.
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
HC Ruling/Observation
As regards the pre-amended law in relation to s. 201, section 200 and heading of section 201 clearly cover the case of the total failure of deduction also The resident payer, who has not filed an application u/s. 195(2) cannot, later, after having failed to deduct and remit the amount turn around and contend that no part of the payment had resulted in any taxable income in the hands of the non-resident recipient and therefore, it cannot be said that there was any failure on the part of the payer in fulfilling its obligation u/s. 195(1)
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)
HC Ruling/Observation
It is not open to a resident payer to invite the AO to embark upon the exercise of determining the tax liability of a non-resident recipient on a mere filing of objections to a demand u/s. 201 by merely contending that the payment did not result in any taxable income. This exercise can be undertaken by AO only on filing of actual return of income by the non-resident recipient. As far as the resident payer is concerned, the limited option is to have applied to the AO as per s. 195(2) Admittedly in all these appeals the assesses having not made any such application u/s. 195(2), no further questions arises for examination in so far as the liability of the resident payer in terms of s. 195(1) is concerned All such contentions urged on the merits of the question of actual taxability are to be ignored as irrelevant and are not productive.
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
HC Ruling/Observation
The only limited way of either avoiding or warding off the guided missile (obligation to withhold tax) is by the resident payer invoking the provisions of s. 195(2) and even here to the very limited extent of correcting an incorrect identification, an incorrect computation or to call in aid the actual determination of the tax liability of the non-resident . Except for this method, there is no other way of the resident payer avoiding the obligations cast on it by s. 195(1) Even in a situation where an application is made u/s. 195(2), the AO cannot embark on an exercise as though it is meant to determine the actual tax liability of the non-resident recipient. If such a situation is permitted to take place, there can arise conflicting decisions and versions in so far as the tax liability of the non-resident is concerned at the time of 195(2) and on actual filing of return by such non-resident
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
HC Ruling/Observation
A situation of this nature should be avoided and it can be avoided if we should bear in mind that the exercise u/s. 195(2) is only for extending a limited concession in favour of the payer when things are very clear or does not involve any doubt or ambiguity such as in a situation where the AO has actually examined the nature of payment and has indicated in an assessment order on the basis of return filed by the non-resident that no part of the receipt is taxable and if so based on this settled/undisputed factual/legal position, the resident payer by quoting the assessment order passed by AO for any earlier year seek for granting commensurate relief from the obligation for deduction of the percentage of payment to the non-resident
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
HC Ruling/Observation
Also an erroneous order and demand being raised by the AO u/s. 201 regarding with the incorrect description of the resident payer or incorrect computation of the amount to be deducted either by employing a wrong percentage for deduction, at variance with the rates as prescribed in the Finance Act or such arithmetical or factual errors committed by the AO, without involving the question of actual determination of the tax liability of non-resident alone can constitute the subject matter for appeal u/s. 246A.
In Prasad Productions Ltd., a Special Bench of the Tribunal , Chennai has been constituted In view of the judgement of the Karnataka High Court in Samsung Electronics
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)
Rule 29B permit an application by a non resident only if following conditions are satisfied
Non resident has prior track record of assessment in India Non resident has been carrying on business or profession in India continuously for a period of 5 years Value of fixed assets in India exceeds Rs. 50 lakhs Should not have been deemed to be an assessee in default
Thank You
Vispi T. Patel
Vispi T. Patel & Associates Contact no : +91 98 6763 5555 Email id : vispitpatel@vispitpatel.com