2009 (9) TMI 961 - HC - Income Tax

Summary

Issues Involved:
1. Obligation of resident payer u/s 195 of the Income-tax Act, 1961.
2. Jurisdiction of appellate authority u/s 248 of the Act.
3. Nature of payments as 'royalty' and their taxability.
4. Application of Supreme Court judgments in related cases.

Summary:

1. Obligation of Resident Payer u/s 195 of the Income-tax Act, 1961:
The main issue revolves around the nature of the obligation on the part of a resident payer making payments to a non-resident recipient as envisaged u/s 195 of the Income-tax Act, 1961. The provision mandates deduction of an amount in advance at a percentage of the remittance towards the possible future tax liability of the non-resident recipient. The judgment discusses the scope and extent of this obligation, including whether it can be reduced or avoided.

2. Jurisdiction of Appellate Authority u/s 248 of the Act:
The respondents, who are resident payers, had deducted and remitted the amount but later disputed their liability and preferred appeals u/s 248 of the Act. The first appellate authority had varied decisions, and the Income-tax Appellate Tribunal (ITAT) uniformly held that there was no obligation on the resident payer to deduct any amount as the payment was not in the nature of 'royalty'. The revenue contended that the obligation u/s 195 was present and that the payment was indeed 'royalty'. The court examined whether the appellate authority could assess the income of the non-resident in the hands of the resident payer.

3. Nature of Payments as 'Royalty' and Their Taxability:
The court addressed whether payments made for the purchase of software could be treated as income liable to tax in India as 'royalty' or 'scientific work' u/s 9 of the Act, read with Double Taxation Avoidance Agreements (DTAA). The Tribunal's view that the payments were not 'royalty' and thus not taxable was contested by the revenue. The court concluded that the payments did bear the character of income receipt in the hands of the non-resident recipient and were chargeable to tax.

4. Application of Supreme Court Judgments in Related Cases:
The court referred to the Supreme Court's judgment in CIT v. Wesman Engg. Co. (P.) Ltd. and Transmission Corpn. of A.P. Ltd. v. CIT to determine the scope of appeal u/s 248 and the obligation u/s 195. It was held that the appellate authority could not assess the income of the non-resident in the hands of the resident payer, as this was beyond the scope of section 195.

Conclusion:
The court answered the substantial questions raised in ITA No. 351 of 2007 and other connected appeals in favor of the revenue and against the assessee. The Tribunal's conclusions were found to be incorrect, and the appeals were allowed. The court appreciated the guidance and assistance provided by the learned counsel for both parties in understanding the intricacies of section 195 of the Act.