I am paying a foreign supplier for equipment and its erection. Most of the payment is cost, not profit. Must I deduct tax at source under section 195 at all?
Yes. The Supreme Court held that any other sum chargeable under the provisions of this Act in section 195(1) is not confined to pure income profits. A sum is within the section if it is chargeable to tax, and that includes a sum in which income is hidden or embedded, such as a trading receipt of which only a fraction is taxable. The deduction is tentative, subject to regular assessment, and the payer's and recipient's protection lies in applying under section 195(2) or (3) or section 197 for a determination of the chargeable proportion or a lower or nil deduction.
Decided by the Supreme Court (Supreme Court of India - D.P. Wadhwa and M.B. Shah JJ; judgment by Shah J) on 1999-08-17, reported as AIR 1999 SC 3036; 1999 AIR SCW 2967; 1999 (7) SCC 266; 1999 Tax LR 843; (1999) 105 Taxman 742; (1999) 5 SCALE 40; (1999) 239 ITR 587. It bears on section 195, section 195(2), section 197, section 4 of the Income Tax Act 1961, in TDS Defaults matters.
This is the decision that made section 195 a real obligation on Indian payers rather than an argument about characterisation. The Appellate Assistant Commissioner and the Tribunal had both held that only pure income profits attract the section, and if that were right a payer could simply decide for himself that a composite contract price was mostly cost. The Court's answer is procedural as much as textual: the machinery in sections 195(2), 195(3) and 197 exists precisely because sums of mixed composition are covered, and if no application is made the obligation to deduct is unqualified. The Court also affirmed the High Court's second answer, that the obligation extends only to the appropriate proportion of the chargeable income, so the two limbs must be read together - the section applies to composite payments, and the quantum is settled by the officer on application.
Binding on every court and authority in India.
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The Andhra Pradesh State Electricity Board paid non-residents for the purchase of machinery and equipment and for work done in India erecting and commissioning it. It had two agreements with Charmilles Engineering Works Ltd, Geneva, for the purchase of two 95,000 BHP Francis turbines and two butterfly valves, and two further contracts for assembly, erection, testing and commissioning, with payments across financial years 1966-67 to 1972-73. It had an agreement with Oerlikon Engineering Co, Zurich, for two 60 MW generators and indoor switchgear for the Sileru hydro electric scheme, with a separate erection contract, payments falling in 1966-67 to 1968-69. It had a third contract with Sacheron Works Ltd, Geneva, for the purchase and erection of seven power transformers, paid in 1966-67. The Board paid without deducting tax and was treated as an assessee in default, the Income Tax Officer determining the tax deductible under section 195. The Appellate Assistant Commissioner allowed the Board's appeals, holding that any other sum chargeable under the provisions of this Act does not take in trade receipts and that section 195 applies only where the sums paid are pure income profits. The Tribunal dismissed the Revenue's appeals on the same reasoning. On references under section 256(1), the Andhra Pradesh High Court reframed the question to cover both whether section 195 applies where the sum is not wholly income and, if so, whether tax must be deducted on the gross sum. It held that the Board was obliged to deduct, that the obligation was limited to the appropriate proportion of chargeable income, and that the Income Tax Officer had erred in computing on gross sums in two of the three references. The assessee appealed.
The appeals failed and were dismissed with costs. The expression any other sum chargeable under the provisions of this Act in section 195(1) means a sum on which income tax is leviable, that is, a sum chargeable to tax and assessable under the Act; it is not limited to payments that are wholly income. A sum may be income, or may have income hidden or otherwise embedded in it, and if so tax must be deducted on that sum, the income itself being computed at regular assessment under the ordinary provisions. There was no substance in the contention that the expression excludes a trading receipt which may or may not include pure income. The Court affirmed both of the High Court's answers that were pressed before it: that the Board was obliged to deduct tax at source under section 195 on the sums paid to the three non-residents under the contracts, and that the obligation to deduct is limited to the appropriate proportion of the income chargeable under the Act forming part of the gross sums paid. Counsel advanced no submissions on the High Court's other findings.
The Court read section 195 with sections 190, 195(2), 195(3) and 197 as a scheme. Section 190 makes tax on income payable by deduction at source or advance payment notwithstanding that regular assessment comes later, without prejudice to the charge under section 4. Section 195(1) obliges a payer to deduct at the rates in force on interest or any other sum chargeable under the Act, excluding interest on securities and salary, which are dealt with by sections 192 and 193. Sub-section (2) lets a payer who considers that the whole of such a sum would not be chargeable in the recipient's hands apply to the officer to determine the appropriate proportion so chargeable, after which deduction is made only on that proportion. Sub-section (3) lets the recipient apply for a certificate to receive the sum without deduction, and section 197 lets him seek a lower or nil rate. The existence of that machinery is what shows the section covers sums of mixed composition: if only pure income were covered, there would be nothing for the officer to apportion. The Court also pointed to the general structure of tax deduction, which applies not only to receipts wholly of an income character such as salaries, dividends and interest on securities but to gross sums which may not wholly be income, such as payments to contractors and sub-contractors and insurance commission. It accepted that a trading receipt may contain only a fraction of taxable income, but noted that other payments - interest, commission, transfers of rights in patents, goodwill, drawings for plant and machinery - may carry a large taxable element, and that in either case the income is computed at regular assessment. The deduction is a tentative payment subject to that assessment and does not adversely affect the parties' rights. Finally the Court approved the Calcutta High Court's construction of the corresponding section 18(3B) of the 1922 Act in Ray and Co (India) Private Ltd v Mukherjee, ITO (1959) 36 ITR 365, that the provision contemplates not merely wholly taxable amounts but amounts of mixed composition, and that gross revenue receipts are still sums chargeable under the Act.
That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that any other sum chargeable under the provisions of this Act in section 195(1) is not confined to pure income profits. A sum is within the section if it is chargeable to tax, and that includes a sum in which income is hidden or embedded, such as a trading receipt of which only a fraction is taxable. The deduction is tentative, subject to regular assessment, and the payer's and recipient's protection lies in applying under section 195(2) or (3) or section 197 for a determination of the chargeable proportion or a lower or nil deduction. This was decided by the Supreme Court (Supreme Court of India - D.P. Wadhwa and M.B. Shah JJ; judgment by Shah J) and bears on section 195, section 195(2), section 197, section 4 of the Income Tax Act 1961. It is reported as AIR 1999 SC 3036; 1999 AIR SCW 2967; 1999 (7) SCC 266; 1999 Tax LR 843; (1999) 105 Taxman 742; (1999) 5 SCALE 40; (1999) 239 ITR 587. This is the decision that made section 195 a real obligation on Indian payers rather than an argument about characterisation. The Appellate Assistant Commissioner and the Tribunal had both held that only pure income profits attract the section, and if that were right a payer could simply decide for himself that a composite contract price was mostly cost. The Court's answer is procedural as much as textual: the machinery in sections 195(2), 195(3) and 197 exists precisely because sums of mixed composition are covered, and if no application is made the obligation to deduct is unqualified. The Court also affirmed the High Court's second answer, that the obligation extends only to the appropriate proportion of the chargeable income, so the two limbs must be read together - the section applies to composite payments, and the quantum is settled by the officer on application. If it applies to you, the first step is this: Apply under section 195(2) before paying whenever you think only part of the sum is chargeable, and get the determination in writing; deciding the proportion yourself is what creates a default.
The Andhra Pradesh State Electricity Board paid non-residents for the purchase of machinery and equipment and for work done in India erecting and commissioning it. It had two agreements with Charmilles Engineering Works Ltd, Geneva, for the purchase of two 95,000 BHP Francis turbines and two butterfly valves, and two further contracts for assembly, erection, testing and commissioning, with payments across financial years 1966-67 to 1972-73. It had an agreement with Oerlikon Engineering Co, Zurich, for two 60 MW generators and indoor switchgear for the Sileru hydro electric scheme, with a separate erection contract, payments falling in 1966-67 to 1968-69. It had a third contract with Sacheron Works Ltd, Geneva, for the purchase and erection of seven power transformers, paid in 1966-67. The Board paid without deducting tax and was treated as an assessee in default, the Income Tax Officer determining the tax deductible under section 195. The Appellate Assistant Commissioner allowed the Board's appeals, holding that any other sum chargeable under the provisions of this Act does not take in trade receipts and that section 195 applies only where the sums paid are pure income profits. The Tribunal dismissed the Revenue's appeals on the same reasoning. On references under section 256(1), the Andhra Pradesh High Court reframed the question to cover both whether section 195 applies where the sum is not wholly income and, if so, whether tax must be deducted on the gross sum. It held that the Board was obliged to deduct, that the obligation was limited to the appropriate proportion of chargeable income, and that the Income Tax Officer had erred in computing on gross sums in two of the three references. The assessee appealed. The matter was decided on 1999-08-17 by the Supreme Court (Supreme Court of India - D.P. Wadhwa and M.B. Shah JJ; judgment by Shah J). On those facts the Supreme Court held as follows. The appeals failed and were dismissed with costs. The expression any other sum chargeable under the provisions of this Act in section 195(1) means a sum on which income tax is leviable, that is, a sum chargeable to tax and assessable under the Act; it is not limited to payments that are wholly income. A sum may be income, or may have income hidden or otherwise embedded in it, and if so tax must be deducted on that sum, the income itself being computed at regular assessment under the ordinary provisions. There was no substance in the contention that the expression excludes a trading receipt which may or may not include pure income. The Court affirmed both of the High Court's answers that were pressed before it: that the Board was obliged to deduct tax at source under section 195 on the sums paid to the three non-residents under the contracts, and that the obligation to deduct is limited to the appropriate proportion of the income chargeable under the Act forming part of the gross sums paid. Counsel advanced no submissions on the High Court's other findings.
The Court read section 195 with sections 190, 195(2), 195(3) and 197 as a scheme. Section 190 makes tax on income payable by deduction at source or advance payment notwithstanding that regular assessment comes later, without prejudice to the charge under section 4. Section 195(1) obliges a payer to deduct at the rates in force on interest or any other sum chargeable under the Act, excluding interest on securities and salary, which are dealt with by sections 192 and 193. Sub-section (2) lets a payer who considers that the whole of such a sum would not be chargeable in the recipient's hands apply to the officer to determine the appropriate proportion so chargeable, after which deduction is made only on that proportion. Sub-section (3) lets the recipient apply for a certificate to receive the sum without deduction, and section 197 lets him seek a lower or nil rate. The existence of that machinery is what shows the section covers sums of mixed composition: if only pure income were covered, there would be nothing for the officer to apportion. The Court also pointed to the general structure of tax deduction, which applies not only to receipts wholly of an income character such as salaries, dividends and interest on securities but to gross sums which may not wholly be income, such as payments to contractors and sub-contractors and insurance commission. It accepted that a trading receipt may contain only a fraction of taxable income, but noted that other payments - interest, commission, transfers of rights in patents, goodwill, drawings for plant and machinery - may carry a large taxable element, and that in either case the income is computed at regular assessment. The deduction is a tentative payment subject to that assessment and does not adversely affect the parties' rights. Finally the Court approved the Calcutta High Court's construction of the corresponding section 18(3B) of the 1922 Act in Ray and Co (India) Private Ltd v Mukherjee, ITO (1959) 36 ITR 365, that the provision contemplates not merely wholly taxable amounts but amounts of mixed composition, and that gross revenue receipts are still sums chargeable under the Act. In the words reproduced by the source cited on this page: "That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum."
It was decided by the Supreme Court on 1999-08-17 and is reported as AIR 1999 SC 3036; 1999 AIR SCW 2967; 1999 (7) SCC 266; 1999 Tax LR 843; (1999) 105 Taxman 742; (1999) 5 SCALE 40; (1999) 239 ITR 587. 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 195(2), section 197, section 4, 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 failed and were dismissed with costs. The expression any other sum chargeable under the provisions of this Act in section 195(1) means a sum on which income tax is leviable, that is, a sum chargeable to tax and assessable under the Act; it is not limited to payments that are wholly income. A sum may be income, or may have income hidden or otherwise embedded in it, and if so tax must be deducted on that sum, the income itself being computed at regular assessment under the ordinary provisions. There was no substance in the contention that the expression excludes a trading receipt which may or may not include pure income. The Court affirmed both of the High Court's answers that were pressed before it: that the Board was obliged to deduct tax at source under section 195 on the sums paid to the three non-residents under the contracts, and that the obligation to deduct is limited to the appropriate proportion of the income chargeable under the Act forming part of the gross sums paid. Counsel advanced no submissions on the High Court's other findings. It arises in TDS Defaults matters, on section 195, section 195(2), section 197, section 4 of the Income Tax Act 1961, and was decided by Supreme Court of India - D.P. Wadhwa and M.B. Shah JJ; judgment by Shah 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. Have the non-resident consider an application under section 195(3) or section 197 for a nil or lower deduction certificate, which is the recipient's own route. Do not argue that a contract price is mostly cost and therefore outside the section. That argument was rejected, and the Court expressly noted that some payments, such as interest, commission or amounts for patents, goodwill or drawings, carry a large taxable element. Split supply and erection into separate agreements only for commercial reasons, and expect the tax treatment of each to be examined on its own terms rather than by the label. Remember that what is deducted is provisional. The recipient can file a return and prove the chargeable income, so an over-deduction is recoverable and is not a reason to withhold deduction.
Still good law. Nothing in the judgment suggests doubt about it and I checked no later authority, but this is a decision a reader should not take at face value without checking what came after. I state from my own knowledge, unverified here, that the Supreme Court in GE India Technology Centre Pvt Ltd v CIT later explained this judgment and held that section 195 is attracted only where the payment carries a chargeable element, so that no deduction is required where the sum is not chargeable to tax at all in India; passages in this judgment had been read by the Department as requiring deduction from every remittance. Section 195 and the machinery around it, including the reporting requirements for remittances, have also been amended repeatedly since 1999, and the current text must be read. 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 Court records that counsel made no submissions on the High Court's other findings, including its conclusion that the Income Tax Officer had erred in computing the deduction on the gross sums in two of the three references, so those findings stand unexamined here. The judgment therefore does not settle how the chargeable proportion is to be worked out where no application under section 195(2) is made, which is the question that matters most in practice. The batch line describes the holding as requiring deduction on the gross sum, but the Court affirmed the High Court's answer that the obligation is limited to the appropriate proportion of chargeable income; this record follows the judgment. The later Supreme Court treatment noted in the validity field is from my own knowledge and was not checked here. 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 failed and were dismissed with costs. The expression any other sum chargeable under the provisions of this Act in section 195(1) means a sum on which income tax is leviable, that is, a sum chargeable to tax and assessable under the Act; it is not limited to payments that are wholly income. A sum may be income, or may have income hidden or otherwise embedded in it, and if so tax must be deducted on that sum, the income itself being computed at regular assessment under the ordinary provisions. There was no substance in the contention that the expression excludes a trading receipt which may or may not include pure income. The Court affirmed both of the High Court's answers that were pressed before it: that the Board was obliged to deduct tax at source under section 195 on the sums paid to the three non-residents under the contracts, and that the obligation to deduct is limited to the appropriate proportion of the income chargeable under the Act forming part of the gross sums paid. Counsel advanced no submissions on the High Court's other findings.
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