(1999) 239 ITR 587 (SC)
TDS on specified payments including non-resident remittances
Withholding attaches to the sum chargeable, and where a payment is composite the payer must apply to the Assessing Officer for a determination of the appropriate proportion rather than deciding unilaterally.
Where a composite payment to a non-resident includes elements that are not chargeable to tax, must the payer withhold on the gross sum, or only on the taxable portion?
The assessee made payments to non-resident contractors under composite contracts which covered both the supply of equipment from outside India and services rendered within India. It took the view that a substantial part of the consideration related to offshore supply and was not chargeable in India, and deducted tax only on a portion. It did not apply to the Assessing Officer for a determination of the proportion on which tax should be withheld. The Revenue held the assessee in default in respect of the balance.
The matter came before the Supreme Court, which examined the interaction between the general withholding obligation and the machinery permitting a payer to obtain a determination of the proportion chargeable.
For the assessee
The obligation extends only to sums chargeable to tax. Where a payment is plainly composite and part of it represents consideration for something not taxable in India, requiring deduction on the gross amount would collect tax on a receipt outside the charge.
For the Revenue
The statute provides a specific mechanism for precisely this situation: a payer who considers that only a proportion is chargeable may apply for a determination. A payer who bypasses that mechanism and makes its own apportionment does so at its own risk and cannot complain of being held in default.
The Court confirmed that the withholding obligation is confined to sums chargeable to tax, but held that where the payment is composite and the chargeable proportion is not self-evident, the payer is not at liberty to determine that proportion for itself and withhold accordingly. The statute supplies a mechanism for the purpose, permitting the payer to apply to the Assessing Officer for a determination of the appropriate proportion, and that mechanism exists because the payer is not the appropriate authority to adjudicate the extent of a non-resident's Indian tax liability. The Court held that a payer who makes its own apportionment without obtaining a determination assumes the risk that the apportionment will be found wrong, and may be treated as in default to the extent of the shortfall. It emphasised that the decision does not require withholding on sums that are not chargeable at all; the obligation remains tied to chargeability, and the determination procedure is the route by which a disputed apportionment is resolved.
Withholding is consolidated in Section 393 of the IT Act 2025. Read this case with GE India Technology, which clarified that where the payer's view is that no part of the sum is chargeable, no deduction is required and an application is optional rather than mandatory. Transmission Corporation governs the different situation of a composite payment with a disputed taxable proportion, where obtaining a determination is the prudent course.