I pay a non-resident in kind, not in cash. Do I still have to deduct tax at source under section 195?
Yes. The Supreme Court held that charter fee discharged by handing a non-resident owner 85 per cent of the fish caught was a payment attracting section 195, and that the non-resident received it in India. Until the catch was apportioned it belonged wholly to the Indian charterer; the non-resident got control only when its share was handed over at Chennai after certification, valuation and customs clearance. That was the first receipt in the eye of law and it was in India, so the income was chargeable under section 5(2). The company was rightly treated as an assessee in default under section 201 for not deducting.
Decided by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction - D.K. Jain and C.K. Prasad, JJ; judgment by C.K. Prasad, J) on 2010-07-07, reported as Civil Appeal Nos. 3844-3847 of 2003 (Supreme Court of India); on appeal from Referred Case No. 144 of 1995 and Writ Petition No. 1103 of 1998, High Court of Andhra Pradesh. It bears on section 195, section 5(2), section 201(1), section 201(1A) of the Income Tax Act 1961, in TDS Defaults and Residence & Treaty Benefit matters.
This is the answer to the argument that section 195 is not attracted because nothing was paid in cash, or because the non-resident realised the value only abroad. The Court's test is control: income requires that the recipient have control over it, and the place where control first passes is where the income is received. Because the fish was apportioned and handed over in India after valuation, the later sale abroad and the receipt of sale proceeds abroad were irrelevant. It also shows the limits of Toshoku and Ishikawajima-Harima, both of which the assessee relied on and both of which were distinguished - Toshoku because the amounts credited there were not at the non-resident's disposal, and Ishikawajima-Harima because the entire transaction there was completed on the high seas. Anyone structuring payment in kind, in produce or in a share of output should read it before assuming no withholding arises.
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The assessee, an Indian company in the business of sea food, held a permit to fish in India's exclusive economic zone. By an agreement of 7 March 1990 it chartered two pairs of bull trawlers from Eastwide Shipping Co (HK) Ltd, a Hong Kong company, for an all-inclusive charter fee of US$ 600,000 per vessel a year covering fuel, maintenance, wages and crew. Clause 4 provided that the fee was payable by way of 85 per cent of the gross earnings from fish sales, that a minimum 15 per cent of the sales value of the catch was to accrue to the charterer, and that the assessee would receive Rs 75,000 or 15 per cent of the gross value of the catch, whichever was more. The Reserve Bank permitted the remittance of 85 per cent of gross earnings, subject to production of evidence of tax deducted at source or a clearance that none was deductible. The trawlers were delivered at Chennai with crew; fishing was done outside territorial waters but within the exclusive economic zone; each voyage began and ended at Chennai, where the Fishery Department verified the log books, the catch was valued and local taxes paid, and the assessee arranged customs clearance for export. For assessment years 1991-92 to 1994-95 the assessee deducted no tax and produced no clearance. The Income Tax Officer treated it as an assessee in default in Rs 1,66,91,962 including interest under section 201(1A); the Deputy Commissioner (Appeals) reduced the liability to Rs 8,34,597 but upheld the principle, and the Tribunal and the Andhra Pradesh High Court decided against the assessee.
The appeals were dismissed. The receipt of 85 per cent of the catch was in India; it was the first receipt in the eye of law and was chargeable under section 5(2). The assessee was liable to deduct tax under section 195 on the payment to the non-resident company even though the payment was not in cash, and having failed to deduct and deposit it was rightly held to be in default under section 201. The Court rejected the arguments that no sum was paid in India, that the non-resident had no receipt in India because it sold the fish and realised the proceeds abroad, and that what happened was only a receipt by the assessee of 15 per cent of the catch rather than a payment by it.
Section 5(2) brings into the total income of a non-resident all income received or deemed to be received in India, and all income accruing or arising or deemed to accrue or arise in India, and the Court said the legal fiction has to be understood in the light of the terms of the contract. On these terms the whole catch belonged to the assessee until apportionment, the non-resident having no control over it; only when its 85 per cent share was set apart and handed over, after the catch had been brought to Chennai, certified fit for human consumption, valued and cleared, did it come within the non-resident's control. Since it is trite that to constitute income the recipient must have control over it, the non-resident effectively received the charter fee in India. That the fish was afterwards sold and the proceeds realised abroad did not undo the receipt in India. The Court also noted that the fee was expressed in money, US$ 600,000 per vessel a year payable by way of 85 per cent of gross earnings from fish sales, and that receipt of the valued catch amounted in substance to receipt of value of money; had it been otherwise, the measure would have had to be the price actually obtained at the destination. Toshoku was distinguished because there the amounts credited were not at the non-resident's disposal or control, so book entries were not receipt; Ishikawajima-Harima was distinguished because there the entire transaction was completed on the high seas, whereas here the catch was brought to an Indian port, valued and handed over after local taxes were paid.
It is trite to say that to constitute income the recipient must have control over it. Thus the non-resident company effectively received the charter-fee in India.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that charter fee discharged by handing a non-resident owner 85 per cent of the fish caught was a payment attracting section 195, and that the non-resident received it in India. Until the catch was apportioned it belonged wholly to the Indian charterer; the non-resident got control only when its share was handed over at Chennai after certification, valuation and customs clearance. That was the first receipt in the eye of law and it was in India, so the income was chargeable under section 5(2). The company was rightly treated as an assessee in default under section 201 for not deducting. This was decided by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction - D.K. Jain and C.K. Prasad, JJ; judgment by C.K. Prasad, J) and bears on section 195, section 5(2), section 201(1), section 201(1A) of the Income Tax Act 1961. It is reported as Civil Appeal Nos. 3844-3847 of 2003 (Supreme Court of India); on appeal from Referred Case No. 144 of 1995 and Writ Petition No. 1103 of 1998, High Court of Andhra Pradesh. This is the answer to the argument that section 195 is not attracted because nothing was paid in cash, or because the non-resident realised the value only abroad. The Court's test is control: income requires that the recipient have control over it, and the place where control first passes is where the income is received. Because the fish was apportioned and handed over in India after valuation, the later sale abroad and the receipt of sale proceeds abroad were irrelevant. It also shows the limits of Toshoku and Ishikawajima-Harima, both of which the assessee relied on and both of which were distinguished - Toshoku because the amounts credited there were not at the non-resident's disposal, and Ishikawajima-Harima because the entire transaction there was completed on the high seas. Anyone structuring payment in kind, in produce or in a share of output should read it before assuming no withholding arises. If it applies to you, the first step is this: Treat a payment in kind to a non-resident as a payment for section 195 and work out the tax on its value at the point the goods pass out of your control.
The assessee, an Indian company in the business of sea food, held a permit to fish in India's exclusive economic zone. By an agreement of 7 March 1990 it chartered two pairs of bull trawlers from Eastwide Shipping Co (HK) Ltd, a Hong Kong company, for an all-inclusive charter fee of US$ 600,000 per vessel a year covering fuel, maintenance, wages and crew. Clause 4 provided that the fee was payable by way of 85 per cent of the gross earnings from fish sales, that a minimum 15 per cent of the sales value of the catch was to accrue to the charterer, and that the assessee would receive Rs 75,000 or 15 per cent of the gross value of the catch, whichever was more. The Reserve Bank permitted the remittance of 85 per cent of gross earnings, subject to production of evidence of tax deducted at source or a clearance that none was deductible. The trawlers were delivered at Chennai with crew; fishing was done outside territorial waters but within the exclusive economic zone; each voyage began and ended at Chennai, where the Fishery Department verified the log books, the catch was valued and local taxes paid, and the assessee arranged customs clearance for export. For assessment years 1991-92 to 1994-95 the assessee deducted no tax and produced no clearance. The Income Tax Officer treated it as an assessee in default in Rs 1,66,91,962 including interest under section 201(1A); the Deputy Commissioner (Appeals) reduced the liability to Rs 8,34,597 but upheld the principle, and the Tribunal and the Andhra Pradesh High Court decided against the assessee. The matter was decided on 2010-07-07 by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction - D.K. Jain and C.K. Prasad, JJ; judgment by C.K. Prasad, J). On those facts the Supreme Court held as follows. The appeals were dismissed. The receipt of 85 per cent of the catch was in India; it was the first receipt in the eye of law and was chargeable under section 5(2). The assessee was liable to deduct tax under section 195 on the payment to the non-resident company even though the payment was not in cash, and having failed to deduct and deposit it was rightly held to be in default under section 201. The Court rejected the arguments that no sum was paid in India, that the non-resident had no receipt in India because it sold the fish and realised the proceeds abroad, and that what happened was only a receipt by the assessee of 15 per cent of the catch rather than a payment by it.
Section 5(2) brings into the total income of a non-resident all income received or deemed to be received in India, and all income accruing or arising or deemed to accrue or arise in India, and the Court said the legal fiction has to be understood in the light of the terms of the contract. On these terms the whole catch belonged to the assessee until apportionment, the non-resident having no control over it; only when its 85 per cent share was set apart and handed over, after the catch had been brought to Chennai, certified fit for human consumption, valued and cleared, did it come within the non-resident's control. Since it is trite that to constitute income the recipient must have control over it, the non-resident effectively received the charter fee in India. That the fish was afterwards sold and the proceeds realised abroad did not undo the receipt in India. The Court also noted that the fee was expressed in money, US$ 600,000 per vessel a year payable by way of 85 per cent of gross earnings from fish sales, and that receipt of the valued catch amounted in substance to receipt of value of money; had it been otherwise, the measure would have had to be the price actually obtained at the destination. Toshoku was distinguished because there the amounts credited were not at the non-resident's disposal or control, so book entries were not receipt; Ishikawajima-Harima was distinguished because there the entire transaction was completed on the high seas, whereas here the catch was brought to an Indian port, valued and handed over after local taxes were paid. In the words reproduced by the source cited on this page: "It is trite to say that to constitute income the recipient must have control over it. Thus the non-resident company effectively received the charter-fee in India."
It was decided by the Supreme Court on 2010-07-07 and is reported as Civil Appeal Nos. 3844-3847 of 2003 (Supreme Court of India); on appeal from Referred Case No. 144 of 1995 and Writ Petition No. 1103 of 1998, High Court of Andhra Pradesh. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 195, section 5(2), section 201(1), section 201(1A), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed. The receipt of 85 per cent of the catch was in India; it was the first receipt in the eye of law and was chargeable under section 5(2). The assessee was liable to deduct tax under section 195 on the payment to the non-resident company even though the payment was not in cash, and having failed to deduct and deposit it was rightly held to be in default under section 201. The Court rejected the arguments that no sum was paid in India, that the non-resident had no receipt in India because it sold the fish and realised the proceeds abroad, and that what happened was only a receipt by the assessee of 15 per cent of the catch rather than a payment by it. It arises in TDS Defaults and Residence & Treaty Benefit matters, on section 195, section 5(2), section 201(1), section 201(1A) of the Income Tax Act 1961, and was decided by Supreme Court of India, Civil Appellate Jurisdiction - D.K. Jain and C.K. Prasad, JJ; judgment by C.K. Prasad, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Identify where the non-resident first gets control of what it is given; if that happens in India, the later sale and realisation abroad will not save you. If the Reserve Bank permission for the remittance requires proof of deduction or a clearance that no tax is deductible, obtain one or the other before you pay - the failure to do so was part of what sank this assessee. Do not rely on Toshoku unless the amount really was not at the non-resident's disposal, and do not rely on Ishikawajima-Harima unless the whole transaction was completed outside India.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citator search on the judgment returns 21 later decisions citing it, a modest figure that reflects how particular the facts are. It is applied by the Chennai Bench in Deputy Commissioner of Income Tax v Cholamandalam MS General Insurance (26 August 2022) and again in Assistant Commissioner of Income Tax, LTU-2 v Cholamandalam MS General Insurance (21 August 2024), and by the Chandigarh Bench in Deputy Commissioner of Income Tax (TDS) v Punjab Agro Food Grains Corporation Ltd (20 November 2018) and in Punjab State Cooperative Supply and Marketing Federation (30 October 2018), both of which turn on the way the assessee's share of the produce was fixed. The Cochin Bench applied it in Mathewsons Exports and Imports (21 October 2014). Nothing overruling or doubting it was found; the Bangalore Bench on 14 November 2014 distinguished it on the ground that there the sum payable had been quantified, which is a distinction on facts. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists section 9(1)(i) among the sections. The judgment decides the case on receipt in India under section 5(2) and does not rest on section 9(1)(i); the deeming provision is mentioned only in the passage quoted from Toshoku, so section 9(1)(i) is left out and sections 201(1) and 201(1A) are added because the demand was raised under them. The batch line carried no reporter citations, so the case numbers and the High Court's reference and writ petition numbers are used. The judgment does not say what rate of tax the officer applied or how the reduced figure of Rs 8,34,597 was arrived at, and it does not consider any double taxation agreement. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed. The receipt of 85 per cent of the catch was in India; it was the first receipt in the eye of law and was chargeable under section 5(2). The assessee was liable to deduct tax under section 195 on the payment to the non-resident company even though the payment was not in cash, and having failed to deduct and deposit it was rightly held to be in default under section 201. The Court rejected the arguments that no sum was paid in India, that the non-resident had no receipt in India because it sold the fish and realised the proceeds abroad, and that what happened was only a receipt by the assessee of 15 per cent of the catch rather than a payment by it.
TaxSphere, “Kanchanganga Sea Foods Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/kanchanganga-sea-foods-ltd-v-cit/ (validity last checked 2026-08-29)
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