Article on Karnataka High Court ruling in Samsung Electronics published on TIOL.com

1,768 views

Published on

In December 2009, the Karnataka High Court while dealing with withholding tax on payment for software has delivered a ruling which has the potential to impact the withholding tax mechanics on cross border transactions executed by taxpayers in India. This article published in Taxindaonline.com is to share some of my thoughts for coping with effects of this ruling and to explore possibility of a golden mean, respecting the High Court ruling as well as comforting the taxpayers.

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,768
On SlideShare
0
From Embeds
0
Number of Embeds
5
Actions
Shares
0
Downloads
12
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Article on Karnataka High Court ruling in Samsung Electronics published on TIOL.com

  1. 1. Taxindiaonline.com - one stop destination for taxman & taxpayer Page 1 of 4 Click to Print Click to Close Coping with effects of Karnataka High Court ruling in Samsung Electronics JANUARY 06, 2010 By Romesh S A Sankhe LAST month, the Karnataka High Court while dealing with withholding tax on payment for software has delivered a ruling which has the potential to impact the withholding tax mechanics on cross border transactions executed by taxpayers in India. This article is to share some thoughts for coping with effects of this ruling and to explore possibility of a golden mean, respecting the High Court ruling as well as comforting the taxpayers. How taxpayers are affected The Karnataka High Court has held that any payments in the nature of income per se to non-resident taxpayers would require withholding of tax under section 195(1) of the Indian Income Tax Act (Act). For no withholding of tax or withholding at lower rate, a taxpayer will have to obtain a prior approval of tax officer under section 195(2) of the Act. The aggrieved parties in this case may file an appeal before the Supreme Court. However, till the matter is decided by the Supreme Court, the revenue authorities may cast TDS obligation on the tax payers and raise tax demands along with interest and penalties on several cross border payments in which the tax is not withheld. This may also have consequential impact resulting in disallowance of expenses in the hands of the tax payers if they do not withhold tax on payments made to non-residents. The interpretation of the Supreme Court ruling of Transmission Corpn. of A.P. Ltd. v. CIT (2002-TIOL-471-SC-IT) made by the Karnataka High Court is a crucial factor which may have far reaching implications on the cross border tax compliance in India. Therefore it is very important for tax payers in India to explore the possible avenues which will mitigate the implications arising out of this judicial precedent. Options before the tax payers The Karnataka High Court has passed the ruling placing reliance on the decision of Transmission Corpn. of A.P. Ltd. in which the Apex Court had held as under; “the scheme of tax deduction at source applies not only to the amount paid which wholly bears ‘income' character such as salaries, dividends, interest of securities, etc., but also to gross sums, whole of which may not be income or profits of recipient, such as payment to contractors and sub-contractors and payment of insurance commission . The Apex Court had further held that the expression ‘any other sum chargeable under the provisions of this Act' would mean ‘sum' on which income-tax is leviable and that, the expression ‘any other sum chargeable under the provisions of this Act' would include cases where any sum payable to the non-resident is a trading receipt which may or may not include ‘pure income'.” http://www.taxindiaonline.com/RC2/print_story.php?newsid=10191&forumid=1&hea... 01/06/2010
  2. 2. Taxindiaonline.com - one stop destination for taxman & taxpayer Page 2 of 4 On a careful reading of the Supreme Court ruling and interpretation made by various courts till date, the few options which tax payers may wish to exploit are discussed hereunder; a) Contention of non applicability of Section 195 to exempt income Pursuant to the reading of the Supreme Court ruling in Transmission Corpn. of A.P. Ltd., a possible argument which may be taken by the taxpayer is that Section 195(1) of the Act could not be made applicable to sums which are not chargeable to tax at all in India, such as the sums which are explicitly exempt either under the Act or the relevant tax treaty. Courts have had the opportunity to decide on cases involving Section 195, post the Apex Court's judgment in the Transmission Corpn. of A.P. Ltd's case. A few of these relevant decisions are discussed as under; M/s Mahindra & Mahindra Limited v DCIT (2009-TIOL-255-ITAT-MUM-SB); where it was held that “Section 195 (1) casts duty on the person responsible for paying or crediting to the account of a non resident any sum chargeable to tax under this Act for deducting tax at source. On failure to deduct or pay to the Government after deducting, the person responsible is treated as assessee in default u/s.201(1). what is pre-requisite for the Revenue to satisfy before treating an assessee in default is to find out whether the payee's income is liable to tax or not?” From the perusal of above ruling, it appears that the Mumbai tribunal has acknowledged that onus under Section 195 cannot be cast upon the taxpayers if the sum payable is not chargeable to tax in India. This ruling given by Special Bench of Mumbai Tribunal will have precedence over the ruling of non-jurisdictional High Court on the cases falling under its jurisdiction and hence the ruling of Karnataka High Court being non jurisdictional high court will have no impact on the cases covered under Mumbai tribunal jurisdiction. This view can be supported through a recent decision in Kanel Oil vs. JCIT [2009] unreported (ITAT Ahmedabad Third Member), where it was held that; “The ruling delivered by the Special bench will be binding on the division benches of that tribunal , otherwise the very purpose of constituting them will get frustrated. The decision of special bench can be disregarded or distinguished only if there is any contrary view expressed by the jurisdictional High Court or the Supreme Court” Further, the judgment of a High Court does not have binding force outside its jurisdictional state as held in various decisions till date such as Dr. T. P. Kapadia v. CIT [1973] 87 ITR 511 (Mysore HC) and CIT v Thane Electricity Supply Ltd [1994] 206 ITR 727 (Mumbai HC). In this regard, the taxpayers may also use the following decision of Kerala High Court where the views were expressed with respect to Section 195(1) which is as under; CIT v. Fertilisers & Chemicals (Travancore) Ltd. [1990] 86 CTR 40 (Ker HC); where it was held that Where question of failure to deduct tax at source under section 195(1) is to be decided, the basic question to be considered is whether the foreign collaborator rendered any service in India in terms of the agreement on the basis of which it could be said that a portion out of the payments made to the foreign collaborator is income that accrued to such collaborator in India. With respect to tax payers in Karnataka state, then a High Court decision would generally have a binding force in the state in which the High Court has jurisdiction and is binding on all subordinate courts, appellate authorities and the Tax Authority situated within its jurisdictional territory. Therefore the taxpayers in Karnataka state are bound by this ruling delivered by Karnataka High Court. http://www.taxindiaonline.com/RC2/print_story.php?newsid=10191&forumid=1&hea... 01/06/2010
  3. 3. Taxindiaonline.com - one stop destination for taxman & taxpayer Page 3 of 4 b) Validity of the Chartered Accountant (CA) certificate Another important aspect which needs to be considered in such case, is validity of withholding tax certificate obtained from CA. Central Board of Direct Taxes (CBDT) vide its Circular number 759 dated 18 November 1997 and 10/2002 dated 9 October 2002 has provided that remittances were allowed to be made by the Reserve Bank of India without insisting upon a No Objection Certificate from the Department provided the person making the remittance furnished an undertaking in duplicate accompanied by a certificate from an Chartered Accountant ( other than an employee as defined in the Explanation below section 288 of the Act). Through issuance of these circular, the power bestowed under section 195 to Income tax officer has been given to qualified Chartered Accountant. Therefore, in the cases where the entire sum is either taxable or exempt under the Act, then said payments can be remitted after obtaining a certificate from the qualified Chartered Accountant. This position is affirmed by Delhi Tribunal in its ruling discussed hereunder; Millennium Infocom Technologies Limited (2008-TIOL-166-ITAT-DEL); where it was held that “Hon'ble Supreme Court has clearly laid down the principle that the obligation of the assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act. This leaves no doubt in our mind that at the time of making payments of any sums to non- residents, the nature of the remittance has to be determined for the purposes of deduction of tax at source. CBDT in three Circulars i.e. Circular No 759 dated 18 11.1997; No 767 dated 22.05.1998; and No 10/2002 dated 9.10.2002 have entrusted this task to the chartered accountant. Only in the cases where the person responsible for paying any such sum, other than salary, chargeable under the Act to a non resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he is obliged to make application to the assessing officer u/s 195(2) to determine the appropriate portion of such sum so chargeable and tax shall be deducted under sub section (1) only on that proportion of the sum which is chargeable.” These circulars and the validity of the CA certificate were not before the Courts either in Transmission Corpn. of A.P. Ltd. or in Samsung Electronics . In Samsung Electronics , Karnataka High Court specifically observed in paragraph 11 and 75 that the tax payers have not chosen to apply for any relief under Section 195(2) or 195(3) of the Act. Therefore, a possible contention may be adopted that once the CA certificate is obtained by the tax payers then onus under Section 195(1) is deemed to be discharged. Conclusion - Striking a golden mean Based on the above discussion and analysis of the judicial positions till date, the majority of the Court seems to have agreed on the point that the provisions of section 195 are not provisions of convenience which the assessee may or may not use, also tax payer itself should not enter into the shoes of the tax officer while deciding the taxability of the any payment made to non-resident. Therefore while making the payment to nonresident a two step strategies may be adopted by the tax payer which is as under; 1. Where the entire sum is either taxable or explicitly exempt under the Act or a relevant tax treaty, then said payments may be remitted after obtaining a certificate from the qualified Chartered Accountant, and 2. Where the taxpayers feels that only part of the gross sum will be liable to tax in India, then the taxpayers should approach the tax office for determination of the taxable income. http://www.taxindiaonline.com/RC2/print_story.php?newsid=10191&forumid=1&hea... 01/06/2010
  4. 4. Taxindiaonline.com - one stop destination for taxman & taxpayer Page 4 of 4 In such manner, excessive pressure on the Income tax department in issuing the certificates in all the cases can be avoided and the process of remittance will be expedited for the taxpayers in cases where the taxability is amply clear. Thus, it will help to achieve the desired results with a win-to-win situation to all the concerned persons. It is also to be noted that it is very important on the taxpayer's part to properly comply with the withholding tax provisions in India with respect to non-residents, especially keeping in mind the amendment in Section 201 vide Finance Act 2009 which does not put any bar on the Income tax officer to reopen the assessment when there is a default in tax withholding with respect to payment made to non-resident. Therefore, the mantra to be followed by the taxpayers in India should be that “precaution is better than cure”. Click to Print Click to Close http://www.taxindiaonline.com/RC2/print_story.php?newsid=10191&forumid=1&hea... 01/06/2010

×