Thursday, September 24, 2009

TDS and Non-Residents

While the Vodafone decision has been discussed earlier, one aspect which has not been looked at is the application of TDS provisions in the case. In the facts of the case, Hutch had received consideration from Vodafone for the alleged transfer of a capital asset situated in India. The primary liability to pay tax would be that of Hutch (the payee). According to the Revenue, the liability of Vodafone (the payer) would be one to deduct tax at source under Section 195 of the Income Tax Act. With several similar transactions under the scrutiny of the Revenue, and with the Vodafone case itself back before the Assessing Officer to decide on jurisdictional issues, the issue of the applicability of Section 195 has great significance.
The relevant part of Section 195 reads:
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, 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 of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force...
One of the important questions in this regard is whether Section 195 operates extraterritorially to cover payments made by non-residents to non-residents outside India. Are the requirements of territorial nexus satisfied in such a case? The Revenue’s argument is clear. For establishing chargeability u/s 9, undoubtedly, nexus is required. According to the Revenue’s argument, once chargeability is established, no further requirements of nexus need to be satisfied for attracting TDS provisions. As such, there is no ground for not giving the words “any person” in Section 195 their natural and ordinary meaning. The Revenue’s stand can be countered by arguing that “any person” can only refer to residents, and the provision must be given a contextual meaning. The case law on the point is not entirely clear. In Satellite TV v. DCIT, (2006) 99 TTJ (Mum) 1025, the Tribunal held that the words used in section 195 were “any person responsible for paying to a non-resident”. On a plain reading, the words “any person” could not be construed to exclude non-residents; nor could it be said that payments made outside India were outside the scope of the Section.
The assessee in that case had relied on an earlier decision of a co-ordinate Bench of the Tribunal in Shrikumar Poddar v. DCIT, (1997) 59 TTJ (Mum) 304. The Tribunal in Satellite TV refused to follow Shrikumar Poddar, saying that a decision is authority only for what it decides, and not for everything that may logically follow from it. Poddar had been decided on the ground that the charging provision in that case was not applicable in the facts of that case. Given this fact, the question of deduction of tax in terms of Section 195 did not arise for the consideration of the Tribunal. Therefore, the observations in Poddar (that Section 195 was not applicable as the payment was made outside India) were treated as obiter and not conclusive of the issue. Accordingly, the Tribunal in Satellite TV took a view different from that in Poddar.
Thus, while obiter in Poddar would support the assessee, the ratio of the decision in Satellite TV would go in favour of the Revenue’s arguments. Arguably, the Revenue’s stand is also vindicated by the Supreme Court judgment in CIT v. Eli Lilly, Civil Appeal 5114/2007. The Court suggests that chargeability under Section 9 would constitute sufficient nexus for the purposes of TDS provisions too. Yet, the Supreme Court specifically confined its decision to TDS under Section 192 (TDS in case of salaries); and on the facts of that case, the issue of payments by non-residents did not arise. Given this state of the case law, the question of the extraterritorial application of Section 195 cannot be regarded as settled. On principle, it is at least arguable that Section 195 should not be attracted in a Vodafone-type case. No doubt, the Section uses the words “any person”. However, the rationale behind TDS provisions seems to require a contextual interpretation of “persons” to mean only “residents”. TDS provisions are meant to ensure easier collection of taxes. The logic is that certain sums, though taxable in the hands of the payee, might escape tax because of problems in enforcement machinery in the case of non-resident payees. Hence, those sums should be deducted by the payer, from whom they can be recovered more easily. For this logic to hold true, it is essential that the payer must be in a better position than the payee – it must be easier to collect from the payer than from the payee. This will be true only in cases where the payer is a resident and the payee is a non-resident. In case both parties are non-residents, it will be as easy or as difficult to collect the sums due from the payee as the payer. In that case, the rationale behind application of TDS provisions is not attracted. In order to remain faithful to this rationale, the words “any person” must be read to mean “any residents”. Such an approach is also supported by a decision of the House of Lords in Clark v. Oceanic Contractors, [1983] 2 WLR 94, where their Lordships had to directly consider the question of whether chargeability is ipso facto sufficient nexus to attract TDS provisions. A provision quite similar to Section 195 was not given extraterritorial application, based on principles of statutory interpretation. This judgment has been more recently explained by the Court of Appeal in Andre Agassi v. Robinson (see paragraph 25 onwards). Whether this approach will be followed in India is a matter which remains to be seen.

7 comments:

Anonymous said...

Agassi explains the position quite nicely, thanks for drawing attention. So, given the nature of 195, "person" prima facie means resident and it is up to the Revenue to show why this is "non-resident". A nice tactic of justifying the argument under 'plain meaning'...

tanmay said...

hi! Mihir, fine post, just an observation - in cases of TDS in respect of capital gains tax, it may be simpler to recover from the payer than the payee (assuming both are non-residents) since the payer would be coming into possession of some capital asset in india. therefore, at least in respect of TDS pertaining to capital gains tax, "any person" should include even non-residents.

Mihir Naniwadekar said...

Dear Tanmay,

Thanks for the observation. I agree, if it is clear that there is a transfer of a capital asset in India then it appears simpler to recover from the payer. But, that would not be the case when the asset is "controlling interest" in an Indian business or some other intangible. Such as in the Vodafone case itself... Also, the same wont hold true outside of payments for acquiring capital assets. S. 195 refers not just to capital gains but to "any" payments. In such a context, it is arguable that "person" must mean "resident"; as only in the case of a resident will recovery in case of payment of "any" sums be easier. I welcome your thoughts on this.

Regards,

Mihir

Niraj said...

Re the Tanmay-Mihir exchange:

I think that Mihir's interpretation must prevail, as the meaning of a provision has to prevail in all fact circumstances - the meaning cannot change depending on whether the question is of capital gains or not. Further, when two interpretations are possible, the one in favour of the assessee must be taken.

Tanmay said...

Hi Niraj, my comment was actually directed more on what the law should be, than the interpretation, actually. Apologies if the same were not clear. As far as the interpretation is concerned, I think the language of s. 195 is plain and unambiguous and admits only one interpretation – that the obligation is imposed on all persons, residents or non-residents. Once the plain reading admits of only one interpretation, effect must be given to it, irrespective of what may be perceived to be the rationale behind the provision.

Mihir, I largely agree with the logic given by you, with a minor exception in respect of cases where what is sought to be taxed is gains arising from transfer of controlling interest over an asset in India. In such cases, if the law of the land dictates that such transactions are subject to capital gains tax in India, then it should be permissible to recover the same from the payer, as it may be easier to recover from the payer than the payee, since the payer will end up in possession of controlling interest over an asset in India. If the law dictates that such transactions are not subject to capital gains tax in India then of course there is no question of recovering it from any person.

Niraj said...

Dear Tanmay,

Sorry for the misunderstanding - I thought you were arguing w.r.t. the interpretation of the existing provision.

As I understand, insofar as the existing provision is concerned, you are arguing that it should extend to non-residents because of the use of "all persons". In this, you rely on plain meaning.

Undoubtedly, when plain meaning is clear it must be given effect to. One important exception is when requirements of territorial nexus are not met. This holds true for Union Laws as well as State laws; and the territorial nexus theory has been confirmed in the context of the Income Tax Act. (see Electronic Corporation, 3 JJ, SC; Ishikawajima-Harima, 2JJ, SC).

We must then analyse whether there would be a sufficient nexus to tax non-residents. The Department's argument hinges on the fact that when something is chargeable u/s 9, that chargeability would in itself also result in sufficient nexus for the purposes of TDS. Eli Lilly supports the Department's proposition insofar as TDS u/s 192 is concerned. However, as pointed out by Mihir in the main post, the Supreme Court has expressly confined its decision to Section 192; and has thus left the issue with respect to S. 195 open. The House of Lords suggests that chargeability is not sufficient nexus for TDS. The rationale behind the provisions is relevant, because the nexus must be "rational". As the logic behind chargeability is distinct from the logic behind recovery, it is at least arguable that what is "rational" nexus in the case of chargeability may not be rational nexus for the purpose of TDS provisions such as 195.

On these points, there is a strong case for the plain meaning being read down; and the provision being interpreted in light of rationale.

On the policy level of what the law ought to be, I agree with your suggestion. On whether the plain meaning should prevail, given the above, I think it should not.

Anonymous said...

I think that the view in the post is capable of grave harm to the public exchequer.