September 15, 2010 No taxable income: No withholding tax : Rules Supreme Court The Supreme Court recently, in the case of GE India Technology Centre Pvt. Ltd., pronounced a judgment in a batch of appeals over-ruling the judgment of the Karnataka High Court in the case of CIT v. Samsung Electronics1 and laid down the law on application of withholding tax at source (WTS) provisions in the Indian Income Tax Act, 1961 (ITA). The High Court held that every
payer had a WTS obligation on all payments made from The Supreme Court, recognizing the misinterpretation of law by the High Court, held that any remittance made by a resident to a non-resident is subject to WTS, only if such payment or a part of it is chargeable to tax under the ITA. It further held that while interpreting a provision, it has to be read in the context of its legislation as a whole and in consonance with its other provisions and not in isolation so as to render it infructuous. The Apex Court’s judgment correcting this position is of prime importance and comes in at a very good time, providing immense relief in the context of all cross-border transactions involving payments for imports of goods/ services and otherwise. Brief Background It all started with the case of Transmission Corporation2, wherein the Supreme Court held that a payment made by a resident to a non-resident was subject to WTS. The payment was made under a composite contract having an embedded income element, which was rightfully subjected to WTS. Unfortunately, much to the chagrin
of the international business community doing business with Major Issues The implications of this decision were widely felt not only by the software industry but for all involved in import of goods and/or services or other kinds of international transactions. Apart from ambiguity and uncertainty which resulted in litigation, it brought along with itself a whole host of issues like (i) non-availability and total disregard of benefits under the applicable tax treaties for various payments, e.g. such an interpretation could result in payments received towards sale of shares of an Indian company by a Mauritius company being subject to WTS; (ii) hardship of making applications to tax authorities for nil withholding when clearly such payments weren’t chargeable to tax in the first place; (iii) delay in execution and in certain cases, fall-out of business deals; (iv) adversity to the foreign supplier for obtaining a foreign tax credit for the amount withheld; (v) grossing up of payments to the foreign supplier to the extent of WTS and suffering the burden of tax on tax, etc. This also led to a conservative
stand by Indian corporate houses which chose to deduct tax on every such
payment especially since the current provisions of the ITA allow the former
to claim a tax deduction for payments made after WTS, if applicable. The
foreign supplier was left with no alternative but to apply for a refund of
taxes, which in itself is a long drawn litigious process in Contrary Decisions The Samsung decision debacle was not repeated by other courts in similar cases. The Chennai High Court in the case of M/s. Prasad Production Limited and the Delhi High Court in the case of Van Oord took an assertive departure from the Samsung decision and held that a WTS obligation arose only where the payment was chargeable to tax under the ITA in the hands of a non-resident. The Advance Rulings Authority in the case of ABB Limited also concurred with the differed view. Held The Supreme Court while over-ruling the Samsung judgment laid down the following principles: (i) a WTS obligation arose only for pure income or composite payments with an embedded income element, the same being chargeable to tax; (ii) the obligation to deduct WTS is, however, limited to the appropriate proportion of income chargeable to tax under the ITA; (iii) a payer is to approach the tax authorities for determining WTS liability only in case of doubt on chargeability of tax on such payment; (iv) the ITA is to be read as one single integral, inseparable code and procedural provisions relating to collection and recovery were to be read in consonance with the chargeability provisions and not in isolation; and (v) a provision cannot be wrongly interpreted (by omitting certain words, in this instance “chargeable to tax”) in a manner to render administrative convenience to the tax authorities, and to give rise to a situation wherein on mere payment, income would be deemed to accrue or arise in India and be subject to WTS in absence of territorial nexus with India or when it is not chargeable to tax in India. The NDA Analysis The Supreme Court has finally lain
to rest the ghost of Samsung which had haunted all transactions involving
cross-border payments from It does however leave one loose end, by stating that the payer was to approach the tax authorities in order to determine the withholding tax liability in case of doubt. While the position in the judgment is very clear, one can’t help but wonder if this will create further ambiguity by an Indian payer alleging ‘doubt’ in case of future payments. The intent however seems to have been made clear by the Supreme Court that based on the principle of proportionality such exercise is only to be undertaken in case of composite payments and not otherwise. Now that the issue on withholding tax on payments made to non-residents seems to have been correctly sorted out, the next watch is to see how the High Court resolves the long pending issue on characterization of payments made for import of shrink wrap software. ________________ 1 320 ITR 209 2 [1999] 239 ITR 587 (SC)
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