TDS on transponder charges fails where the non-resident receipt is not chargeable to tax in India.

Transponder charges paid to a non-resident were treated as not chargeable to tax in India on the basis of earlier decisions involving the same recipient. As section 195 withholding applies only where the remittance is a sum chargeable under the Act, the payer had no obligation to deduct tax at source once the recipient's income was found non-taxable. The resulting TDS demand, assessee-in-default treatment under sections 201(1) and 201(1A), and the royalty characterisation used to sustain them did not survive on that footing.

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Issues: Whether transponder charges paid to the non-resident recipient were sums chargeable to tax in India so as to attract deduction of tax at source under section 195 and consequent treatment of the assessee as an assessee in default under section 201(1) and liability to interest under section 201(1A).

Analysis: The payment for transponder capacity had already been considered in earlier decisions concerning the same recipient, where it was held that such receipts were not chargeable to tax in India in the hands of the non-resident. Following the principle that the obligation to deduct tax at source arises only when the remittance is a sum chargeable under the Act, the absence of taxability in the recipient's hands meant that the payer could not be fastened with withholding liability. Once the underlying sum was held not taxable, the characterisation of the payment as royalty did not sustain the TDS demand or the default order.

Conclusion: The issue was decided in favour of the assessee. No tax was deductible at source on the transponder charges, and the assessee could not be treated as an assessee in default under sections 201(1) and 201(1A).

Ratio Decidendi: The obligation to deduct tax at source under section 195 arises only when the payment is chargeable to tax in the hands of the non-resident recipient; if the sum is not so chargeable, no withholding liability and no consequent default under section 201 can be imposed.

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