The issue relates to the obligation of the payer to deduct and deposit TDS in relation to remittances made to foreign parties.
Granting partial relief to foreign companies operating in the country, the Supreme Court on Thursday reversed the judgment of the Karnataka high court that there was an obligation in each and every case of remittance made to foreign payees to deduct tax at source and only the issue of proportionality of the tax could be decided by the revenue department under Section 195 (2) of the Income Tax Act.
A Bench headed by Chief Justice S H Kapadia held that it was not correct to say the moment a remittance was made to a foreign party, tax became deductible under the provisions of Section 195 of the Income Tax Act, dealing with TDS (tax deducted at source) for non-resident companies.
The court heard the appeals of around 15 foreign companies against the high court ruling, including Samsung, GE India Technology, HP and Sonata Software.
After deciding the principles, all the cases have been remitted to the high court for deciding on the facts and circumstances of each case of assessment.
The issue relates to the obligation of the payer to deduct and deposit TDS in relation to remittances made to foreign parties who do not have any permanent establishment in India and are, therefore, not taxable under the Income Tax Act.
It touches upon the current hot topic, highlighted in Wednesday's Vodafone judgment of the Bombay high court, involving the issue of extra-territorial operation of the Income Tax Act.
Today's judgment assumes importance in view of the fact that a large number of remittances are made to foreign parties from India, on which the department has imposed interest and penalty for the payer not having deducted TDS.
The companies concerned argued that no part of the payees' incomes arose in India nor did they have a permanent establishment in the country.
More, the income was exempt under double taxation avoidance agreements.
Another issue raised in this batch of appeals was whether such payments made to foreign parties constituted royalties and were taxable under the provisions of the Income Tax Act or whether they were exempt under double taxation avoidance agreements with various countries.
This issue has also been remitted to the high court to decide whether the payment made to the foreign suppliers amounted to royalty and whether the same was taxable in India-giving rise to an obligation to deduct tax at source.
