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Shah D J
Nil TDS certificate issued by AO U/s. 195(2) in contravention of provisions not binding on revenue
BIOCON Biopharmaceuticals Pvt. Ltd vs. ITO (ITAT Bangalore), ITA Nos. 507 to 510/Bang/2009, Date of Pronouncement : 19.04.2013
ISSUE NO.2: Whether the issue of shares by the Assessee on 30.3.2004 and 30.9.2004 can be said to be covered by the order of non- deduction of tax at source issued by the AO in his order dated 22.2.2005 and therefore in respect of issue of shares on the above two dates the Assessee cannot be proceeded against u/s. 201(1) & 201(1A) of the Act?
It was contended by the ld. counsel for the assessee that since the AO has passed an order u/s. 195(2) of the Act allowing the assessee to issue shares without tax deduction at source, the issue of shares made by the assessee on 30.03.2004 and 30.09.2004 cannot be the subject-matter of proceedings u/s. 201(1) & 201(1A) of the Act.
In the present case, the assessee has made an application for NIL deduction of tax at source. Such application can be made only by a payee u/s. 195(3) of the Act. When an application is made u/s. 195(2) of the Act, the AO cannot assume jurisdiction to hold that the entire payment
is not chargeable to tax and the payer need not deduct tax at source.
is not chargeable to tax and the payer need not deduct tax at source. According to the ld. Counsel for the assessee, the objective of section 195 is to avoid revenue loss as a result of tax liability of a nonresident. According to him, if taxes are withheld on payments which are not chargeable to tax, that would result in excess remittance of taxes. According to him, tax deduction cannot extend beyond the primary levy of tax. According to him, if excess taxes are deducted, then there would be a requirement of applying for refund of excess tax deducted at source. To avoid two way traffic of paying taxes and then claiming refund, it should be possible for a payer to apply for a Nil deduction of tax at source. It is the stand of the assessee that section 195(2) of the Act provides that when the person responsible for paying any sum chargeable under this Act to a nonresident, considers that the whole of such sum would not be income chargeable in the case of the recipient. According to him, the above expression used in section 195(2) of the Act contemplates a situation where the payer can also make an application for a Nil deduction of tax at source. We are of the view that the above submission of the assessee is without any basis. The provisions of section 195(2) have to be read in its entirety and the later portion of section 195(2) of the Act authorizes the payer to make an application to determine the appropriate proportion of such sum which is chargeable to tax. It is not possible to read the first part of section 195(2) in isolation and it has to be read to the later part of section 195(2) of the Act. In view of the clear language of the provisions of section 195(2) of the Act, we do not think it necessary to elaborate on the submissions made by the ld. Counsel for the assessee by drawing analogy to various provisions in the Act and case laws referred to in this regard. In none of the case laws elaborated by the ld. Counsel for the assessee in his written submissions deal with the scope of section 195(2) in the context of a payer making an application for Nil deduction of tax at source. We are of the view that the submissions made by the assessee in the written submissions are a desperate attempt to justify the Nil deduction of tax granted by the AO which fortunately for the revenue did not operate at the relevant point of time when the assessee issued shares to CIMAB.
by the AO which fortunately for the revenue did not operate at the relevant point of time when the assessee issued shares to CIMAB. The question for consideration would be as to what is the effect of the order dated 22.02.2005 passed by the Assessing Officer u/s. 195(2) of the Act holding that no tax is deductible by the payer. In our view, when there is no power u/s. 195(2) of the Act to hold that no tax is deductible at source, on an application filed by the person making payment to a nonresident, the order passed by the AO holding that no tax is deductible at source would be non est in law. In fact, this aspect is clear from the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., 327 ITR 456 (SC), wherein the Hon'ble Supreme Court has observed that section 195(2) provides a remedy by which a person may seek determination of the appropriate proportion of such sum so chargeable, where a proportion of the sum so chargeable is liable to tax. The Hon'ble Supreme Court has also observed that an application u/s. 195(2) presupposes that the person responsible for making the payment to a non-resident is in no doubt that tax is payable in respect of the some part of the amount to be remitted to a non-resident, but is not sure as to what should be portion so taxable or is not sure as to the amount of tax to be deducted. It is thus clear from the aforesaid observations of the Hon'ble Supreme Court that the payer cannot ask for a non-deduction of tax at source u/s. 195(2) of the Act.
to a nonresident, the order passed by the AO holding that no tax is deductible at source would be non est in law. In fact, this aspect is clear from the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., 327 ITR 456 (SC), wherein the Hon'ble Supreme Court has observed that section 195(2) provides a remedy by which a person may seek determination of the appropriate proportion of such sum so chargeable, where a proportion of the sum so chargeable is liable to tax. The Hon'ble Supreme Court has also observed that an application u/s. 195(2) presupposes that the person responsible for making the payment to a non-resident is in no doubt that tax is payable in respect of the some part of the amount to be remitted to a non-resident, but is not sure as to what should be portion so taxable or is not sure as to the amount of tax to be deducted. It is thus clear from the aforesaid observations of the Hon'ble Supreme Court that the payer cannot ask for a non-deduction of tax at source u/s. 195(2) of the Act. The sum and substance of the submission made by the ld. Counsel for the assessee on the above aspect was that an order passed even without authority of law is a valid order and needs to be set aside in a manner known to law and till such time, it is done so, the same is binding. We do not think that the proposition canvassed by the ld. Counsel for the assessee can be accepted. There cannot be an estoppel against statute. The AO derives his powers by virtue of various provisions contained in the Act. If u/s. 195(2) of the Act, the AO does not have a power to issue a Nil deduction of tax at source on an application filed by the payer, then it would not be proper to say that an order given in contravention of those provisions would be binding on the revenue authorities. Apart from the above, in the present case, factually the order dated 22.02.2005 issued by the AO u/s. 195(2) of the Act did not operate or was not in force for any of the issue of shares made by the assessee non-resident CIMAB. This contention therefore is devoid of merits and in any event, does not arise for consideration in the present proceedings. In that view of the matter, we are of the view that there is no merit in the contentions put forth by the assessee before us.
Tds on Payment to Non-resident u/s. 195 Procedure for remittance to the Non-resident — issued vide CBDT Circular No. 4/2009 dated 29th June, 2009. Obtain certificate in Form No. 15CB from a Chartered Accountant Obtain PAN for the Non-Resident else 20% rate u/s 206AA. Tax calculated should be increased by surcharges except where treaty rates are applied. Tax has to be grossed up u/s 195A for all agreements entered after 2.6.2002 where tax is agreed to be borne by the payer. Tax has to be deducted only if it is required to be deducted on sums chargeable to tax in India under the Income-tax Act. Circular No. 786 dated 7th February, 2000. TDS on salary to non-residents (including Indian NR) is governed by sec. 192 and not 195. Non-residents making payments to non-residents are liable to TDS if the payments are chargeable to tax in India (228 ITR 487-AAR). Exchange rateon the day on which TDS is required to be deducted has to be considered. Payer can make a reference by simple letter on letter head/plain paper to Assessing Officer u/s. 195(2) of the Act (under Rule 10) if he opines that only portion of payment is going to be taxed and hence a request is made for determination of the amount on which tax has to be deducted. An application u/s 195(3) can be made by the payee to the AO for no deduction of tax for receipt of sums other than dividends or interest. (Form 15D). Certificate is valid for the financial year specified therein unless cancelled by AO anytime before the expiry of the financial year. An application u/s 197 can be made by the payee to the AO for no deduction of tax or at a lower rate of tax than rate prescribed to be deducted. (Form 13). Certificates u/s 195(3) and u/s 197 are not appealable. U/s 195 a non-resident is not entitled to basic/threshold exemption in respect of LTCG. Tax has to be deducted at rates prescribed under relevant Finance Act or at the rates prescribed/specified in treaty, whichever are beneficial to the assessee. Treaty is an option to the assessee. In case treaty rates are opted by the remittee/payee/recipient, take residency certificate of payee/receiver to determine DTAA of which country has to be applied. Furnish the information in Form 15CA, verified in the manner prescribed. Rule 37BB. Form No. 15CA to be then electronically uploaded on designated website Take printout of Form No. 15CA, sign and manually file with bankers/authorized dealers of the payee along with copy of Form 15CB. Approach Bank and ask them for remittance with cheque/account debit. Refund of TDS u/s 195 in certain circumstances – Circulars 790/20.4.2000 & 7/23.10.2007. Courtesy : www.wirc-icai.org
| Subject : | Income Tax Law |
| Month-Year : | May 2010 |
| Author/s : | Pradip Kapasi Gautam Nayak Chartered Accountants |
| Topic : | Tax Deduction at Source u/s.195 |
1. Issue for consideration :
1.1 S. 195 of the Income-tax Act provides for tax deduction at source from payment of interest or any other sum chargeable under the provisions of the Income-tax Act (other than salaries or dividend specified in S190) to a non-resident or a foreign company at the prescribed time at the rates in force.
1.2 U/s.195(2), where the payer considers that the whole of such sum so payable to a non-resident would not be income chargeable of the recipient, he can make an application to the Assessing Officer to determine the appropriate proportion of such sum chargeable to tax, and thereupon shall deduct tax u/s.195(1) only on that proportion of the sum chargeable to tax. Similarly, sections 195(3) and 197 provide for the payee making an application to the Assessing Officer for issue of a certificate that income-tax may be deducted at lower rates of tax or not deducted on payment to be received by him, where such lower rate or non-deduction is justified.
that income-tax may be deducted at lower rates of tax or not deducted on payment to be received by him, where such lower rate or non-deduction is justified.1.3 The issue has arisen before the courts as to whether, in a case where the payment to the nonresident or a foreign company does not comprise any income chargeable to tax in India at all (for example, in case of payment for purchase of goods imported from the non-resident), whether the payer has necessarily to apply to the tax authorities for a certificate u/s.195(2) or whether the payment can be made to such non-resident or foreign company without any deduction of tax at source, and without obtaining any such certificate u/s.195(2) or u/s.195(3) or u/s.197.
1.4 While the Karnataka High Court has taken the view that it is mandatory to obtain such a certificate from the tax authorities, the Delhi High Court has taken a contrary view that in such cases, the payer can make the payment without the need for such certificate.
2. Samsung Electronics' case :
' case :2.1 The issue came up before the Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd., 320 ITR 209. Various other appeals of different resident payers were also decided vide this judgment.
2.2 In this case, the assessee payer was a branch of a Korean company engaged in the development, manufacture and export of software for use by its parent company. The software developed by it was for in-house use by the parent company. During the relevant years, the assessee imported ready-made software products from US and French companies for its own use. It did not deduct tax at source from payments made to the US and French companies on the ground that the payment to the foreign companies was for purchase of products, and was not in the nature of royalty, and was not chargeable to tax in India.
for use by its parent company. The software developed by it was for in-house use by the parent company. During the relevant years, the assessee imported ready-made software products from US and French companies for its own use. It did not deduct tax at source from payments made to the US and French companies on the ground that the payment to the foreign companies was for purchase of products, and was not in the nature of royalty, and was not chargeable to tax in India.2.3 The Assessing Officer held that the payment was in the nature of royalty, that the assessee was bound to deduct tax at source on the payments, and accordingly treated the assessee as an assessee in default u/s.201(1), and also levied interest u/s.201(1A). The Commissioner (Appeals) dismissed the assessee's appeals against this order.
2.4 The Tribunal held that the payment was not in the nature of royalty in terms of the relevant provisions of the Double Taxation Avoidance Agreements. It also held that it was not incumbent on the assessee to deduct any amount u/s.195.
2.5 Before the Karnataka High Court, it was argued on behalf of the Department that the payment was in the nature of royalty on which tax was required to be deducted at source u/s.195. It was argued that the transaction was a licence and was therefore in the nature of royalty. It was further claimed that the assessee was bound to deduct tax u/s.195 and that it could not contend that it was not the income of the recipient. Reliance was placed on the decision of the Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT, 239 ITR 587.
2.6 It was argued by the assessee that the nature of payment was not royalty even u/s.9(1)(vi), on account of the fact that the non-resident supplier had merely sold a copyrighted article and not the copyright itself, relying on the decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh, 271 ITR 401. It was therefore claimed that the payment was for purchase of articles/goods in connection with the business carried on by the assessee. It was further claimed that under the Double Taxation Avoidance Agreements, since the non-resident recipients had no permanent establishments in India, the entire income of the non-residents attributable to the payments was not taxable in India. It was therefore claimed that there was no obligation on the part of the payer to deduct any amount.
was not royalty even u/s.9(1)(vi), on account of the fact that the non-resident supplier had merely sold a copyrighted article and not the copyright itself, relying on the decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh, 271 ITR 401. It was therefore claimed that the payment was for purchase of articles/goods in connection with the business carried on by the assessee. It was further claimed that under the Double Taxation Avoidance Agreements, since the non-resident recipients had no permanent establishments in India, the entire income of the non-residents attributable to the payments was not taxable in India. It was therefore claimed that there was no obligation on the part of the payer to deduct any amount.2.7 It was also contended by the other assessees that there was no obligation on their part to deduct any amount from the payments, as they were fully and bona fide satisfied that the amount was not taxable in the hands of the non-resident in India. They had therefore not chosen to apply for any relief or concession in terms of S. 195(2) and (3). It was further argued that the words used in S. 195 are 'chargeable to tax' and hence a person deducting tax u/s.195 would have to necessarily first see whether the same was chargeable to tax and then only, if it was so chargeable, he was to deduct tax. It was contended that if a person was not liable to be charged to tax, then the payer could not be held to be a person in default u/s.201.
2.8 The Karnataka High Court considered the decision of the Supreme Court in Transmission Corporation of AP's case (supra) and of the Calcutta High Court in P. C. Ray & Co. (India) Private Limited v. ITO, 36 ITR 365, wherein the Calcutta High Court had held that if the term 'chargeable under the provisions of this Act' means actually liable to be assessed to tax, in other words, if the sum contemplated was taxable income, a difficulty is undoubtedly created as to complying with the provisions of the Section.' The High Court in that case had held that what was contemplated was not merely amounts, the whole of which were taxable without deduction, but amounts of a mixed composition, a part of which only might turn out to be taxable income as well; and the disbursements, which were of the nature of gross revenue receipts, were yet sums chargeable under the provisions of the Income-tax Act and came within the ambit of the Section.
2.9 The Karnataka High Court therefore rejected the arguments of the assessees that the expression 'any other sum chargeable under the provisions of this Act' would not include cases where any sum payable to non-resident was trading receipts, which may or may not include 'pure income'. According to the Karnataka High Court, the language of S. 195(1) was clear and unambiguous and cast an obligation to deduct appropriate tax at the rates in force.
receipts, which may or may not include 'pure income'. According to the Karnataka High Court, the language of S. 195(1) was clear and unambiguous and cast an obligation to deduct appropriate tax at the rates in force. 2.10 The Karnataka High Court observed that S. 195 was not a charging Section, nor a Section providing for determination of the tax liability of the nonresident receiving the payments from the resident. The amount deducted by the resident was only a provisional tentative amount, which was kept as a buffer for adjusting this amount against the possible tax liability of the non-resident. Deduction of the amount u/s.195 was not the same as determination of the liability of the non-resident, who may be or may not be liable to pay any tax. Determination of tax liability could only be on the basis of the return of income filed by the non-resident. According to the Karnataka High Court, the only scope and manner of reducing the obligation for deduction imposed on a resident payer in terms of S. 195(1) was by the method of invoking the procedure u/s.195(2) of making 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 alone, being allowed the liberty of deducting the proportionate sum so chargeable to tax to fulfil the obligations u/s.195(1).
of the nonresident receiving the payments from the resident. The amount deducted by the resident was only a provisional tentative amount, which was kept as a buffer for adjusting this amount against the possible tax liability of the non-resident. Deduction of the amount u/s.195 was not the same as determination of the liability of the non-resident, who may be or may not be liable to pay any tax. Determination of tax liability could only be on the basis of the return of income filed by the non-resident. According to the Karnataka High Court, the only scope and manner of reducing the obligation for deduction imposed on a resident payer in terms of S. 195(1) was by the method of invoking the procedure u/s.195(2) of making 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 alone, being allowed the liberty of deducting the proportionate sum so chargeable to tax to fulfil the obligations u/s.195(1).2.11 The Karnataka High Court therefore held that in the absence of an application u/s.195(2), the payer was obliged to deduct tax at source u/s. 195(1), even though the payment did not contain any element of income of the non-resident chargeable to tax in India.
3. Van Oord's case :
3.1 The issue again recently came up before the Delhi High Court in the case of Van Oord ACZ India (P) Ltd. v. CIT, (unreported — ITA No. 439 of 2008 dated 15th March 2010, available on www.itatonline.org).
3.2 In this case, the assessee was an Indian subsidiary of a Netherlands company, and was engaged in the business of dredging, contracting, reclamation and marine activities. During the relevant year, the assessee reimbursed mobilisation and demobilisation cost to its parent company. This cost related essentially to transportation of dredger, survey equipment and other plant and machinery from countries outside India to the site in India and the transportation of such plant and machinery on completion of the contract, including fuel cost incurred on transportation. These services were contacted by the parent company and were provided by various non-resident entities. The assessee reimbursed such cost to the parent company on the basis of invoices received by the parent company from the non-resident entities.
equipment and other plant and machinery from countries outside India to the site in India and the transportation of such plant and machinery on completion of the contract, including fuel cost incurred on transportation. These services were contacted by the parent company and were provided by various non-resident entities. The assessee reimbursed such cost to the parent company on the basis of invoices received by the parent company from the non-resident entities.3.3 The assessee filed an application to the Assessing Officer for issue of nil tax withholding certificate in respect of reimbursement of various costs to the parent company. The Assessing Officer issued a certificate of deduction of tax at source at 11%, and the assessee deducted tax at source accordingly on Rs.6.98 crore. In the course of assessment proceedings, the Assessing Officer disallowed payments of Rs.8.66 crore made to the parent company u/s.40(a) (i), on the ground that the assessee had defaulted in deducting tax at source u/s.195.
in respect of reimbursement of various costs to the parent company. The Assessing Officer issued a certificate of deduction of tax at source at 11%, and the assessee deducted tax at source accordingly on Rs.6.98 crore. In the course of assessment proceedings, the Assessing Officer disallowed payments of Rs.8.66 crore made to the parent company u/s.40(a) (i), on the ground that the assessee had defaulted in deducting tax at source u/s.195.3.4 The Commissioner (Appeals) upheld the disallowance made by the Assessing Officer. The Tribunal confirmed the addition, stating that the assessee was mandatorily liable to deduct tax at source u/s.195, and that it was not necessary to determine whether such payment was chargeable to tax in India in the hands of the non-resident. The Tribunal further held that the assessee was a dependent agent permanent establishment of the parent foreign company and therefore the reimbursement of expenses to the foreign parent company was to be subjected to tax.
was chargeable to tax in India in the hands of the non-resident. The Tribunal further held that the assessee was a dependent agent permanent establishment of the parent foreign company and therefore the reimbursement of expenses to the foreign parent company was to be subjected to tax.3.5 Before the Delhi High Court, it was argued on behalf of the assessee that the amount reimbursed to the parent company was not chargeable to tax in India in the hands of the parent company, and that the assessee was consequently not liable to deduct tax at source u/s.195. It was argued that the obligation to deduct tax at source u/s.195 was predicated on the condition that tax was payable by the non-resident on the payments received by it, and once it was established that no such tax was payable by the non-resident, the assessee could not be treated to be in breach of its obligations.
3.6 It was pointed out that the reason for fastening the obligation to deduct tax at source of the payment to non-resident only in a situation where such payment was chargeable to tax in India was that it was not the intention of the law to fasten an absolute liability on the remitter to deduct tax at source from the payment to the non-resident, and then subject the non-resident to the rigorous process of filing return and seeking refund and assessment on the basis of such return. Where the remitter was of the opinion that some part of the income may be chargeable to tax in India, the remitter could approach the Assessing Officer to determine the appropriate portion of the income that would be subject to tax in India and the rate on which tax was to be deducted at source. Reliance was placed on the observations of the Supreme Court in the case of Transmission Corporation of AP Ltd. (supra) and various other cases for the proposition that the obligation to deduct tax at source is triggered only when the payment to be made to the non-resident is chargeable to tax in India in the hands of the nonresident recipient.
3.7 On behalf of the Department, it was argued that S. 195 only determines the proportion of liability and presupposes the existence of liability. It was pointed out that the assessee itself had applied for determination of extent of liability. The statutory obligation of the assessee with regard to deduct tax at source was fully crystallised, and therefore there was no justification on the part of the assessee not to deduct tax at source, particularly when the order passed u/s.195(2) had attained finality.
3.8 The Delhi High Court noted that the issue before the Supreme Court in the case of Transmission Corporation of AP (supra) was whether tax at source was to be deducted by the payee on the entire amount paid by it to the recipient or whether it was to be deducted only on the component of pure income profits. It was therefore in the context of whether tax deductible was to be on the gross sum of trading receipts paid to non-residents or whether only on the income component. It was in that context that the Supreme Court held that "any other sum chargeable under the provision of this Act" would include the entire amount paid by the assessee to non-residents. The observations of the Supreme Court therefore needed to be read in that context. The Delhi High Court noted that the Supreme Court was not concerned in that case with a situation where no tax in the hands of the recipient was payable at all. The Delhi High Court noted that certain observations in the judgment clearly depicted the mind of the Supreme Court that liability to deduct tax at source arose only when the sum paid to the non-resident was chargeable to tax. Once that is chargeable to tax, it was not for the assessee to find out how much of the amount of the receipts was chargeable to tax, but it was its obligation to deduct tax at source on the entire sum paid by the assessee to the recipient.
receipts paid to non-residents or whether only on the income component. It was in that context that the Supreme Court held that "any other sum chargeable under the provision of this Act" would include the entire amount paid by the assessee to non-residents. The observations of the Supreme Court therefore needed to be read in that context. The Delhi High Court noted that the Supreme Court was not concerned in that case with a situation where no tax in the hands of the recipient was payable at all. The Delhi High Court noted that certain observations in the judgment clearly depicted the mind of the Supreme Court that liability to deduct tax at source arose only when the sum paid to the non-resident was chargeable to tax. Once that is chargeable to tax, it was not for the assessee to find out how much of the amount of the receipts was chargeable to tax, but it was its obligation to deduct tax at source on the entire sum paid by the assessee to the recipient.3.9 The Delhi High Court relied on certain other decisions of the High Courts, including that of the Delhi High Court in the case of CIT v. Estel Communications (P) Ltd., 217 CTR 102 and the Karnataka High Court in the case of Jindal Thermal Power Company Limited v. Dy. CIT, 182 Taxman 252, where Courts had taken the view that there was no obligation to deduct tax at source since there was no tax liability of the non-resident in India. The Delhi High Court noted the decision of the Karnataka High Court in the case of Samsung Electronic Co. Ltd. (supra), and observed that the context in that case was different. The Delhi High Court expressed its disagreement with some of the observations made in that judgment of the Karnataka High Court.
Co. Ltd. (supra), and observed that the context in that case was different. The Delhi High Court expressed its disagreement with some of the observations made in that judgment of the Karnataka High Court.3.10 The Delhi High Court therefore held that the obligation to deduct tax at source arises only when the payment was chargeable under the provisions of the Income-tax Act. The Delhi High Court noted that in the case before it, the income-tax authorities had accepted that the foreign company was not liable to pay any tax in India by accepting the foreign company's tax return u/s.143(1) and refunding the tax deducted at source. Therefore, the assessee could not be regarded as having defaulted in deduction of TDS u/s.195.
4. Observations :
4.1 This issue was also again very recently considered by the Special Bench of the Income-tax Appellate Tribunal at Chennai, in the case of ITO v. Prasad Production Ltd., (ITA No. 663/Mds/2003, dated 9th April 2010 — unreported, available on www.itatonline.org).
4.2 The Tribunal in this case considered the decision of the Karnataka High Court in Samsung's case (supra) as well as that of the Supreme Court in the case of Transmission Corporation of AP (supra). The Tribunal noted that both the Department as well as the assessee were relying upon the Supreme Court decision in the case of Transmission Corporation of AP. It therefore focussed on the observations in that judgment. It noted the provisions of the following paragraph on page 588 :
"The consideration would be — whether payment
4.3 The Tribunal also noted the observations of the Supreme Court in the case of Eli Lilly & Co., 312 ITR 225, as under :
"To answer the contention herein we need to examine briefly the scheme of the 1961 Act. S. 4 is the charging Section. U/s.4(1), total income for the previous year is chargeable to tax. S. 4(2), inter alia, provides that in respect of income chargeable U/ss.(1), income-tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which, inter alia, brings in the TDS provisions contained in Chapter XVII-B. In fact, if a particular income falls outside S. 4(1), then the TDS provisions cannot come in."
4.4 From these two decisions of the Supreme Court, the Tribunal concluded that it was abundantly clear that the charging provisions could not be divorced from the TDS provisions, and that S. 195 would be applicable only if the payment made to the non-resident was chargeable to tax.
from the TDS provisions, and that S. 195 would be applicable only if the payment made to the non-resident was chargeable to tax.4.5 The Tribunal also noted the material difference between the provisions of Ss.(2) and Ss.(3) of S. 195. U/ss.(2), the payer made the application for deduction of tax at lower rates. U/ss.(3), the payee could make an application for deduction of tax at lower rate or without deduction of tax. According to the Tribunal, the reason for such difference was that where the payer had a bona fide belief that no part of the payment bore income character, S. 195(1) itself would be inapplicable and hence there would be no question of going into the procedure prescribed in S. 195(2). Ss.(3) deals with a situation where the payer wants to deduct tax from the payment, but the payee believed that he was not chargeable to tax in respect of that payment. Hence the payee was given an opportunity to seek approval of the Assessing Officer to receive the payment without deduction of tax.
with a situation where the payer wants to deduct tax from the payment, but the payee believed that he was not chargeable to tax in respect of that payment. Hence the payee was given an opportunity to seek approval of the Assessing Officer to receive the payment without deduction of tax.4.6 The Tribunal interestingly observed that by deciding whether the payment bore any income character or not, the payer was not determining the tax liability of the total income of the payee, but merely considering the chargeability in respect of the payment that he was making to the payee.
4.7 The tribunal also considered the fact that for the purposes of remittances to non-residents, a chartered accountant's certificate was prescribed as an alternative to the procedure u/s.195(2). This was evident from the CBDT Circular 767, dated 22-5-1998. It noted that the certification covered all types of payment, whether purely capital or revenue in nature, but exempt either under the act or the relevant Double Taxation Avoidance Agreement or payments bearing pure income character. The Tribunal held that the new format of the CA certificate clearly established the legal position of S. 195 that the payer need not undergo the procedure of S. 195 at all if he was of the bona fide belief that no part of the payment was chargeable to tax in India.
covered all types of payment, whether purely capital or revenue in nature, but exempt either under the act or the relevant Double Taxation Avoidance Agreement or payments bearing pure income character. The Tribunal held that the new format of the CA certificate clearly established the legal position of S. 195 that the payer need not undergo the procedure of S. 195 at all if he was of the bona fide belief that no part of the payment was chargeable to tax in India. 4.8 The Tribunal therefore held that if the assessee had not applied to the Assessing Officer u/s. 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident was chargeable to tax, then he was not under any statutory obligation to deduct tax at source on any part of the payment.
4.9 When one looks at the provisions of S. 195(1), the language is clear that it applies only to income chargeable to tax, and not to other items at all. As analysed by the Special Bench of the Tribunal, the Karnataka High Court seems to have misapplied the ratio of the decision of the Supreme Court in Transmission Corporation of AP. The better view seems to be that of the Delhi High Court and that of the Special Bench of the Tribunal that if the income is not chargeable to tax in India in the hands of the nonresident recipient, the payer need not obtain a certificate u/s.195(2) for not deducting tax at source.
of the decision of the Supreme Court in Transmission Corporation of AP. The better view seems to be that of the Delhi High Court and that of the Special Bench of the Tribunal that if the income is not chargeable to tax in India in the hands of the nonresident recipient, the payer need not obtain a certificate u/s.195(2) for not deducting tax at source.4.10 In any case, an appeal to the Supreme Court against the decision of the Karnataka High Court has been admitted by the Supreme Court and has been fixed for hearing on 18th August 2010, on which date one hopes that this controversy will ultimately be laid to rest.
On Tuesday, 11 August 2015 9:04 AM, "Malav Sheth shethmalav@gmail.com [aaykarbhavan]" <aaykarbhavan@yahoogroups.com> wrote:
Dear All,Please share format for application u/s 195(2).--Regards
Malav Sheth
Chartered Accountant
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