A recent decision of the Karnataka High Court in
Sec. 195(1) provides for tax deduction from “any interest or any other sum chargeable under the provisions of this Act... shall at the time of credit..... deduct income tax”. Sec. 195(2) provides that the person “paying any such sum chargeable under this Act ..... may make an application to the assessing officer” to determine the appropriate proportionate amount on which tax is deductible. Sec. 195(3) enables the non-resident who “may make an application in the prescribed form to the assessing officer” for a certificate. The statute by the use of the word “may” in Sec. 195(2) and (3) providing for assessing officer’s certificate in contrast with the use of the word “shall” for deduction itself, where the income is chargeable, does not make an application to the assessing officer mandatory.
In CIT (International Taxation) v Samsung Electronics Co. Ltd. (2009) 185 Taxman 313 (Kar), the High Court has, however, considered it necessary to get such clearance in every case. It related to a payment for import of software from a non-resident on which tax is not required to be deducted, since non-resident is not liable to tax on such sale of goods. Software has been decided to be “goods” by the Supreme Court in Tata Consultancy Services v State of A.P. (2001) 271 ITR 401 (SC), Bharat Sanchar Nigam Ltd. v Union of India (2006) 282 ITR 273 (SC) and Sprint RPG India Ltd. v Commissioner of Customs (2000) 2 SCC 486. There are also other decisions to the same effect. A buyer of a book, on which copyright is held either by the author or the publisher, does not either buy the copyright or pays for the use of copyright, but only purchases the copyrighted article. In Samsung’s case, the same issue had been decided on merits in an earlier year by the Tribunal that there is no income chargeable on the non-resident in such sale of software and that, therefore, there was no need for tax deduction at source. The Tribunal, therefore, decided that no possible action can lie against the assessee under Sec. 201 of the Act for failure to deduct tax. It was against this finding that the matter was taken up to the High Court on the tenability of consideration of merits in a matter relating to an appeal under Sec. 201.
The High Court accepted the departmental appeal purportedly following its decision in Transmission Corporation of AP Ltd. v CIT (1999) 239 ITR 587 (SC) holding that tax deduction is necessary in every case unless spared by an appropriate certificate on an application by the assessee under Sec. 195(3). The only issue decided in this decision before the Supreme Court was that tax is required to be deducted even when chargeable income was not pure income but only part of the payment. There is only an observation of the Supreme Court, meeting the assessee’s complaint regarding the difficulty in the determination of chargeable part that it is open to the assessee to make an application in such cases for determination of the proportion of “such sum” being “chargeable income”, if an application is made to the assessing officer. There are number of other cases decided by various courts sparing liability to deduct tax when they found that there was no liability for the non-resident without placing any further requirement by way of clearance from the assessing officer.
In fact, there is a decision of the Tribunal explaining the further development of law in Millennium Infocom Technologies Ltd. v Asst. CIT (2009) 309 ITR (AT) 18 (Del) pointing out the requirement of Board Circular No.759 dated November 18, 1997, prescribing an undertaking in the nature of indemnity from the assessee (now Form 15CA) and auditor’s certificate (now Form 15CB) before a remittance could be made. The Board has even reiterated the requirement in Circular No.4 dated June 29, 2009 (2009) 314 ITR (St.) 237. This development substituting the procedure under Sec. 195(2) and (3) in the light of rule-making power under Sec. 195(5) was not brought to the notice of the High Court. Auditors can, therefore, continue to give such certificate, where no tax is required to be deducted to enable remittance without any further formality.
The decision in Samsung Electronics’ case (supra) has to be treated as rendered per incuriam as it is not consistent with the statute, the perception of the courts, the Board circulars and the practice that is being adopted by the Department itself. There is a stay of recovery of tax granted on admission of special leave petition by the Supreme Court against this decision. It, however, highlights the necessity of the Central Board of Direct Taxes to resile from the position taken by its counsel before the High Court contrary to its instructions and the law so as to avoid any widespread confusion which this decision has given rise to. There is also no purpose in requiring tax to be deducted only to be refunded, where there is no liability.