International taxation norms
Friday, October 01, 2021 5:52 PM

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MOHAN R. LAVI

International taxation cases have been hogging the limelight in the courts in the recent past. The marquee Vodafone (NASDAQ:VOD) case has moved from Mumbai to Delhi for a final decision while the tax-deduction cases triggered by the Samsung decision of the Karnataka High Court have moved from Delhi to the respective High Courts.

It appears that Vodafone has almost lost the battle, with the Supreme Court ruling for a pre-deposit of half the tax due.

Since the company is claiming that the transaction is not taxable at all, paying half the tax would be tantamount to admitting the entire liability.

The diktat in Samsung's case to either deduct tax at source or obtain a no-deduction certificate from the tax authorities in the case of any payments to non-residents has been referred back by the apex court for fresh consideration on the facts and circumstances of each transaction, keeping in mind the benchmark that the payment has to be taxable in India.

A bunch of petitions were up for hearing before the Supreme Court, seeking justice on the same issue. In GE (NYSE:GE) Technology Center India Pvt Ltd vs Commissioner of Income Tax and Anr, payments for imported pre-packaged shrink-wrapped software were held to be royalty, triggering withholding tax payments.

The Commissioner( Appeals) agreed with this view, the Tribunal disagreed and the High Court — with the shadow of the Samsung case looming over it — nodded in favour of the withholding tax.

Going by the age-old CIT vs Cooper Engineering [ 68 ITR 457] case and the more recent Vijay Ship Breaking Corporation and Ors vs CIT [ 314 ITR 309], the apex court opined that in case there is no taxable income in India, there is no obligation to deduct tax at source. On interpretation, the Court held that weightage has to be given to every word used in a Section and the charging section has to be read de hors the machinery section.

The apex court ruled that the Karnataka High Court had completely misunderstood a portion of its judgement in Transmission Corporation of AP Ltd vs CIT, to mean that it is not open for a payer to contend that if the amount paid by him to the non-resident is not at all chargeable to tax in India, there is no necessity to deduct tax at source.

Sums chargeable in Section 195 are to be interpreted to mean sums chargeable under Sections 4, 5 and 9 of the Income Tax Act. In effect, the Court ruled that “any sum” can't be interpreted literally and would mean any sum chargeable to tax under the Act.

The Direct Taxes Code (DTC) has attempted a solution to this imbroglio. Out of sheer coincidence, Section 195 would continue to deal with withholding taxes in the DTC era, too.

The Section helpfully uses the words “specified payment” with the specifications being moved to the Fourth Schedule. Income from employment, payments of interest, dividends and distribution of profits, payments for royalties or fees for technical services, winnings from lotteries, crossword puzzles, card games, horse races, payments to non-resident sportsmen in any form and payment of guarantee money to a non-resident sports association have all been assigned different withholding tax rates ranging from 10-30 per cent.

Tax payers should heave a sigh of relief, since the residual section clearly mentions any other sum chargeable to tax would get a 30 per cent withholding tax.

The only exemption in the Code from withholding taxes appears as the last proviso in Clause 200 -— any payment made to a non-resident foreign institutional investor on any payment made to it as a consideration for sale of securities listed on a recognized stock exchange.

With a Supreme Court decision to reflect upon and a specific entry in the DTC, it appears that the High Courts would concur with the decision of the Supreme Court and rule that tax deduction provisions would apply only if there is income that is taxable in India.

(The author is a Bangalore-based chartered accountant.)




 

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