IMPORTANT POINT
Obligation to deduct TAS arises only when there is a sum chargeable under the Act.

JUDGMENT

S.H. Kapadia, CJI.

1. Leave granted.

2. The short question which arises for determination in this 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 “I.T. Act”) arises in India?

Facts in the leading case of Sonata Information Technology Ltd.

3. Appellant(s) are the distributors of imported pre- 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 software. The ITO(TDS) held that since the sale of software 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 I.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.1 [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 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 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- section (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the