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Legal pulse (tax): Three cases lay to rest withholding tax debate post 2009 Samsung-decision

A raging tax controversy in respect of withholding tax on remittances to non-residents has been resolved after three March and April rulings of the Delhi High Court in the Van Oord case, its order in Maharishi Housing Development case and the latest ruling by the Special Bench of Tax Tribunal, all of which override the November 2009 Karnataka High Court decision in the Samsung case.

Experts believe that the combined effect of these rulings on Section 195 of the Income Tax Act, 1961 will provide a considerable relief to payers of income tax and bring in clarity on cross-border tax withholding issues pending final adjudication before the Apex Court.

"Van Oord, Maharishi and Special Bench ruling say that the payer has to examine the chargeability and if the income is not chargeable then he is not required to deduct tax whereas Karnataka HC Samsung decision held that an assessee cannot go into the issue of chargeability and they had to deduct tax and obtain [a certificate under] 195(2)," explained a tax lawyer who preferred to remain anonymous.

The Delhi High Court, while defining the substantive provision of law held that Section 195 of the Income Tax Act 1961 dealing with the deduction of tax at source by the payer on payments made to non-residents does not cast a statutory obligation to withhold tax unless the payment is chargeable under any provision of the act.

"The question of deducting tax at source will arise only if the sum payable to the non-resident is chargeable to tax in India," the Van Oord case read.

The special bench of the income tax tribunal sitting at Chennai whose ruling will have a precedent value not only reiterated the logic applied by the Delhi HC, but also commented on the procedural part. "The Tribunal held that there was no statutory obligation cast upon a payer to approach the Income Tax Authorities (Revenue) under section 195(2) of the ITA for a nil withholding tax certificate, while making a payment to a non-resident if the payer is of a bona fide belief that no part of the payment is liable to tax in India," read a client alert on the case by law firm Vaish Associates.

One tax lawyer commented: "The ruling will be helpful because all the other assessees all over India will follow the ruling of the special bench except for Karnataka."

The emphasis laid by the Van Oord case on first ascertaining whether the remittance could be charged as tax under the governing act prior to withholding tax on those payments, has now been applied in the Maharishi order of the Delhi HC.

This is a stance contrary to the Revenue’s contention that sought to impose an absolute liability for withholding tax on payments made to non-residents based on the Samsung ruling of the Karnataka High Court.

"The Tribunal examined the doctrine of stare decisis and held that it was not bound by the judgment of the Karnataka High Court, which was in conflict not only with judgments of other High Courts, but also misinterpreted the Supreme Court's judgment in Transmission Corporation. It also relied on the Delhi High Court's judgment in Van Oord ACZ India v. CIT, which had consciously disagreed with Samsung. It held that in case of a conflict of judgments of non-jurisdictional High Courts, it would adopt a view which it finds more appealing. In any event, the Tribunal held, the Karnataka High Court in Samsung, had not adhered to its own judgment in the earlier Jindal Thermal Power Co. Ltd," explained Vaish Associates' memorandum.

"Though the recent decision of the Delhi High Court and the aforesaid decision of the Special Bench have, to a large extent, relieved the anxiety caused in view of the decision in Samsung's case, the decision of the Supreme Court In the appeal against the Karnataka High Court's judgment in Samsung is being eagerly awaited, as that would bring finality to the above controversy," it continued.

The Samsung Supreme Court appeal is scheduled for hearing in August 2010.

Facts of the most recent case before the IT Appellate Tribunal (ITO Vs Prasad Production Ltd):
In the case before the Appellate Tribunal an Indian Company contracted with Canadian company IMAX for he purchase, maintenance and installation of equipment.

The taxpayer remitted a certain amount as technology transfer fees without withholding any taxes under section 195 of the Income Tax Act (ITA).

Certain issues arose on the question of tax liability on payments and its deduction at source and a special bench was constituted to decide the matter.

The Revenue contended that the taxpayer did not have discretion under section 195 to decide whether the income in the hands of the non-resident was liable to taxation in India and section 195(2) would be rendered nugatory if taxpayers were allowed to decide the issue of chargeability on their own.

However, the Tribunal after examining various judgements concluded that section 195 of the ITA was completely inapplicable if the taxpayer was of the bona fide belief that no part of the payment was liable to tax under the Act.

It also observed that the procedure of section 195(2) was optional for the Taxpayer, as was the obtaining of the CA certificate as per the CBDT Circulars under the ITA, albeit the latter may be mandatorily required by the Reserve Bank of India.

Case citations:
ITO Vs. Prasad Production Ltd. ITA No. 663/Mds/2003.
Van Oord ACZ India Vs. CIT ITA No. 439 of 2008
Maharishi Housing Development Finance Corporattion Ltd Vs Assistant Commissiober of Income Tax ITA 222/2009 order dated 8 April 2010
CIT v. Samsung Electronics Co. Ltd 320 ITR 209

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