2010 (9) TMI 7 - SC - Income Tax

Withholding Tax - TDS u/s 195 - Incidence - 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 arises in India? - Held that - 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 - the observations of this Court in Transmission Corporation case (2008 -TMI - 5757 - SUPREME Court) has been completely, with respect, misunderstood by the Karnataka High Court - 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. - Matter remitted back to HC to decided the nature of payment made to non resident.

Issues Involved:
1. Whether the obligation to deduct tax at source (TAS) arises the moment there is a remittance to a non-resident.
2. Whether payments made to foreign software suppliers constitute "royalty" and are taxable in India.

Issue-wise Detailed Analysis:

1. Obligation to Deduct TAS on Remittance:
The primary issue was whether the High Court was correct in holding that the obligation to deduct TAS arises the moment there is a remittance to a non-resident. The Supreme Court examined Section 195 of the Income Tax Act, 1961, which deals with the deduction of tax at source for payments to non-residents.

The Court emphasized that Section 195(1) uses the phrase "sum chargeable under the provisions of the Act," indicating that TAS is required only if the sum being remitted is chargeable to tax in India. The Court stated, "A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the I.T. Act." This interpretation ensures that TAS is deducted only on amounts that have a tax liability in India.

The Court rejected the Department's contention that the mere act of remittance triggers the obligation to deduct TAS, stating that this would "obliterate the words 'chargeable under the provisions of the Act' in Section 195(1)." The Court clarified that the obligation to deduct TAS arises only when the payment is chargeable to tax in India.

2. Payments Constituting "Royalty":
The second issue was whether payments made by the appellant(s) to foreign software suppliers constituted "royalty" and were thus taxable in India. The ITO(TDS) and the Commissioner (A) had held that the payments were for a license to use the software and thus constituted royalty, making them taxable in India under Section 195 of the I.T. Act. However, the ITAT had ruled that the payments were not "royalty" and did not give rise to any income taxable in India, thereby exempting the appellant(s) from the obligation to deduct TAS.

The High Court did not address the merits of whether the payments constituted royalty. Instead, it concluded that the obligation to deduct TAS arises upon remittance, which the Supreme Court overruled.

The Supreme Court remitted the case back to the High Court for a de novo consideration on the merits, specifically to determine "whether on facts and 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."

Conclusion:
The Supreme Court set aside the High Court's judgment, which had held that the obligation to deduct TAS arises the moment there is a remittance. The case was remitted back to the High Court for a fresh evaluation on whether the payments made to foreign software suppliers constituted "royalty" and were taxable in India. The appeal by the appellant(s) was allowed with no order as to costs.

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