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Tax experts have drawn attention to an important difference in emphasis and interpretation in the two separate but concurring judgements pronounced by the Supreme Court in the Vodafone tax case delivered last Friday.
The issue pertains to Section 195 of the Income-Tax Act which mandates deduction of income tax from payments made to non-residents.
The said Section reads thus: “Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”
The Chief Justice of India, Mr S.H. Kapadia, and Mr Justice Swatanter Kumar in their judgement referred to this and said, “Section 195 casts an obligation on the payer to deduct tax at source (“TAS” for short) from payments made to non-residents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India.”
Tax experts said that the emphasis here appears to be not on the residential status of the payer but on whether the payment had an element of income chargeable to tax in India.
The other judgement delivered by Mr Justice K.S. Radhakrishnan while broadly concurring with the above judgement, did, however, seem to draw a subtle distinction on the applicability of Section 195.
In this judgement, Mr Justice Radhakrishnan said, “Section 195 in our view would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India”.
He said that the use of words ‘any person' appearing in Section 195 can only be taken to mean someone resident in India. He goes on to observe, “A literal construction of the words ‘any person responsible for paying' to mean non–residents could lead to absurd consequences.”
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