The Supreme Court (SC) on Thursday reserved its verdict in an important matter that will decide whether technology firms are bound to deduct tax at source (TDS) on payments made to non-residents on software purchases.
A Bench headed by Chief Justice SH Kapadia reserved its judgment after hearing the parties for two days. Earlier,it had stayed the Karnataka high court judgment on a batch of petitions by GE India Technology Centre,Engineering Analysis Centre of Excellence (EACEPL) and others seeking to set aside the HC judgment that held them legally bound to withhold tax on all cross-border payments.
The software companies argued that there is no need to deduct TDS while remitting payments overseas as they do not deem the income to be taxable in India.
However,additional Solicitor General Vivek Tankha,appearing for the Commissioner of Income Tax,International Taxation,said the moment there is payment to a non-resident,there is an obligation on the payer to deduct TDS under section195(1) and the only way to escape the liability is for the payer to make an application to the assessing officer (AO) for non-deduction or for deduction at a lower rate.
If the payer does not make an application and obtain an order,it is not open to him to argue that the payment has not resulted in taxable income in the hands of the non-resident recipient and that,therefore,there is no failure on the part of the payer to deduct tax under section195 (1),the Revenue contended.
Challenging the HC verdict of April 24,2009,the firms said that the HC overlooked the accepted principles of international taxation that are broadly being adhered to by all the countries to ensure uniformity in how tax is to be levied on transnational transactions.
The proliferation of DTAAs establishes the growing recognition of harmony in the taxation systems of different nations. One of the accepted principles of taxation is that the law should not seek to assume jurisdiction over a tax payer who has no presence, the petitions said.
The HC while ruling in favour of the tax department had held that any software purchase from global vendors amounted to royalty payment for a licence to use it,and should not be deemed as a mere purchase of goods that is excluded from withholding tax.
The HC had followed its earlier decision in the case of CIT vs Samsung Electronics where it had held the only way to escape the obligation to deduct TDS is by filing an application before the AO and obtain an order for non-deduction or for deduction at a lower rate.
In both the cases,the assessees made payments to foreign companies for purchase of shrink-wrapped or ready-made software without TDS deduction. While the AO held that the payments were taxable in the hands of the foreign company as royalty, he held the assessees liable for non-deduction of tax and interest thereon.