TAXMANN'S CORPORATE PROFESSIONALS TODAY- VOLUME 17 (Issue 4) Page No.315

Karnataka High Court decision in CIT (Intl. Taxation)  v. Samsung Electronic Co. Ltd.,  reported in 185 TAXMAN 313 is not based on current law.

Decision of the High Court

1.The High Court of Karnataka in CIT (Intl. Taxation) v. Samsung Electronic Co. Ltd., and Others reported in (2009) 185 TAXMAN 313 held that it is the statutory obligation on the part of a resident assessee in making payment to a non-resident, to seek determination of the withholding tax u/s 195(2) on the appropriate proportion of sum  chargeable under Indian Income Tax Act, 1961.  In coming to the aforesaid conclusion, their Lordships relied heavily on the decision of the Supreme Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 and discussed the dicta of the  Supreme Court in Para Nos.51-54 and held that the decision of the Supreme Court is binding on all the courts in India under Article 141 of the Constitution of India.  There cannot be any doubt on such proposition which shall however be subject to the correctness of the legal position. Various important aspects were conspicuously omitted to be considered by the Karnataka High Court in their decision.  The Supreme Court now has granted stay of recovery in the aforesaid batch of cases in GE India Technology Cen. P. Ltd v CIT in Petition(s) for Special Leave to Appeal (C) Nos.34306-07/2009 & Others vide Order Dated 18-12-2009. Hyderabad Bench's decision in Cheminor Drugs Ltd. v. ITO

2. The High Court of Karnataka decided Samsung's case on 24-09-2009 and much before this decision, Hyderabad Bench of ITAT also in the case of Cheminor Drugs Ltd., Vs. ITO (76 ITD 37) decided on 22-12-1999 itself in the same manner holding that it is mandatory for a resident payer while making payment to any non-resident or foreign company to approach an assessing officer u/s 195(2) of the Act to seek determination of the appropriate proportionate amount liable to tax in India and  determination of the consequential withholding tax thereto. Supreme Court's decision in Transmission Corpn. Of A.P. Ltd. v. CIT

3. The Supreme Court in the case of  Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 affirmed the decision of the A.P. High Court in the case of  CIT v. Superintending Engineer, Upper Sileru (1984) 152 ITR 753 and this decision was rendered on 02-07-1984.   The A.P. High Court held that u/s 195(2), the person responsible for paying any such sum, (other than interest on securities, dividend and 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 may make application to the Assessing Officer to determine, by general or special order, the appropriate portion 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 chargeable. The Supreme Court in the case of Transmission Corpn. of A.P. Ltd. (supra) upheld the decision of A P High Court by laying  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 that at the time of making payments of any sum to non-resident, the nature of the remittance has to be determined for the purposes of deduction of tax at source. Therefore, the Supreme Court while affirming the decision of the High Court of AP was considering the legal position as prevailing on 02-07-1984 which factual and legal position could not be disputed.  However, the Karnataka High Court simply followed the decision of the Supreme Court as if the same position continued till date. Similarly, Hyderabad Bench of ITAT also decided the case in Cheminor Drugs Ltd., on 22-12-1999 while dealing with the Order of the ITO, Dated 16-03-1995. 

In both the cases decided by the  Supreme Court and the Hyderabad Bench of ITAT in the cases of 
i) Transmission Corpn. of A.P. Ltd., and
ii) Cheminor Drugs Ltd.,
they were considering the factual and legal position that prevailed respectively as on 02-07-1984 and 16-03-1995.  After 02-07-1984 much water has flown under the bridge in the wake of fast developments on the global front in view of initiation of liberalization of our economy by the Government of India. Relevant provisions

4. It is very pertinent to note that the legislature had inserted the provisions of Sub-Sections (3), (4) and (5) in Section 195 by the Finance Act, 1970 with effect from 1st April 1970 by making the aforesaid sub-sections applicable to all non-residents including foreign companies to avoid the avoidable inconvenience to persons and concerns, who, though technically not resident in India, conduct their activities in this country on a more or less permanent basis through a branch or other establishment and are regularly assessed to income tax here.  Besides, the existing provision, if interpreted strictly, would require tax to be deducted at source with reference to the income element embedded in payments made by a large number of consumers for goods or services provided by non-resident concerns operating in India.  With a view to avoid hardship and inconvenience in such cases, the Finance Act, 1970, has made a specific provision in Section 195 of the Income Tax Act under which any non-resident, including a foreign company, may obtain, from the Income-tax Officer, a certificate authorizing him to receive payments of income by way of interest (other than 'Interest on securities) or any other sum (other than dividends) which is chargeable to tax in India without deduction of tax at source.  Consequently, Rule 29B and Forms No.15C, 15D and 15E have been prescribed by the CBDT.  The Scope of these provisions has been explained by the Department in Circular No.45, Dated September 2, 1970.  The legislature had cautiously used the words 'non- resident' and 'foreign company' in various provisions including the Sub-Sections (1) and (2) of Section 195.  These two terms were defined in Sub-Sections (30) and (23A) of Section 2 of the Act respectively and the word 'foreign company'� though was not defined in the Act initially, it was defined in Section 80-B(4) and the same was omitted therefrom with effect from 1st April, 1989 consequent upon shifting the definition in the newly inserted Section 2(23A) and it was never intended that a non-resident shall mean or include a foreign company.  If it were the intention, the word 'foreign company' should not have been specifically used in various provisions like Sub-Sections (6A), (6B) and (6C) of Section 10, 44BBB, 44D, 44DA, Section 115A as their meaning is not at all interchangeable or synonymous by any stretch of imagination.   Even in Sub-Section (2) of Section 195, a Proviso was inserted by the Finance Act, 1987 which was again omitted by the Finance (No.2) Act, 1991.  This Proviso reads as- "Provided that this sub-section shall not apply to any payment to a foreign company by way of interest referred to in clause (v) or royalty referred to in clause (vi),  or fees for technical services referred to in clause (vii) of sub-section (1) of section 9."
� 
The scope and effect of this amendment was explained in the memorandum appended to the Bill as under:

"25. Taxation of foreign companies and other non-resident taxpayers. – Under the provisions of section 195 of the Income-tax Act, any person responsible for paying to a non-resident taxpayer or to a foreign company any sum, other than interest on securities, salary and dividends, chargeable to income-tax in India, is required to deduct income-tax thereon at the rates in force.  Where the person responsible for paying any sum to a non-resident, considers that the whole amount would not be income chargeable to tax, he may apply to the Assessing Officer to determine the appropriate proportion of such sum chargeable to tax.  In such cases, tax is required to be deducted from the portion as determined by the Assessing Officer. This facility of deducting tax only from a portion of the sum payable is not available in cases where the payment is by way of interest, royalty or fee for technical services to a foreign company. 
In some of the bilateral agreements for the avoidance of double taxation, it has been provided that any or all of the incomes referred to above would be taxed in India on net basis.  Further, under certain tax treaties, income by way of royalty or fee for technical services is charged to tax on net basis in cases where such income is attributable to any 'permanent establishment' of the foreign enterprise in India.

 As a result, in a large number of cases of payments of royalty, fee for technical services, etc., to non-residents, tax required to be deducted at source is much larger than the final tax liability. With a view to avoiding such situations, it is proposed to amend section 195 of the Income-tax Act to empower the Assessing Officer to determine, in all cases of payment of interest, dividends, royalties, fee for technical services, etc., paid to a foreign company or to a non-resident taxpayer, the appropriate portion of the amount from which tax is to be deducted at source. This amendment will take effect from 1st October, 1991. Under the existing scheme of deduction of tax at source, even in cases where a lower rate of tax income is provided in the tax treaty, tax has to be deducted at the rate prescribed in law.  As a result, in many cases, the amount of tax deducted from sums remitted to foreign companies is larger than the final tax liability, thus requiring filing of claims for refunds. With a view to correcting this position, it is proposed to amend section 2(37A) of the Income Tax Act to secure that tax is deducted at source at the rate applicable in a particular case, for final tax liability. This amendment will take effect from 1st October, 1991.

Press Note Issued by Department of Economic Affairs 

5. In the meantime, the Department of Economic Affairs, Ministry of Finance issued a Press Note dated 17-05-1988 laying down the procedure for remittances to foreign companies by way of royalty and fees for technical services under approved agreements.  This procedure is applicable only where income-tax @ 30% from such payments is deducted and paid into "designated" banks.  As per this procedure, the remitter has to furnish to the "designated"� bank details of payments in the prescribed form certified by a chartered accountant along with the income-tax Challan of payment.  On payment of tax by the remitter, the designated bank would forward a certificate regarding such payment to the Reserve Bank of India.  On receipt of the certificate of payment of tax from the concerned bank, the RBI would permit the remittance of the balance without insisting on a "No Objection Certificate"� from the income-tax authorities.

The Reserve Bank of India used to insist on the production of a "No Objection Certificate" from the income-tax authorities whenever there is a claim that the rate or rates for deduction of tax at source is lower than 30% in case of royalty or fees for technical services, or if the proposed remittance is in respect of other types of income.  In order to simplify and to bring uniformity in the form of application to be made by the remitter and the authorization to be issued, the Board has considered the issue on non-statutory forms for such purposes.   The Board had issued a Circular No.695, dated 29-11-1994 and also enclosed the non-statutory form thereto and it was prescribed that the authority to whom the application for authorization is made will verify the claims of the payer in the light of the I.T. Act, the DTAAs and the specific facts of the transactions, before authorizing the remittance.

 In Item No.3 of the Notes of the aforesaid non-statutory form it is mentioned that- 

"An authorization from the income-tax authority will not be required for the payment of royalty and fees for technical services to foreign companies under approved contracts, where income-tax at 30% has been deducted and paid into designated banks as per the instructions issued by the Economic Affairs Department.  In all other cases, an authorization is to be obtained for the proposed payment."

 Circular No.759 issued by CBDT 

6. Further to streamline and simplify the procedure of obtaining an authorization from income tax authorities while making payment of sums to non-residents after deduction of tax at source u/s 195(1), the Central Board of Direct Taxes issued a Circular No.759, dated 18-11-1997 to dispense with the requirement of submission of a No-Objection Certificate from income-tax authorities for remittance to a non-resident as required by the Reserve Bank of India.   The RBI too issued A.D. (M.A. Series) Circular No.48, Dated 29-11-1997 u/s 73(3) of the Foreign Exchange Regulation Act, 1973 instructing all the Authorized Dealers to comply with the procedure prescribed under the Circular No.759, Dated 18-11-1997 issued by the CBDT.  The RBI in their Circular No.48, at Para No.4 directed all the Authorized dealers to comply with the statutory provisions strictly to avoid the penalties for contravention or non-observance of the provisions of Foreign Exchange Regulation Act,1973.

The CBDT in their Circular No.759, Dated 18-11-1997 in F.No.500/152/ 96-FTD dispensed with the requirement of No Objection Certificate to be obtained from the Assessing Officer at the time of remittance outside India. Circular No 759 is reproduced as under : "Sub : Remittance to a non-resident - Deduction of tax at source - Submission of No Objection Certificate - Dispensing with - Regarding.

1. Section 195 of the Income-tax Act, 1961 provides that any person responsible for paying to a non-resident any sum chargeable under the Act 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 cheque or draft or any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

2. The Reserve Bank of India have provided in their Office Manual that no remittance shall be allowed unless a No Objection Certificate has been obtained from the Income-tax Department. It has since been decided that henceforth remittances may be allowed by the Reserve Bank of India without insisting upon a No Objection Certificate from the Income-tax Department and on the person making the remittance furnishing an undertaking (in duplicate) addressed to the Assessing Officer accompanied by a certificate from an accountant (other than an employee) as defined in the Explanation below section 288 of the Income-tax Act, 1961 in the form annexed to this circular. The person making the remittance shall submit the undertaking along with the said certificate of the accountant to the Reserve Bank of India, who in turn shall forward a copy thereof to the Assessing Officer.

3. The contents of this circular may be brought to the notice of all the officers working in your charge.� The undertaking to be filed by the assessee reads as  under :

Undertaking

To..................... (Designation of the Assessing Officer)
I/We.......................... (name, address & Permanent Account Number)propose to make a remittance of..........(Amount)being...................(nature of payment)to....................(name & complete address of the person.............................. .......................................................to whom the remittance has been made)after deducting a sum of Rs. .........being the tax at the rate of..........,which is the appropriate rate of tax deductible at source on the said amount of remittance.

2. A certificate from the accountant as defined in Explanation below section 288 of the Income-tax Act certifying the nature and amount of income, amount of tax payable and the amount actually paid, is also annexed.

3. In case it is found that the tax actually payable on the amount of remittance made has either not been paid or has not been paid in full, I/we undertake to pay the said amount of tax along with interest found due in accordance with the provision of the Income-tax Act.

4. I/we will also be subject to the provisions of penalty and prosecution for the said default as per the Income-tax Act.

5. I / we also undertake to submit the requisite documents etc. for enabling the Income-tax Department to determine the nature and amount of income and tax, interest,  penalty  etc. payable thereon.

(Name and Signature)

Date:

Place:

(The Undertaking shall be signed by the person authorized to sign the return of income of the person making the payment).

The certificate from the Chartered Accountant to be filed along with the undertaking is reproduced as under :

Certificate

I/we have examined the books of account of M/s. ....................................(Name, address and Permanent Account Number of person making the remittance)for ascertaining the nature of the remittance, of......................(amount of remittance)to................................(Name and complete address of the person to whom the remittance is being made) and the rate at which the tax is deductible at source thereon and hereby certify that a sum of Rs. .........has been deducted as tax at the appropriate rate and has been paid to the credit of the Government.   

Place:
Date:                                                                          Accountant.

Issuance of Circular No.48 by RBI

7.In consequence of the aforesaid Circular of the CBDT, the Reserve Bank of India issued Ad (M.A. Series) Circular No. 48, dated 29-11-1997 u/s 73(3) of the Foreign Exchange Regulation Act, 1973  by adopting the procedure laid down by the CBDT.  The Reserve Bank instructed all the Authorized Dealers who accept the remittances not to contravene the procedure as the same is subject to penalties prescribed under FERA.  From the Circular No. 759, dated 18-11-1997 issued by the CBDT, it can be noted that at the time of remittance, the only requirement on the part of the assessee (the remitter) is to file an undertaking along with a certificate of the accountant to the RBI, who in turn shall forward a copy thereof to the Assessing Officer. CBDT in Circular No. 767, dated 22-5-1998 reiterated the requirements to be fulfilled as in earlier  Circular No.759, dated 18-11-1997.   The CBDT in continuation to the aforesaid Circular No.759 issued another Circular No.767 Dated 22-05-1998  to further streamline the procedure by delegating the powers to all the Authorized Dealers in compliance with forwarding the undertaking of the remitter to the Assessing Officer.  In Paragraph No.4 it was specifically mentioned that-

"It is also clarified that Circular No.759 will cover those remittances for which RBI had prescribed the production of a No Objection Certificate from the income-tax authorities under its Exchange Control Manual.  Further, if an order under section 195(2) has been obtained by a person responsible for deducting tax, the new procedure of filing an undertaking along with a certificate prescribed in Circular No.759 would not be applicable."

After coming into force of these Circulars, the Department is neither expected nor can be heard to say that No Objection Certificate from income-tax authorities is required to be filed by the assessee. Again CBDT in Circular No. 10/2002, dated 9-10-2002 reiterated the submitting of an undertaking along with a Certificate from a Chartered Accountant before RBI at the time of the remittances to non-residents. In this Circular new formats of the undertaking by the assessee and Certificate from an Accountant have been prescribed.

The undertaking furnished before RBI (a copy thereof to be forwarded to the Assessing Officer by RBI), the assessee has to undertake the responsibility:  

1.  to pay the tax along with interest found due in accordance with the provision of the Income-tax Act, in case it is found that the tax actually payable on the amount of remittance made has either not been paid or has not been paid in full; and will also be subject to the provisions of penalty and prosecution for the said default as per the Income-tax Act.  

2.  to submit the requisite documents etc. for enabling the Income-tax Department to determine the nature and amount of income and tax, interest, penalty, etc., payable thereon.From the format of the certificate to be issued by the chartered accountant, it can be seen that he is duty bound to examine the books of account for ascertaining the nature of the remittance. The certificate contains the amount of remittance; name and complete address of the person to whom the remittance to be made; the rate at which the tax is to be deducted at source; the amount of tax deducted and credited to the Government. Under the new procedure, the revenue can recover the tax along with interest, if any from the assessee in a case the tax authorities later on find that short or no deduction of tax at source was made. This undertaking of a remitter can be converted into regular recovery proceedings only if there is any tax liability on the part of the non-resident by treating the resident-remitter as an agent u/s 163(1)(c) of the Act. The resident-remitter is also liable for penalty/prosecution for the default committed by him. Thus, the CBDT with effect from 18-11-1997 prescribed a new procedure for the purposes of the remittance of payments under which issuing No Objection Certificate under section 195(2) by the income-tax authorities has been dispensed with.The CBDT by these three Circulars, i.e.,

i) Circular No.759, Dated 18-11-1997;

ii) No. 767, Dated 22-5-1998;

iii) and No. 10/2002, dated 9-10-2002 have entrusted this task to the Chartered Accountants.

Only in the cases of ambiguities, 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 under section 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. Even this determination also is relevant only to the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind which cannot be definitely ascertained, then the amount of such income for the purpose of assessment to income-tax may be calculated by the assessing officer under Rule 10 of I.T. Rules, 1962. In such circumstances only, the provisions of sub-section 195(2) may have relevance before remittance of any amounts to a non-resident u/s 195(1).  Even in the cases where lower tax has been deducted or no tax deducted, the assessee by filing an undertaking before the RBI (addressed to the Assessing Officer) has made himself liable not only for payment of tax on such remittances but also for penalty and prosecution for the defaults committed by him for non-deduction or lower deduction of tax at source. Therefore, the ratio laid down by the Hon’ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. (supra) that the assessee was under an obligation to make application to the Assessing Officer under section 195(2) of the Act for the determination of income and tax to be deducted, in the light of the aforesaid procedure streamlined by the Government of India through the Circulars of CBDT and the Reserve Bank of India, is no more applicable as it runs contrary to the procedure adopted by the Government of India.

Analysis

8.The Circular No. 759 & 767 dated 18-11-1997 & 22-5-1998 issued by the CBDT and the Ad (M.A. Series) Circular No. 48, dated 29-11-1997 issued by the Reserve Bank of India (1997) 95 Taxman (St.) (121-22), were not available to the facts of Cheminor Drugs Ltd’s case before the Hyderabad Bench of ITAT nor to the facts of CIT v. Superintending Engineer, Upper Sileru 152 ITR 753 before the High Court of AP which was later affirmed by the Supreme Court in the case of Transmission Corporation of India.  This was because, the legal position was narrated by the aforesaid Judicial Authorities prior to the new procedure streamlined by the Government of India through their circulars issued by CBDT & RBI.  Till then the provisions of Section 195(2) of the Act enabled the Income Tax Department to issue clearances before remittance of any sum to a foreign payee by issuing a NOC/Tax Clearance Certificate. By these Circulars, the procedure for remittance of monies payable by any person to any non-resident or foreign company is streamlined and the procedure of obtaining No-objection certificate prescribed in the Exchange Control Manual of RBI read with Section 195(2) till then was dispensed with.  However, to safeguard the interests of revenue, the Central Government had evolved a procedure by obtaining an undertaking from the remitter along with a certificate of a chartered accountant in duplicate from the remitter and a copy of which shall be directed to be forwarded by the RBI or its Authorized Dealer to the jurisdictional assessing officer so that an assessing officer shall be entitled to make good of any deficit tax payable by any non-resident or foreign company by treating the remitter as an agent of the non-resident u/s 163(1)(c) of the Act. Therefore, any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under Income Tax Act, 1961 (not being income chargeable under the head "Salaries"�)   shall at the time of payment thereof deduct income tax thereon u/s 195(1) or has to comply with the terms of the Circulars issued by the CBDT and the RBI.  In the context of disallowance of expenditure u/s40 a(i) read with Section 195 of the Act, the Delhi Bench of ITAT in the case of  Millennium Infocom Technologies Ltd. v. Assistant Commissioner of Income-tax, Circle-6(1), New Delhi   [2009] 117  itd  114   (DELHI)  has elaborately dealt with the legal position and the new procedure streamlined by the Government of India and on a careful appreciation of the decisions of both the  Supreme Court in the case of Transmission Corpn., of AP (supra) and the Hyderabad Bench in the case of Cheminor Drugs Ltd., (supra) held in Para Nos. 8.10-8.11 that- "The contention of the Ld. DR by placing reliance on the decision of Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. (supra) that the assessee was under an obligation to make application to the Assessing Officer under section 195(2) of the Act for the determination of income and tax to be deducted, in our view, holds no water, as it runs contrary to the Circulars issued by CBDT"

Thus, the decision of Karnataka High Court in the case of CIT (Intl. Taxation) v. Samsung Electronic Co., Ltd (185 TAXMAN 313) does not apply to the practice and procedure adopted by the Income Tax Department from the dates of the aforesaid Circulars of the CBDT and the Reserve Bank Of India or precisely from 18-11-1997. 

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