Ge India Technology Centre Private Ltd v. Commissioner Of Income Tax & Anr

[2010] 10 S.C.R. 1142 A GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. V. COMMISSIONER OF INCOME TAX & ANR. (Civil Appeal Nos. 7541-7542 of 2010) SEPTEMBER 09, 2010 B [S.H. KAPADIA, CJI AND K.5. PANICKER RADHAKRISHNAN, J.] Income Tax Act, 1961: c --s.195(1) Payment to Non-resident Liability to deduct -tax at source Held: The payer is bound to deduct tax at source (TAS) only if the tax is assessable in India -Expression "chargeable under the provisions of the Act" in 0 [s.195(1) shows that the remittance has got ][to ][be ][of ][a ][trading ]receipt, the whole or part of which is liable to tax in India - On facts, software imported by Indian Company- Payment made -to non-resident software supplier Failure on part of Indian -Company to deduct tax at source Tribunal's view that the E sum paid to non-resident supplier was not royalty and the same did not give rise to any income taxable in India and, -therefore, liability to deduct TAS did not arise High Court held that the moment there is remittance, an obligation to -deduct TAS arises The view of High Court was not correct in the light of expression "chargeable under the provisions of F the Act" in s.195(1) - Since High Court did not go into merits of the case on the question of payment of royalty, the impugned order is set aside and matter remitted to High Court -for consideration afresh Circular No. 728 dated October 30, -1995 issued by CBDT Interpretation of statutes. Interpretation of statutes: While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections - The Act is to be read as an integrated A -Code Income Tax Act, 1961. While interpreting a section one has to give weightage to every word used in that section. B The question which has arisen for consideration in the instant appeals is whether the amount paid by an Indian company to a non-resident software supplier constitute royalty which is deemed to accrue or arise in lndie} ,and thus,the Indian Company is liable to deduct tax at source under Section 195 of the Income Tax Act, 1961. C Allowing the appeal and remitting the matter to the High Court, the Court HELD: 1. Section 195 of the Income Tax Act, 1961 D imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the l.T. Act, to deduct income tax at the rates in force unless he is E liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under\ the provisions of the I. T. Act to which the requirement oftax deduction at source applies. A person paying interest or any other sum to a non-F resident is not liable to deduct tax if such sum is not chargeable to tax under the l.T. Act. Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or G incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct tax at source (TAS) in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income H 1144 SUPREME COURT REPORTS [2010] 10 S.C.R. A chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, "chargeable under the provisions of the Act". CBDT had B also clarified by Circular No. 728 dated October 30, 1995 that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. [Para 7] [1150-H; 1151-A-H; 1152-A-C] Vijay Ship Breaking Corporation and Others v. CIT 314 आर1142 c uk e~ ITR 309 - relied on. Transmission Corporation of A.P. Ltd. v. C.I. T. 239 ITR 587 (SC) - distinguished. CIT v. Cooper Engineering 68 ITR 457; Czechoslovak Ocean Shipping International Joint Stock Company v. /TO 81 ITR 162(Calcutta) - referred to. Circular No. 728 dated October 30, 1995 issued by E CBDT - referred to. 2. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVll-8 deals with deduction at source by the payer. On analysis of various F provisions of Chapter XVII, one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in Section 195. Section 194C casts an obligation to deduct TAS in respect of "any sum paid to any resident". Similarly, G Sections 194EE and 194F inter alia provide for deduction of tax in respect of "any amount" referred to in the specified provisions. None of these provisions has the expression "sum chargeable under the provisions of the Act", which is an expression used only in Section 195(1). H It follows, therefore, that the obligation to deduct TAS GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. COMMISSIONER OF INCOME TAX 1145 arises only when there is a sum chargeable under the A Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with B the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 195(1). The fact that the Revenue has not obtained any information p~r se cannot be a ground to construe Section 195 widely so c as to require deduction of TAS even in a case where an amount paid is not ·chargeable to tax in India at all. While interpreting a Section one has to give weightage to every word used in that section. The interpretation suggested by the Department that under Section 195, the moment 0 there is remittance the obligation to deduct TAS arises cannot be accepted as it would then mean that, on mere payment, income would be said to arise or accrue in India. Such interpretation would obliterate expression "sum chargeable under the provisions of the Act" from Section E 195(1 ). While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. If the contention of the Department that any person making payment to a non-resident is F necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the l.T. Act by which a payer can obtain refund. Section 195 uses the word G 'payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1 ). If the payment does not contain the element of income the payer cannot be made liable. He H A cannot be declared to be an assessee-in-default. The payer is also an assessee under the ordinary provisions of the l.T. Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an B "expenditure". Under Section 40(a)(i), payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are c chargeable under the l.T. Act. This provision ensures effective compliance of Section 195 of the l.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the l.T. Act. In a given case where the payer is an assessee he will definitely claim deduction 0 under the l.T. Act for such remittance and on inquify if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the l.T. Act then it would E be open to the AO to disallow such claim for deduction. [Para 9) [1153-F-H; 1154-A-H; 1156-F-H; 1157-A-B] C.I. T. v. Eli Lilly & Co. (India) (P.) Ltd. 312 ITR 225 -referred to. 3. In the present case, on facts, the ITO (TDS) had taken the view that since the sale of the concerned software, included a license to use the same, the payment made by appellant(s) to foreign Suppliers constituted "royalty" which was deemed to accrue or arise in India G and, therefore, TAS was liable to be deducted under Section 195(1) of the Act. The said finding of the ITO(TDS) was upheld by the CIT(A). However, in second appeal, the ITAT held that such sum paid by the appellant(s) to the foreign software Supplier was not a "royalty" and that the same did not give rise to any "income" taxable in India GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1147 COMMISSIONER OF INCOME TAX and, therefore, the appellant(s) was not liable to deduct A TAS. However, the High Court did not go into the merits of the case and it went straight to conclude that the moment there is remittance an obligation to deduct TAS arises, which view stands hereby overruled. The impugned judgment of the High Court is set aside and s the matter is remitted to the High Court for deciding whether on facts and circumstances of the case, the IT AT was justified in holdiljlg that the amount(s) paid by the appellant(s) to the foreign software suppliers was not "royalty" and the same did not give rise to any "income" c taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source. [Paras 10-12] [1158-H; 1159-A-E] From the Judgment & Order dated 24.09.2009 of the High Court of Karnataka in Income Tax Appeal Nos. 1268 & 1269 of 2006. WITH C.A. Nos. 7543-7544, 7545-7548, 7549-7758, 7759-7764, 7765-7767, 7768, 7769, 7770, 7771-7772, 7773, 7774, 7775-7776, 7777, 7778 of 2010. 1148 SUPREME COURT REPORTS A Vivek Tankha, ASG, Harish N. Salve, F.S. Nariman, S. Ganesh, M.S. Syali, V. Giri, R.P. Bhatt, Anuradha Dutt, B. Vijayalakshmi Menon, Pawan Sharma, Kuber Dewan Subhash Sharma, Siddharth Aggarwal, Senthil Jagadeesan, Atul Y. Chitale, Suchitra Atul Chitale, Sunaina Dutta, Satyen Sethi, B Mahua Kalra, Husnal Syali, Sumit K. Singh, Arta Trana Parda, Pd., Rameshwar Prasad Goyal, Mukesh Bhutani, H. Raghavendra Rao, Arijit Prasad, Yashaj Singh Deora, T. Suryanayarayana, Sarva Mitter (for Milter & Mitter Co.) M.P. Vinod, Ajay K. Jain, Rustom B. Hathikhanawala, Anitha Shenoy, c A.S. Bhasme, Brajesh Pandey, Vikas Malhotra, Rishabh Sancheti, Vaibhav Srivastava, Pratul Shandilya, Sumeer Sodhi, Kumaran D., B. Balaram Das, Abhinav Ashwain, Aunil Agarwal, Shashank Singh, N. Ganpathy for the appearing parties. D The Judgment of the Court was delivered by S.H. KAPADIA, CJI. 1. Leave granted. 2. The short question which arises for determination in this E batch of cases is - whether the High Court was right in holding that the moment there is remittance the obligation to deduct tax at source (TAS) arises? 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 (for short "l.T. Act") arises in India? F Facts in the leading case of Sonata Information Technology Ltd. 3. Appellant(s) are the distributors of imported pre-G packaged shrink wrapped standardized software from Microsoft and other Suppliers outside India. During the relevant assessment year(s) appellant(s) made payments to the said software Suppliers which according to the appellant(s) represented the purchase price of the abovementioned H software. The ITO(TDS) held that since the sale of software GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.] 1149 included a license to use the same, payments made by the appellant(s) to the foreign Suppliers constituted royalty, which was deemed to accrue or arise in India. Therefore, TAS was liable to be deducted under Section 195 of the l.T. Act. The said finding of the ITO(TDS) was upheld by the Commissioner (A). In second appeal, the ITAT, however, held that the amount paid by appellant(s) to the foreign software Suppliers was not "royalty" and the same did not give rise to any income taxable in India, and therefore, the appellant(s) was not liable to deduct TAS. 4. The Department appealed to the Karnataka High Court. Before the High Court, the Department for the first time raised the contention that unless the payer makes an application to the ITO(TDS) under Section 195(2) and has obtained a permission for non-deduction of the TAS,/it was not permissible for the payer to contend that the payment made to the non-resident did not give rise to "income" taxable in India and that, therefore, there was no need to deduct any TAS. This argument of the Department was accepted by the High Court vide the impugned judgment. For reaching this conclusion, the High Court placed strong reliance on the judgment of this Court in Transmission Corporation of A.P. Ltd. Vs. C.I. T. [239 ITR 587(SC)]. Aggrieved by the said decision, the appellant(s) has come to this Court by way of civil appeal(s). Analysis of Section 195 5. At the outset, we quote hereinbelow the relevant provisions of Section 195, as it stood at the relevant time. "195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue A of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of B such sum would not be income chargeable in the case of the recipient, he may make 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, tax shall be deducted under sub-c section (1) only on that proportion of the sum which is so chargeable.