GE INDIA TECHNOLOGY CENTRE PRIVATE LTD.versusCOMMISSIONER OF INCOME TAX & ANR.

                       [2010] 10 S.C.R. 1142


A       GE INDIA TECHNOLOGY CENTRE PRIVATE LTD.
                                  V.
            COMMISSIONER OF INCOME TAX & ANR.
              (Civil Appeal Nos. 7541-7542 of 2010)
                       SEPTEMBER 09, 2010
B
           [S.H. KAPADIA, CJI AND K.5. PANICKER
                    RADHAKRISHNAN, J.]

        Income Tax Act, 1961:
c
       s.195(1) - Payment to Non-resident - Liability to deduct
  tax at source - Held: The payer is bound to deduct tax at
  source (TAS) only if the tax is assessable in India -
  Expression "chargeable under the provisions of the Act" in
0 s.195(1) shows that the remittance has got to be of a trading
  receipt, the whole or part of which is liable to tax in India - On
  facts, software imported by Indian Company- Payment made
  to non-resident software supplier - Failure on part of Indian
  Company to deduct tax at source - Tribunal's view that the
E sum paid to non-resident supplier was not royalty and the
  same did not give rise to any income taxable in India and,
  therefore, liability to deduct TAS did not arise - High Court
  held that the moment there is remittance, an obligation to
  deduct TAS arises - The view of High Court was not correct
  in the light of expression "chargeable under the provisions of
F the Act" in s.195(1) - Since High Court did not go into merits
  of the case on the question of payment of royalty, the
  impugned order is set aside and matter remitted to High Court
  for consideration afresh - Circular No. 728 dated October 30,
  1995 issued by CBDT - Interpretation of statutes.
G
        Interpretation of statutes:

        While interpreting the provisions of the Income Tax Act
    one cannot read the charging Sections of that Act de hors the
H                                1142
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v.          1143
          COMMISSIONER OF INCOME TAX

machinery Sections - The Act is to be read as an integrated   A
Code - Income Tax Act, 1961.

     While interpreting a section one has to give weightage
to every word used in that section.

     The question which has arisen for consideration in       B
the instant appeals is whether the amount paid by an
Indian company to a non-resident software supplier
constitute royalty which is deemed to accrue or arise in
lndie} ,and thus,the Indian Company is liable to deduct tax
at source under Section 195 of the Income Tax Act, 1961.      C

    Allowing the appeal and remitting the matter to the
High Court, the Court

     HELD: 1. Section 195 of the Income Tax Act, 1961
imposes a statutory obligation on any person                  D
responsible for paying to a non-resident, any interest (not
being interest on securities) or any other sum (not being
dividend) chargeable under the provisions of the l.T. Act,
to deduct income tax at the rates in force unless he is
liable to pay income tax thereon as an agent. Payment to      E
non-residents by way of royalty and payment for technical
services rendered in India are common examples of
sums chargeable under\ the provisions of the I. T. Act to
which the requirement oftax deduction at source applies.
A person paying interest or any other sum to a non-           F
resident is not liable to deduct tax if such sum is not
chargeable to tax under the l.T. Act. Section 195
contemplates not merely amounts, the whole of which
are pure income payments, it also covers composite
payments which has an element of income embedded or           G
incorporated in them. Thus, where an amount is payable
to a non-resident, the payer is under an obligation to
deduct tax at source (TAS) in respect of such composite
payments. The obligation to deduct TAS is, however,
limited to the appropriate proportion of income               H
    1144    SUPREME COURT REPORTS             [2010] 10 S.C.R.


A chargeable under the Act forming part of the gross sum
  of money payable to the non-resident. This obligation
  being limited to the appropriate proportion of income
  flows from the words used in Section 195(1), namely,
  "chargeable under the provisions of the Act". CBDT had
B also clarified by Circular No. 728 dated October 30, 1995
  that the tax deductor can take into consideration the
  effect of DTAA in respect of payment of royalties and
  technical fees while deducting TAS. [Para 7] [1150-H;
  1151-A-H; 1152-A-C]
c       Vijay Ship Breaking Corporation and Others v. CIT 314
    ITR 309 - relied on.

        Transmission Corporation of A.P. Ltd. v. C.I. T. 239 ITR
    587 (SC) - distinguished.
D
        CIT v. Cooper Engineering 68 ITR 457; Czechoslovak
    Ocean Shipping International Joint Stock Company v. /TO 81
    ITR 162(Calcutta) - referred to.

     Circular No. 728 dated October 30, 1995 issued by
E CBDT - referred to.

       2. Section 195 falls in Chapter XVII which deals with
  collection and recovery. Chapter XVll-8 deals with
  deduction at source by the payer. On analysis of various
F provisions of Chapter XVII, one finds use of different
  expressions, however, the expression "sum chargeable
  under the provisions of the Act" is used only in Section
  195. Section 194C casts an obligation to deduct TAS in
  respect of "any sum paid to any resident". Similarly,
G Sections 194EE and 194F inter alia provide for deduction
  of tax in respect of "any amount" referred to in the
  specified provisions. None of these provisions has the
  expression "sum chargeable under the provisions of the
  Act", which is an expression used only in Section 195(1).
H It follows, therefore, that the obligation to deduct TAS
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v.           1145
         COMMISSIONER OF INCOME TAX

arises only when there is a sum chargeable under the           A
Act. Section 195(2) is not merely a provision to provide
information to the ITO(TDS). It is a provision requiring tax
to be deducted at source to be paid to the Revenue by
the payer who makes payment to a non-resident.
Therefore, Section 195 has to be read in conformity with       B
the charging provisions, i.e., Sections 4, 5 and 9. This
reasoning flows from the words "sum chargeable under
the provisions of the Act" in Section 195(1). The fact that
the Revenue has not obtained any information p~r se
cannot be a ground to construe Section 195 widely so           c
as to require deduction of TAS even in a case where an
amount paid is not ·chargeable to tax in India at all. While
interpreting a Section one has to give weightage to every
word used in that section. The interpretation suggested
by the Department that under Section 195, the moment           0
there is remittance the obligation to deduct TAS arises
cannot be accepted as it would then mean that, on mere
payment, income would be said to arise or accrue in India.
Such interpretation would obliterate expression "sum
chargeable under the provisions of the Act" from Section
195(1 ). While interpreting the provisions of the Income Tax
                                                               E
Act one cannot read the charging Sections of that Act de
hors the machinery Sections. The Act is to be read as an
integrated Code. If the contention of the Department that
any person making payment to a non-resident is
necessarily required to deduct TAS then the                    F
consequence would be that the Department would be
entitled to appropriate the moneys deposited by the
payer even if the sum paid is not chargeable to tax
because there is no provision in the l.T. Act by which a
payer can obtain refund. Section 195 uses the word             G
'payer' and not the word "assessee". The payer is not an
assessee. The payer becomes an assessee-in-default
only when he fails to fulfill the statutory obligation under
Section 195(1 ). If the payment does not contain the
element of income the payer cannot be made liable. He          H
    1146    SUPREME C{OURT REPORTS               [2010] 10 S.C.R.


A cannot be declared to be an assessee-in-default. The
  payer is also an assessee under the ordinary provisions
  of the l.T. Act. When the payer remits an amount to a non-
  resident out of India he claims deduction or allowances
  under the Income Tax Act for the said sum as an
B "expenditure". Under Section 40(a)(i), payment in respect
  of royalty, fees for technical services or other sums
  chargeable under the Income Tax Act would not get the
  benefit of deduction if the assessee fails to deduct TAS
  in respect of payments outside India which are
c chargeable under the l.T. Act. This provision ensures
  effective compliance of Section 195 of the l.T. Act relating
  to tax deduction at source in respect of payments
  outside India in respect of royalties, fees or other sums
  chargeable under the l.T. Act. In a given case where the
  payer is an assessee he will definitely claim deduction
0
  under the l.T. Act for such remittance and on inquify if the
  AO finds that the sums remitted outside India comes
  within the definition of royalty or fees for technical service
  or other sums chargeable under the l.T. Act then it would
E be open to the AO to disallow such claim for deduction.
  [Para 9) [1153-F-H; 1154-A-H; 1156-F-H; 1157-A-B]

         C.I. T. v. Eli Lilly & Co. (India) (P.) Ltd. 312 ITR 225 -
    referred to.

F      3. In the present case, on facts, the ITO (TDS) had
  taken the view that since the sale of the concerned
  software, included a license to use the same, the payment
  made by appellant(s) to foreign Suppliers constituted
  "royalty" which was deemed to accrue or arise in India
G and, therefore, TAS was liable to be deducted under
  Section 195(1) of the Act. The said finding of the ITO(TDS)
  was upheld by the CIT(A). However, in second appeal, the
  ITAT held that such sum paid by the appellant(s) to the
  foreign software Supplier was not a "royalty" and that the
  same did not give rise to any "income" taxable in India
H
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v.          1147
          COMMISSIONER OF INCOME TAX

and, therefore, the appellant(s) was not liable to deduct     A
TAS. However, the High Court did not go into the merits
of the case and it went straight to conclude that the
moment there is remittance an obligation to deduct TAS
arises, which view stands hereby overruled. The
impugned judgment of the High Court is set aside and          s
the matter is remitted to the High Court for deciding
whether on facts and circumstances of the case, the ITAT
was justified in holdiljlg that the amount(s) paid by the
appellant(s) to the foreign software suppliers was not
"royalty" and the same did not give rise to any "income"      c
taxable in India and, therefore, the appellant(s) was not
liable to deduct any tax at source. [Paras 10-12] [1158-H;
1159-A-E]
                    Case Law Reference:
                                                              D
    239 ITR 587 (SC)       distinguished       Para 4, 7,
                                               10
    68 ITR 457             referred to         Para 7
    81 ITR 162(Cal)        referred to         Para 7         E
    314 ITR 309            relied on           Para 8
    312 ITR 225            referred to         Para 9
    CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.
7541-7542 of 2010.                                            F

     From the Judgment & Order dated 24.09.2009 of the High
Court of Karnataka in Income Tax Appeal Nos. 1268 & 1269
of 2006.
                                                              G
                          WITH

C.A. Nos. 7543-7544, 7545-7548, 7549-7758, 7759-7764,
7765-7767, 7768, 7769, 7770, 7771-7772, 7773, 7774, 7775-
7776, 7777, 7778 of 2010.
                                                              H
    1148    SUPREME COURT REPORTS                [2010] 10 S.C.R.


A      Vivek Tankha, ASG, Harish N. Salve, F.S. Nariman, S.
  Ganesh, M.S. Syali, V. Giri, R.P. Bhatt, Anuradha Dutt, B.
  Vijayalakshmi Menon, Pawan Sharma, Kuber Dewan Subhash
  Sharma, Siddharth Aggarwal, Senthil Jagadeesan, Atul Y.
  Chitale, Suchitra Atul Chitale, Sunaina Dutta, Satyen Sethi,
B Mahua Kalra, Husnal Syali, Sumit K. Singh, Arta Trana Parda,
  Pd., Rameshwar Prasad Goyal, Mukesh Bhutani, H.
  Raghavendra Rao, Arijit Prasad, Yashaj Singh Deora, T.
  Suryanayarayana, Sarva Mitter (for Milter & Mitter Co.) M.P.
  Vinod, Ajay K. Jain, Rustom B. Hathikhanawala, Anitha Shenoy,
c A.S. Bhasme, Brajesh Pandey, Vikas Malhotra, Rishabh
  Sancheti, Vaibhav Srivastava, Pratul Shandilya, Sumeer Sodhi,
  Kumaran D., B. Balaram Das, Abhinav Ashwain, Aunil
  Agarwal, Shashank Singh, N. Ganpathy for the appearing
  parties.
D       The Judgment of the Court was delivered by

        S.H. KAPADIA, CJI. 1. Leave granted.

        2. The short question which arises for determination in this
E batch of cases is - whether the High Court was right in holding
  that the moment there is remittance the obligation to deduct tax
  at source (TAS) arises? Whether merely on account of such
  remittance to the non-resident abroad by an Indian company
  per se, could it be said that income chargeable to tax under
  the Income Tax Act, 1961 (for short "l.T. Act") arises in India?
F
    Facts in the leading case of Sonata Information
    Technology Ltd.

       3. Appellant(s) are the distributors of imported pre-
G packaged shrink wrapped standardized software from Microsoft
  and other Suppliers outside India. During the relevant
  assessment year(s) appellant(s) made payments to the said
  software Suppliers which according to the appellant(s)
  represented the purchase price of the abovementioned
H software. The ITO(TDS) held that since the sale of software
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1149
 COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.]

included a license to use the same, payments made by the             A
appellant(s) to the foreign Suppliers constituted royalty, which
was deemed to accrue or arise in India. Therefore, TAS was
liable to be deducted under Section 195 of the l.T. Act. The
said finding of the ITO(TDS) was upheld by the Commissioner
(A). In second appeal, the ITAT, however, held that the amount       B
paid by appellant(s) to the foreign software Suppliers was not
"royalty" and the same did not give rise to any income taxable
in India, and therefore, the appellant(s) was not liable to deduct
TAS.

     4. The Department appealed to the Karnataka High Court.         C
Before the High Court, the Department for the first time raised
the contention that unless the payer makes an application to
the ITO(TDS) under Section 195(2) and has obtained a
permission for non-deduction of the TAS,/it was not permissible
for the payer to contend that the payment made to the non-           D
resident did not give rise to "income" taxable in India and that,
therefore, there was no need to deduct any TAS. This argument
of the Department was accepted by the High Court vide the
impugned judgment. For reaching this conclusion, the High
Court placed strong reliance on the judgment of this Court in        E
Transmission Corporation of A.P. Ltd. Vs. C.I. T. [239 ITR
587(SC)]. Aggrieved by the said decision, the appellant(s) has
come to this Court by way of civil appeal(s).

Analysis of Section 195                                              F
     5. At the outset, we quote hereinbelow the relevant
provisions of Section 195, as it stood at the relevant time.

     "195. (1) Any person responsible for paying to a non-
    resident, not being a company, or to a foreign company,          G
    any interest (not being interest on securities) or any other
    sum chargeable under the provisions of this Act (not being
    income chargeable under the head "Salaries") 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 the issue        H
    1150    SUPREME COURT REPORTS                 [2010] 10 S.C.R.


A       of a cheque or draft or by any other mode, whichever is
        earlier, deduct income-tax thereon at the rates in force :

        (2) Where the person responsible for paying any such sum
        chargeable under this Act (other than interest on securities
        and salary) to a non-resident considers that the whole of
B
        such sum would not be income chargeable in the case of
        the recipient, he may make an application to the Assessing
        Officer to determine, by general or special order, the
        appropriate proportion of such sum so chargeable, and
        upon such determination, tax shall be deducted under sub-
c       section (1) only on that proportion of the sum which is so
        chargeable.

        (3) Subject to rules made under sub-section (5), any person
        entitled to receive any interest or other sum on which
D       income-tax has to be deducted under sub-section (1) may
        make an application in the prescribed form to the
        Assessing Officer for the grant of a certificate authorizing
        him to receive such interest or other sum without deduction
        of tax under that sub-section, and where any such
E       certificate is granted, every person responsible for paying
        such interest or other sum to the person to whom such
        certificate is granted shall, so long as the certificate is in
        force, make payment of such interest or other sum without
        deducting tax thereon under sub-section(1 )."
F       6. At this stage we may also quote hereinbelow Section
    195 (6) as inserted by Finance Act, 2008 w.e.f. 1.4.2008.

        "195(6) The person referred to in sub-section (1) shall
        furnish the information relating to payment of any sum in
G       such form and manner as may be prescribed by the
        Board."

        7. Under Section 195(1), the tax has to be deducted at
    source from interest (other than interest on securities) or any
    other sum (not being salaries) chargeable under the l.T. Act in
H
 GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1151
COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.]

the case of non-residents only and not in the case of residents. A
 Failure to deduct the tax under this Section may disentitle the
payer to any allowance apart from pros~cution under Section
2768. Thus, Section 195 imposes a statutory obligation on any
person responsible for paying to a non~resident, any interest
(not being interest on securities) or any other sum {not being s
dividend) chargeable under the provisions of the l.T. Act, to
deduct income tax at the rates in force unless he is liable to
 pay income tax thereon as an agent. Payment to non-residents
by way of royalty and payment for technical services rendered
 in India are common examples of sums chargeable under the C
provisions of the LT. Act to which the aforestated requirement
of tax deduction at source applies. The tax so collected and
deducted is required to be paid to the credit of Central
Government in terms of Section 200 of the l.T. Act read with
Rule 30 of the l.T. Rules 1962. Failure to deduct tax or failure
                                                                 0
to pay tax would also render a person liable to penalty under
Section 201 read with Section 221 of the l.T. Act. In addition,
he would also be liable under Section 201(1A) to pay simple
interest at 12 per cent per annum on the amount of such tax
from the date on which such tax was deductible to the date on
which such tax is actually paid. The most important expression E
 in Section 195(1) consists of the words "chargeable under
the provisions of the Act". A person paying interest or any
 other sum to a non-resident is not liable to deduct tax if such
sum is not chargeable to tax under the l.T. Act. For instance,
where there is no obligation on the part of the payer and no F
 right to receive the sum by the recipient and that the payment
does not arise out of any contract or obligation between the
payer and the recipient but is made voluntarily, such payments
cannot be regarded as income under the l.T. Act. It may be noted
that Section 195 contemplates not merely amounts, the whole G
of which are pure income payments, it also covers composite
payments which has an element of income embedded or
incorporated in them. Thus, where an amount is payable to a
non-resident, the payer is under an obligation to deduct TAS
in respect of such composite payments. The obligation to H
   1152      SUPREME COURT REPORTS                [201 OJ 10 S.C.R.


A deduct TAS is, however, limited to the appropriate proportion
  of income chargeable under the Act forming part of the gross
  sum of money payable to the non-resident. This obligation
  being limited to t.he appropriate proportion of income flows from
  the words used in Section 195(1), namely, "chargeable under
B the provisions of the Act". It is for this reason that vide Circular
  No. 728 dated October 30, 1995 that the CBDT has clarified
  that the tax deductor can take into consideration the effect of
  DTAA in respect of payment of royalties and technical fees while
  deducting TAS. It may also be noted that Section 195(1) is in
C identical terms with Section 18(38) of the 1922 Act. In CIT Vs.
  Cooper Engineering [68 ITR 457] it was pointed out that if the
  payment made by the resident to the non-resident was an
  amount which was not chargeable to tax in India, then no tax is
  deductible at source even though the assessee had not made
  an application under Section 18(38) (now Section 195(2) of the
0
  l.T. Act). The application of Section 195(2) pre-supposes that
  the person responsible for making the payment to the non-
  resident is in no doubt that tax is payable in respect of some
  part of the amount to be remitted to a non-resident but is not
  sure as to what should be the portion so taxable or is not sure
E as to the amount of tax to be deducted. In such a situation, he
  is required to make an application to the ITO(TDS) for
  determining the amount. It is only when these conditions are
  satisfied and an application is made to the ITO(TDS) that the
  question of making an order under Section 195(2) will arise. In
F fact, at one point of time, there was a provision in the l.T. Act
  to obtain a NOC from the Department that no tax was due. That
  certificate was required to be given to RBI for making
  remittance. It was held in the case of Czechoslovak Ocean
  Shipping International Joint Stock Company Vs. /TO [81 ITR
G 162(Calcutta)] that an application for NOC cannot be said to
  be an application under Section 195(2) of the Act. While
  deciding the scope of Section 195(2) it is important to note that
  the tax which is required to be deducted at source is deductible
  only out of the chargeable sum. This is the underlying principle
H of Section 195. Hence, apart from Section 9(1), Sections 4, 5,
                                                                          \



 GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1153                              \
COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.]
                                                                                  '
9, 90, 91 as well as the provisions of DTAA are also relevant,        A
while applying tax deduction at source provisions. Reference
to ITO(TDS) under Section 195(2) or 195(3) either by the non-
resident or by the resident payer is to avoid any future hassles
for both resident as well as non-resident. In our view, Sections
195(2) and 195(3) are safeguards. The said provisions are of          B
practical importance. This reasoning of ours is based on the
decision of this Court in Transmission Corporation (supra) in
which this Court has observed that the provision of Section
195(2) is a safeguard. From this it follows that where a person
responsible for deduction is fairly certain then he can make his      C
own determination as to whether the tax was deductible at
source and, if so, what should be the amount thereof.

Submissions and findings thereon

     8. If the contention of the Department that the moment there     D
is remittance the obligation to deduct T AS arises is to be
accepted then we are obliterating the words "chargeable under
the provisions of the Act" in Section 195(1 ). The said
expression in Section 195(1) shows that the remittance has got
to be of a trading receipt, the whole or part of which is liable to   E
tax in India. The payer is bound to deduct TAS only if the tax is
assessable in India. If tax is not so assessable, there is no
question of TAS being deducted. [See : Vijay Ship Breaking
Corporation and Others Vs. CIT 314 ITR 309]
                                                                      F
      9. One more aspect needs to be highlighted. Section 195
falls in Chapter XVII which deals with collection and recovery.
Chapter XVll-B deals with deduction at source by the payer.
On analysis of various provisions of Chapter XVII one finds use
of different expressions, however, the expression "sum                G
chargeable under the provisions of the Act" is used only in
Section 195. For example, Section 194C casts an obligation
to deduct TAS in respect of "any sum paid to any resident".
Similarly, Sections 194EE and 194F inter alia provide for
deduction of tax in respect of "any amount" referred to in the
                                                                      H
'       1154    SUPREME COURT REPORTS               [2010] 10 S.C.R.


    A specified provisions. In none of the provisions we find the
      expression "sum chargeable under the provisions of the Act",
      which as stated above, is an expression used only in Section
      195(1 ). Therefore, this Court is required to give meaning and
      effect to the said expression. It follows, therefore, that the
    B obligation to deduct TAS arises only when there is a sum
      chargeable under the Act. Section 195(2) is not merely a
      provision to provide information to the ITO(TDS). It is a
      provision requiring tax to be deducted at source to be paid to
      the Revenue by the payer who makes payment to a non-
    e resident. Therefore, Section 195 has to be read in conformity
      with the charging provisions, i.e., Sections 4, 5 and 9. This
      reasoning flows from the words "sum chargeable under the
      provisions of the Act" in Section 195(1 ). The fact that the
      Revenue has not obtained any information per se cannot be a
      ground to construe Section 195 widely so as to require
    D deduction of TAS even in a case where an amount paid is not
      chargeable to tax in India at all. We cannot read Section 195,
      as suggested by the Department, namely, that the moment
      there is remittance the obligation to deduct TAS arises. If we
      were to accept such a contention it would mean that on mere
    E payment income would be said to arise or accrue in India.
      Therefore, as stated earlier, if the contention of the Department
      was accepted it would mean obliteration of the expression
      "sum chargeable under the provisions of the Act" from Section
      195(1). While interpreting a Section one has to give weightage
    F to every word used in that section. While interpreting the
      provisions of the Income Tax Act one cannot read the charging
      Sections of that Act de hors the machinery Sections. The Act
      is to be read as an integrated Code. Section 195 appears in
      Chapter XVII which deals with collection and recovery. As held
    G in the case of C.I. T Vs. Eli Lilly & Co. (India) (P.) Ltd. [312
      ITR 225] the provisions for deduction of TAS which is in Chapter
      XVII dealing with collection of taxes and the charging provisions
      of the l.T. Act form one single integral, inseparable Code and,
      therefore, the provisions relating to TDS applies only to those
    H sums which are "chargeable to tax" under the l.T. Act. It is true
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1155
 COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.]
                                                                         \   '
                                                                                 '
that the judgment in Eli Lilly (supra) was confined to Section A
192 of the l.T. Act. However, there is some similarity between
the two. If one looks at Section 192 one finds that it imposes
statutory obligation on the payer to deduct TAS when he pays
any income "chargeable under the head salaries". Similarly,
Section 195 imposes a statutory obligation on any person B
responsible for paying to a non-resident any sum "chargeable
under the provisions of the Act", which expression, as stated
above, do not find place in other Section$ of Chapter XVII. It is
in this sense that we hold that the l.T. Act ;constitutes one single
integral inseparable Code. Hence, the provisions relating to C
TDS applies only to those sums which are chargeable to tax
under the l.T. Act. If the contention of the Department that any
person making payment to a non-resident is necessarily
required to deduct TAS then the consequence would be that
the Department would be entitled to appropriate the moneys D
deposited by the payer even if the sum paid is not chargeable
to tax because there is no provision in the l.T. Act by which a
payer can obtain refund. Section 237 read with Section 199
implies that only the recipient of the sum, i.e., the payee could
seek a refund. It must therefore follow, if the Department is right,
that the law requires tax to be deducted on all payments. The E
payer, therefore, has to deduct and pay tax, even if the so-called
deduction comes out of his own pocket and he has no remedy
whatsoever, even where the sum paid by him is not a sum
chargeable under the Act. The interpretation of the Department,
therefore, not only requires the words "chargeable under the F
provisions of the Act" to be omitted, it also leads to an absurd
consequence. The interpretation placed by the Department
would result in a situation where even when the income has no
territorial nexus with India or is not chargeable in India, the
Government would nonetheless collect tax. In our view, Section G
195(2) provides a remedy by which a person may seek a
determination of the "appropriate proportion of such sum so
chargeable" where a proportion of the sum so chargeable is
liable to tax. The entire basis of the Department's contention
                                                                     H
,
        1156      SUPREME COURT REPORTS                   [2010] 10 S.C.R.


    A    is based on administrative convenience in support of its
         interpretation. According to the Department huge seepage of
         revenue can take place if persons making payments to non-
         residents are free to deduct TAS or not to deduct TAS. It is the
         case of the Department that Section 195(2), as interpreted by
    B    the High Court, would plug the loophole as the said
         interpretation requires the payer to make a declaration before
        the ITO(TDS) of payments made to non-residents. In other
        words, according to the Department Section 195(2) is a
        provision by which payer is required to inform the Department
    C   of the remittances he makes to the non-residents by which the
        Department is able to keep track of the remittances being
        made to non-residents outside India. We find no merit in these
        contentions. As stated hereinabove, Section 195(1) uses the
        expression "sum chargeable under the provisions of the Act."
    D   We need to give weightage to those words. Further, Section
         195 uses the word 'payer' and not the word "assessee". The
        payer is not an assessee. The payer becomes an assessee-
        in-default only when he fails to fulfill the statutory obligation under
        Section 195(1 ). If the payment does not contain the element of
        income the payer cannot be made liable. He cannot be
    E   declared to be an assessee-in-default. The abovementioned
        contention of the Department is based on an apprehension
        which is ill founded. The payer is also an assessee under the
        ordinary provisions of the l.T. Act. When the payer remits an
        amount to a non-resident out of India he claims deduction or
    F   allowances under the Income Tax Act for the said sum as an
        "expenditure". Under Section 40(a}(i}, inserted vide Finance
        Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for
        technical services or other sums chargeable under the Income
        Tax Act would not get the benefit of deduction if the assessee
    G   fails to deduct TAS in respect of payments outside India which
        are chargeable under the l.T. Act. This provision ensures
        effective compliance of Section 195 of the I. T. Act relating to
        tax deduction at source in respect of payments outside India
        in respect of royalties, fees or other sums chargeable under the
    H   l.T. Act. In a given case where the payer is an assessee he will
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1157
 COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.]

definitely claim deduction under the 1.T. Act for such remittance    A
and on inquiry if the AO finds that the sums remitted outside
India comes within the definition of royalty or fees for technical
service or other sums chargeable under the l.T. Act then it
would be open to the AO to disallow such claim for deduction.
Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub-Section       B
(6) has been inserted in Section 195 which requires the payer
to furnish information relating to payment of any sum in such
form and manner as may be prescribed by the Board. This
provision is brought into force only from 1.4.2008. It will not
apply for the period with which we are concerned in these cases      c
before us. Therefore, in our view, there are adequate
safeguards in the Act which would prevent revenue leakage.

Applicability of the judgment in the case of Transmission
Corporation (supra)
                                                                     D
      10. In Transmission Corporation case (supra) a non-
resident had entered into a composite contract with the resident
party making the payments. The said composite contract not
only comprised supply of plant, machinery and equipment in
India, but also comprised the installation and commissioning         E
of the same in India. It was admitted that the erection and
commissioning of plant and machinery in India gave rise to
income taxable in India. It was, therefore, clear even to the
payer that payments required to be made by him to the non-
resident included an element of income which was exigilble to        F
tax in India. The only issue raised in that case was whether TDS
was applicable only to pure income payments and not to
composite payments which had an element of income
embedded or incorporated in them. The controversy before us
in this batch of cases is, therefore, quite different. In            G
Transmission Corporation case (supra) it was held that TAS
was liable to be deducted by the payer on the gross amount if
such payment included in it an amount which was exigible to
tax in India. It was held that if the payer wanted to deduct TAS
not on the gross amount but on the lesser amount, on the footing
                                                                     H
    1158     SUPREME COURT REPORTS                [201 O] 10 S.C.R.


A   that only a portion of the payment made represented "income
    chargeable to tax in India'', then it was necessary for him to
    make an application under Section 195(2) of the Act to the
    ITO(TDS) and obtain his permission for deducting TAS at lesser
    amount. Thus, it was held by this Court that if the payer had a
B   doubt as to the amount to be deducted as TAS he could
    approach the ITO(TDS) to compute the amount which was liable
    to be deducted at source. In our view, Section 195(2) is based
    on the "principle of proportionality". The said sub-Section gets
    attracted only iri cases where the payment made is a composite
c   payment in which a certain proportion of payment has an
    element of "income" chargeable to tax in India. It is in this
    context that the Supreme Court stated, "If no such application
    is filed, income-tax on such sum is to be deducted and it is
    the statutory obligation of the person responsible for paying
    such 'sum' to deduct tax thereon before making payment. He
0
    has to discharge the obligation to TDS". If one reads the
    observation of the Supreme Court, the words "such sum" clearly
    indicate that the observation refers to a case of composite
    payment where the payer has a doubt regarding the inclusion
E   of an amount in such payment which is exigible to tax in India.
    In our view, the above observations of this Court in
    Transmission Corporation case (supra) which is put in italics
    has been completely, with respect, misunderstood by the
    Karnataka High Court to mean that it is not open for the payer
    to contend that if the amount paid by him to the non-resident is
F   not at all "chargeable to tax in India", then no TAS is required
    to be deducted from such payment. This interpretation of the
    High Court completely loses sight of the plain words of Section
    195(1) which in clear terms lays down that tax at source is
    deductible only from "sums chargeable" under the provisions
G   of the l.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the
    l.T. Act.

         11. Before concluding we may clarify that in the present
    case on facts the ITO (TDS) had taken the view that since the
H   sale of the concerned software, included a license to use the
  GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. v. 1159
 COMMISSIONER OF INCOME TAX [S.H. KAPADIA, CJI.]

same, the payment made by appellant(s) to foreign Suppliers         A
constituted "royalty" which was deemed to accrue or arise in
India and, therefore, TAS was liable to be deducted under
Section 195(1) of the Act. The said finding of the ITO(TDS) was
upheld by the CIT(A). However, in second appeal, the ITAT held
that such sum paid by the appellant(s) to the foreign software      B
Supplier was not a "royalty" and that the same did not give rise
to any "income" taxable in India and, therefore, the appellant(s)
was not liable to deduct T AS. However, the High Court did not
go into the merits of the case and it went straight to conclude
that the moment there is remittance an obligation to deduct TAS     c
arises, which view stands hereby overruled.

      12. Since the High Court did not go into the merits of the
case on the question of payment of royalty, we hereby set aside
the impugned judgment of the High Court and remit these cases
to the High Court for de novo consideration of the cases on         D
merits. The question which the High Court will answer is -
whether on facts and circumstances of the case the ITAT was
justified in holding that the amount(s) paid by the appellant(s)
to the foreign software Suppliers was not "royalty" and that the
same did not give rise to any "income" taxable in India and,        E
therefore, the appellant(s) was not liable to deduct any tax at
 source?

     13. Subject to what is stated hereinabove, we set aside
the impugned judgment(s) and remit these cases to the High          F
Court to answer the question framed hereinabove. Accordingly,
the appeal(s} filed by the appellant(s) stands allowed with no
order as to costs.

D.G                                           · Appeal allowed.