INCOME TAX ACT, 1961

Tax deduction at source- Applicability of section 195-No income accrued to the foreign company in India

Assessee-company was engaged in the development, manufacture and export of software for use by its parent company located in Korea. It imported software products from foreign companies located in USA and France and made payment to them without deduction of tax at source. Assessee submitted that since the imported software products were readily available in market, payment made to the foreign companies could not be treated as royalty as per provisions of section 9(1)(iv) read with provisions of the DTAAs entered into between India and USA, and India and France respectively and, hence, it was not liable for deduction of tax at source from the payment made to the foreign companies. AO was of view that as per the provisions of section 9(1)(vi), the payment made by assessee to the foreign companies was royalty payment and, hence, it was bound to deduct tax at source therefrom in terms of section 195. AO, therefore, treated assessee as an assessee in default within the meaning of section 201(1) and also levied interest under section 201(1A).

CIT (A) affirmed order of AO. Tribunal held that payment made by assessee to foreign companies did not partake character of royalty in terms of relevant articles of the Double Taxation Avoidance Agreements, entered into with several countries and relevant for purpose of each payment, therefore, went out of purview of royalty as defined in terms of section 9(1)(vi) on the principle when there is an inconsistency between the provisions of an International Agreement and the provisions of the Act, it is the provisions of the Agreement that have to prevail. It, therefore, there was no obligation on part of assessee to deduct any amount in terms of section 195 and, therefore, the order passed under section 201 calling upon assessee to pay amount by treating it as an assessee in default could not be substained. Held:Obligation on the part of person responsible for paying to non-resident under section 195(1), arouse if and only if the payment partakes character of income payment, in the sense that, if an amount is not in the nature of income payment at all, then section 195(1) did not operate, one cannot lose sight of the fact that section 195(1) is neither a provision for assessing the tax liability of a non-resident nor as to whether under section 9, any income is deemed to have resulted in the accrual or arising of income to the non-resident in India, but by simply accepting the operation of the mandate under section 195(1) on every resident payer making a payment to a non-resident recipient in respect of any goods/services supplied by the non-resident, which the resident payer is making use of in the running of its business or any other activity indulged in as a part of the business/professional activity of the resident assessee, as in such a situation, the payment to the non-resident recipient prima facie bears the character of an income of recipient and, therefore, the obligation under sub-section (1) of section 195 springs up. [Para 53]

Referred decision of the Supreme Court in Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 / 105 Taxman 742 in which it was a binding authority for this proposition and there is absolutely no scope for the High Courts even to examine an alternative argument either on the premise that the ruling of the Supreme Court in Transmission Corpn. of A.P. Ltd.s case (supra) is not a binding precedent or on the premise that the said judgment is distinguishable for any other reason for the purpose of applying the ruling in that judgment to the fact situation as it prevailed in the instant appeals. [Para 54]

The amount deducted under section 195 by a resident, who is responsible for making payments to the non-resident, is only a provisional or tentative amount which is kept as a buffer for adjusting this amount against the possible tax liability of the non-resident assessee. The said amount is not the same as determining the liability of the non-resident assessee for payment of tax under the Act. A non-resident may be or may not be liable to pay any tax. The amount, which is deducted by making payment and which is at a fixed percentage of the amount, may be even much more than the actual tax liability of the non-resident company and even may be less than the actual tax liability of the non-resident company, in a given case. But these aspects are all not determinative of the actual deduction in terms of section 195(1) and the rate of deduction is the rate as in force and as given in advance by the Finance Act of each year with reference to the current year (unlike the rate of income-tax which is provided in the Finance Act with reference to an assessment year). The exercise of determination of the tax liability of a resident payer or the tax liability of the non-resident recipient does not happen and is not carried out under the provisions of section 195. [Para 60]