1999 (8) TMI 2 - SC - Income Tax

Section 195 requires tax deduction at source on payments to non-residents for machinery and services

Transmission Corporation of AP Ltd. And Another Versus Commissioner of Income-Tax

The SC held that Section 195 of the Income-tax Act, 1961 applies to payments made to non-residents for machinery purchase and erection/commissioning ... Applicability of Section 195 of the Income-tax Act, 1961, to sums paid to non-residents during course of regular trading operation - phrase 'any other sum chargeable under the provisions of this Act' - payments to non-residents against the purchase of machinery and equipment and also against the work executed by the non-residents in India of erecting and commissioning the machinery and equipment. HELD THAT:- The scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves no doubt that the expression 'any other sum chargeable under the provisions of this Act' would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The purpose of sub-section (1) of section 195 is to see that the sum which is chargeable u/s 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected. Further, the rights of the payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. The only thing which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorising the recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source. Hence, in our view, there is no substance in the contention of learned counsel for the appellant that the expression 'any other sum chargeable under the provisions of this Act' would not include cases where any sum payable to the non-resident is a trading receipt which may or may not include 'pure income'. The language of section 195(1) for deduction of income-tax by the payer is clear and unambiguous and casts an obligation to deduct appropriate tax at the rates in force. We make it clear that learned counsel for the parties have not advanced any submissions with regard to other findings given by the High Court. Thus, the answers given by the High Court that (i) the assessee who made the payments to the three non-residents was under obligation to deduct tax at source u/s 195 of the Act in respect of the sums paid to them under the contracts entered into ; and (ii) the obligation of the respondent-assessee to deduct tax u/s 195 is limited only to the appropriate proportion of income chargeable under the Act, are correct. In the result these appeals fail and are dismissed, accordingly with costs. Issues Involved:1. Applicability of Section 195 of the Income-tax Act, 1961, to sums paid to non-residents.2. Determination of the tax deductible on gross sums paid to non-residents.3. Interpretation of the phrase 'any other sum chargeable under the provisions of this Act' in Section 195.Issue-wise Detailed Analysis:1. Applicability of Section 195 of the Income-tax Act, 1961, to sums paid to non-residents:The primary issue was whether Section 195 of the Income-tax Act, 1961, applies to payments made to non-residents, even if such payments do not wholly represent income. The Andhra Pradesh State Electricity Board (the Board) made payments to non-residents for the purchase of machinery and equipment and for services related to their erection and commissioning. The Income-tax Officer deemed the Board as an assessee in default for not deducting tax at source on these payments under Section 195. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ruled in favor of the Board, stating that Section 195 applies only to sums that are 'pure income profits.'Upon appeal, the High Court reframed the question to determine if the Board was liable to deduct income-tax under Section 195 on payments made to non-residents and whether the tax deductible should be on the gross sum or only the income portion. The High Court concluded that the Board was indeed obligated to deduct tax at source under Section 195, but only on the income portion of the gross sums paid.2. Determination of the tax deductible on gross sums paid to non-residents:The High Court addressed whether the Income-tax Officer could enforce tax deduction at source on the entire gross amount of trading receipts or only on the portion chargeable as income. The court held that the obligation to deduct tax under Section 195 is limited to the appropriate proportion of income chargeable under the Act. This means that the tax should be deducted only on the income component embedded within the gross sum paid to non-residents.The Supreme Court upheld this interpretation, emphasizing that Section 195(2) allows the payer to apply to the Income-tax Officer to determine the appropriate proportion of the sum chargeable to tax. This ensures that tax is deducted only on the income portion, safeguarding the rights of both the payer and the recipient.3. Interpretation of the phrase 'any other sum chargeable under the provisions of this Act' in Section 195:The crux of the legal argument hinged on the interpretation of the phrase 'any other sum chargeable under the provisions of this Act' in Section 195. The appellant contended that this phrase implies that tax should be deducted only when the sum paid is entirely income. However, the Supreme Court clarified that the phrase encompasses sums that may include income hidden or embedded within them. The court explained that the purpose of Section 195 is to ensure that tax is deducted on sums chargeable to tax under the Act, even if these sums are gross amounts that include both income and non-income components.The Supreme Court referred to the scheme of Sections 195(1), 195(2), 195(3), and 197, which collectively ensure that appropriate tax is deducted at source, subject to regular assessment. The court emphasized that the statutory obligation to deduct tax at source is clear and unambiguous, and the rights of the parties are protected through provisions allowing for the determination of the appropriate proportion of the sum chargeable to tax.Conclusion:The Supreme Court upheld the High Court's findings that:1. The Board was obligated to deduct tax at source under Section 195 on payments made to non-residents.2. The obligation to deduct tax is limited to the appropriate proportion of income chargeable under the Act.3. The phrase 'any other sum chargeable under the provisions of this Act' includes sums that may contain both income and non-income components.The appeals were dismissed with costs, affirming the obligation to deduct tax at source on the income portion of payments made to non-residents.