http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: THE SUPERINTENDING ENGINEER UPPER SILERU & ANOTHER

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, A.P.

DATE OF JUDGMENT:       17/08/1999

BENCH: D.P.Wadhwa, M.B.Shah

JUDGMENT:

Shah, J.

     These  appeals  are filed by the Assessee against  the judgment and order dated 2nd July, 1984 passed by the Andhra Pradesh  High Court in deciding three income tax  references partly   in   favour  of  the   revenue.   (Re:    CIT   Vs. Superintending  Engineer, Upper Sileru [(1985) 152 ITR 753]. The  Court  held that provisions of Section 195 relating  to deduction of tax at source come into operation in respect of sums  paid  to  a  non-resident, whether  or  not  such  sum represents  only income or profits if such sums are paid  to non-   residents  during  the   course  of  regular  trading operation.   That  finding is challenged in  these  appeals. Before  deciding the question involved, we would refer to  a few  facts  of  the matter:  - The appellant    the  Andhra Pradesh  State Electricity Board (hereinafter referred to as the  Board) made certain payments to non-residents against the purchase of machinery and equipment and also against the work  executed by the non-residents in India of erecting and commissioning  the  machinery  and   equipment.   The  Board entered  into two separate agreements with M/s.   Charmilles Engineering  Works  Ltd., Geneva, Switzerland, one  for  the purchase  of  Nos.  95,000 BHP Francis Turbines and  another for  purchase  of 2 Nos.  Butterfly Valves.  There were  two other  contracts  of the assembly, erection and testing  and commissioning  of  the aforesaid equipments.   The  payments were  made  to the non- resident company for  the  financial year  1966-67  to 1972-73.  The Board also entered  into  an agreement   with   Oerlikon     Engineering   Co.,   Zurich, Switzerland,  for  the purchase of 2 Nos.  60 MW  generators and  Indoor Switchgear for the Sileru Hydro Electric Scheme. Another contract was executed for the assembly, erection and testing  and  commissioning  of the above  equipments.   The payments  were  made in the financial year 1966-67,  1967-68 and  1968-69.  Third contract was entered by the Board  with M/s.   Sacheron  Works  Ltd., Geneva,  Switzerland  for  the purchase  and erection of 7 nos.  power transformers for the Sileru  Hydro  Electric  Scheme.  On the basis of  the  said contract  in the financial year 1966-67, the amount was paid to  the  non-resident company.  For the aforesaid  payments, the  question arose whether the Electricity Board was  under an  obligation  to deduct tax at source from these  payments

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

under  Section 195 of the Income Tax Act, 1961  (hereinafter referred  to as the Act).  These payments were made by the Electricity Board without deduction of tax at source.  Owing to  the failure of the Electricity Board to deduct such tax, it was deemed to be an assessee in default in respect of the tax  deductible at source.  Hence, Income Tax Officer passed orders  determining  the  tax which, according to  him,  was deductible  at source under Section 195 and the  Electricity Board  was required to pay such amounts.  Against the  order of  the  Income  Tax  Officer, appeals  were  filed  by  the assessee  which  were  allowed by  the  Appellate  Assistant Commissioner  with the observation that the words any other sum  chargeable under the provisions of this Act  occurring in  Section  195 of the Act do not contemplate inclusion  of trade  receipts in their ambit and that Section 195  applies only to cases where the sums paid are pure income profits. The Appellate Assistant Commissioner, therefore, allowed the appeals  and  set aside the orders passed by the Income  Tax Officer.  Against the said orders, Revenue preferred appeals before  the  Income Tax Appellate Tribunal.  The Income  Tax Appellate  Tribunal also dismissed the appeals filed by  the Income  Tax  Officer  on the ground that the  provisions  of Section  195  of the Act are not applicable to  payments  of sums to a non-resident, which are not pure income profits. Thereupon,  on  the  reference  applications  filed  by  the Commissioner  of Income Tax under Section 256(1) of the  Act the  Tribunal referred the following question of law for the decision  of  the  High Court for the payments made  to  the non-resident company:  - R.C.  No.  205 of 1978:

     Whether  on the facts and in the circumstances of the case,  the  Superintending  Engineer,  Civil  Circle,  Upper Sileru,  is  liable  to deduct income-tax u/s.  195  of  the Income-tax  Act,  1961  on  the payments made  to  the  non- resident  company for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70?

     Similar  questions with regard to payments made to two other  non-residents  as stated above were also referred  in R.C.  Nos.  203 and 204 of 1978.

     At  the time of hearing of the matter, the High  Court stated   that   two   fundamental    questions   arise   for consideration  and they were:  (a) whether the provisions of Section 195 of the Act are applicable to cases where the sum paid  to the non-resident does not wholly represent  income; and  (b) if Section 195 is applicable in such cases, whether the  Income-Tax  Officer could enforce deduction of  tax  at source  on  the gross amount of trading receipts or only  in respect of that portion of the trading receipts which may be chargeable as income under the Act?  The Court observed that the  question  referred  to  deals with  only  first  aspect mentioned above but the second aspect is an integral part of the first aspect and, therefore, it was necessary to reframe the  question in order to bring real controversy between the parties.   Thereafter,  the Court re-framed and decided  the following  question:   - Whether, on the facts and  in  the circumstances  of  the  case, the  Superintending  Engineer, Civil  Circle, Upper Sileru, is liable to deduct  income-tax under  Section 195 of the Income-Tax Act, 1961 in respect of payments  made  to  non-residents   viz.,  M/s.   Charmilles Engineering  Works Ltd., M/s.  Sacheron Works Ltd., and M/s. Oerlikon  Engineering  Company and, if so, whether  the  tax deductable  is  liable to be determined on the gross sum  of money paid to the non-residents?

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

     Dealing  with  the contentions raised by the  assessee and  interpreting  Section 195, the High Court held that  it should  be  borne in mind that whatever tax is  deducted  at source  under  Section 195 from out of the gross sum is  not irretrievably  lost  to  the  recipient;    it  is  only   a provisional  payment  which  will  be made  to  the  Central Government  to the credit of the recipient;  the  provisions of the Act enable the recipient, whether such recipient is a resident  or non-resident, to file a return of income in the regular  course and prove to the satisfiction of the ITO the income  chargeable  under the Act.  The Court  answered  the reframed  quesion as under:  - 1.  The  respondent-assessee, who  made  the  payments to the  three  non-residents  above referred,  was  under an obligation to deduct tax at  source under  Section 195 of the Act in respect of the sums paid to them  under the contracts entered into.  2.  The  obligation of  the respondent-assessee to deduct tax under Section  195 is  limited only to the appropriate proportion of the Income chargeable  under the Act forming part of the gross sums  of money  paid  to the three non-residents above referred.   3. While   the   Income  Tax  Officer   was  correct   in   the determination  of  tax under Section 195 in respect  of  the payments  made  to M/s.  Sacheron Works Ltd., in  R.C.   No. 204, he was in error in determining the tax deductible under Section  195  in respect of the gross sums of money paid  to M/s.   Charmilles Engineering Works Ltd.  in R.C.  No.   203 and M/s.  Oerlikon Engineering Company in R.C.  No.  205.

     Against  the  said judgment and order, the  appellant- Superintending  Engineer (assessee) has filed these appeals. At the time of hearing of these appeals, learned counsel for the appellant submitted that Section 195 would be applicable where  payment to non-resident is wholly income chargeable to tax as it provides that any person responsible for paying to  a non-resident any sum chargeable under the  provisions of  this Act, shall, at the time of payment, deduct  income tax  thereon  at the rates in force.  It is  his  contention that  under  the  Income  Tax Act, tax  can  be  levied  and collected  on  the income but when the payments made to  the non-  resident  were  not  entirely income,  but  a  trading receipt,  there is no question of deduction of income tax at the  source  as  the section does not provide  for  it.   He submitted  that  the  expression any other  sum  chargeable under the provisions of the Act occurring in Section 195 of the  Act  conveys  only one meaning that tax at  the  source could  be  deducted  when  the  sum  paid  is  total  income chargeable  under Section 5 of the Act.  If the payment is anything  more than or other than income, it does not answer the  definition  of the total income under Section 5 of  the Act.   The  substance of the contention is what  is  taxable under  the  Income Tax Act is pure income or profit and  not the  gross  sum  which would include cost of  materials  and other expenses and hence Section 195 would not be applicable in  such  cases.  For appreciating the contention raised  by the  learned Counsel, we would first refer to relevant parts of  Sections  190, 195(1), 195(2), 195(3) and 197,  as  they stood  at  the relevant time, which are as under:   -  190. (1)  Notwithstanding that the regular assessment in  respect of  any income is to be made in a later assessment year, the tax  on such income shall be payable by deduction at  source or  by  advance payment, as the case may be,  in  accordance with the provisions of this Chaper.

     (2) Nothing in this section shall prejudice the charge

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

of  tax on such income under the provisions of sub-  section (1) of section 4.

     195.   (1) Any person responsible for paying to a non- resident, not being a company, or to a foreign company which is  neither  an Indian company nor a company which has  made the  prescribed arrangements for the declaration and payment of  dividends within India, any interest not being Interest on  securities  or  any  other sum,  not  being  dividends, chargeable  under the provisions of this Act, shall, at  the time  of  payment,  unless he is himself liable to  pay  any income-tax  thereon as an agent, deduct income- tax  thereon at the rates in force:

     (2)  Where the person responsible for paying any  such sum chargeable under this Act (other than interest including interest   on  securities,  dividends   and  salary)  to   a non-resident  considers that the whole of such sum would not be  income  chargeable in the case of the recipient, he  may make  an application to the Income Tax Officer to determine, in  the prescribed manner the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted  under  sub-section (1) only on that proportion  of the sum which is so chargeable.

     (3)  Subject to rules made under sub-section (5),  any person  entitled  to  receive any interest or other  sum  on which  income-tax  has to be deducted under sub-section  (1) may make an application in the prescribed form to the Income Tax  Officer for the grant of a certificate authorising  him to  receive such interest or other sum without deduction  of tax  under that sub-section, and where any such  certificate is  granted,  every  person   responsible  for  paying  such interest or other sum to the person to whom such certificate is  granted  shall, so long as the certificate is in  force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).

     197.   Where, in the case of any income of any  person other than a company-

     (a)  income-tax is required to be deducted at the time of  credit or, as the case may be, at the time of payment at the  rates  in force under the provisions of  sections  192, 193, 194A, 194D and 195,

     (b) being a non-resident, income-tax is required to be deducted  at the time of payment at the rates in force under the provisions of Section 194,

     the  Assessing  Officer  is satisfied that  the  total income   of  the  recipient   justifies  the  deduction   of income-tax at any lower rates or no deduction of income-tax, as  the  case  may be, the Income Tax Officer shall,  on  an application made by the assessee in this behalf, give to him such certificate as may be appropriate.

     (2)  Where  any such certificate is given, the  person responsible   for  paying  the   income  shall,  until  such certificate  is cancelled by the Income-tax Officer,  deduct income-tax  at  the rates specified in such  certificate  or deduct no tax, as the case may be.

     (2A)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

     Before  considering  Section 195, it is to  be  stated that  the  said  section  is   in  Chapter  XVII  containing provisions for collection and recovery of tax.  Said chapter is  divided  into  various parts as (A) to (F).   Part  A General    deals  with  deduction  at  source  and  advance payment.    Section   190,  inter    alia,   provides   that notwithstanding  that  the regular assessment in respect  of any income is to be made in a later assessment year, the tax on  such income shall be payable by deduction or  collection at  source  or  by advance payment, as the case may  be,  in accordance  with  the  provisions of  the  Chapter.   Hence, before  a regular assessment is made, tax on income shall be payable  by deduction or collection at source or by  advance payment  in  accordance with the other provisions.   Section 191  provides  for  direct  payment  of  income-tax  by  the assessee  where provision is not made under the chapters for deducting  income  tax at the time of payment.   Thereafter, Part  (B)  of  the said Chapter contains group  of  sections which  provides  for deduction of tax at source.   Section 192  provides  for  deduction of income tax  on  the  income chargeable   under  the  head   Salaries  by  any   person responsible  for paying such salaries.  Section 193 provides for  deduction  of income tax by the person responsible  for paying  any  income  by  way of  interest  on  securities. Similarly,  Section 194 provides for deduction of income-tax by  the company paying dividends.  Section 194(A), Section 194(B), Section 194(BB) provides for deduction of income-tax on the income of interest other than interest on securities, winning  from lotteries or crossword puzzle and winning from horse  race respectively.  Even with regard to the  payments to  contractors  and sub-contractors, specific provision  is made for deducting the tax specified on the basis of payment thereof  in  cash or by issue of cheque or draft or  by  any other  mode  at the rate of 1% or 2% as the case may  be  of such sum as income tax on income comprised therein.  Section 194(c)  reveals the intention of the Legislature to  enforce tax  deduction at source even in respect of gross sums,  the whole  of which do not represent income chargeable under the Act.  Similar provisions are made in Section 194(D), Section 194(E),  Section  194(EE), Section 194(F),  Section  194(G), Section  194(H), Section 194(I), Section 194(J) and  Section 194(K)  which cast an obligation to deduct tax on the person responsible  for  paying  such sum which may  not  represent income.   In all these cases, what is deducted is the amount specified  in  the  said sections without  their  being  any actual  assessment.   Thereafter,  Section  195  deals  with deduction  of tax in cases where payment is to be made to  a non-resident  which  inter alia provides:  - (a) Any  person responsible  for paying to a non-resident, any interest,  or any  sum, chargeable under the provisions of this  Act(other than  interest on securities and salary), shall, at the time of payment, deduct income-tax thereon at the rates in force. Sub-Section(1)  of  Section 195 excludes from its  operation the sum which is to be paid as interest on securities or the sum  which  is chargeable under the head Salaries  as  the deduction  on such sum would be governed by other  sections, namely,  Section  192  and  193.    (b)  Where  the   person responsible for paying any sum chargeable under the Act to a non-resident  considers that the whole or such sum would not be  chargeable in the case of the recipient, he may make  an application  to  the  Assessing Officer  to  determine  the appropriate  proportion  of such sums so chargeable;   upon such  determination, tax shall be deducted under sub-Section (1)  only on that portion of the sum which is so chargeable. (c)  Not  only this, but sub-Section (3) provides  that  any

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

person  entitled  to  receive any interest or other  sum  on which  income-tax is to be deducted under sub-Sectin (1) may make  an application in the prescribed form to the Assessing Officer  for  the  grant of certificate authorising  him  to receive  such interest or other sum without deduction of tax under  the sub- section.  (d) Further, section 197  provides that  recipient  can  file an application to  the  Assessing Officer  for  a  certificate that the total  income  of  the recipient  justify the deduction of income- tax at any lower rates  or  no  deduction  of income tax  and  the  Assessing Officer,  if satisfied, can grant such certificate as may be appropriate.

     The scheme of sub-sections (1), (2) and (3) of Section 195 and Section 197 leaves no doubt that the expression any other sum chargeable under the provisions of this Act would mean sum on which income-tax is leviable.  In other words, the  said sum is chargeable to tax and could be assessed  to tax under the Act.  Consideration would be  whether payment of  sum  to  non- resident is chargeable to  tax  under  the provisions  of  the Act or not?  That sum may be  income  or income  hidden or otherwise embedded therein.  If so, tax is required  to  be deducted on the said sum what would be  the income  is to be computed on the basis of various provisions of  the  Act  including provisions for  computation  of  the business  income, if the payment is trade receipt.  However, what  is to be deducted is income tax payable thereon at the rates  in  force.   Under  the Act,  total  income  for  the previous  year would become chargeable to tax under  Section 4.   Sub-Section (2) of Section 4 inter alia, provides  that in  respect  of  income chargeable under sub-  Section  (1), income  tax  shall  be  deducted at source where  it  is  so deductible  under any provision of the Act.  If the sum that is  to be paid to the non-resident is chargeable to tax, tax is required to be deducted.  The sum which is to be paid may be  income  out of different heads of income provided  under Section 14 of the Act, that is to say, income from salaries, income from house property, profits and gains of business or profession,  capital  gains and income from  other  sources. The  scheme  of tax deduction at source applies not only  to the  amount paid which wholly bears income character  such as  salaries,  dividends, interest of securities  etc.,  but also  to gross sums, the whole of which may not be income or profits  of  the recipient, such as payments to  contractors and   sub-   contractors  and   the  payment  of   insurance commission.  It has been contended that the sum which may be required  to  be  paid  to the non-resident may  only  be  a trading  receipt,  and,  may contain a fraction  of  sum  as taxable  income.   It is true that in some cases, a  trading receipt may contain a fraction of sum as taxable income, but in  other  cases such as interest, commission,  transfer  of rights  of  patents,  goodwill  or drawings  for  plant  and machinery  and such other transactions, it may contain large sum  as  taxable  income under the provisions  of  the  Act. Whatever  may be the position, if the income is from profits and gains of business, it would be computed under the Act as provided  at the time of regular assessment.  The purpose of sub-section  (1) of Section 195 is to see that the sum which is  chargeable  under  Section  4 of the Act  for  levy  and collection of income tax, the payee should deduct income tax thereon  at the rates in force, if the amount is to be  paid to  a  non-resident.   The said provision is  for  tentative deduction   of  income  tax   thereon  subject  to   regular assessment and by the deduction of income-tax, rights of the parties   are  not,  in   any  manner,  adversely  affected.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

Further,  the  rights  of  payee   or  recipient  are  fully safeguarded  under  Sections 195(2), 195(3) and  197.   Only thing  which  is required to be done by them is to  file  an application  for determination by the Assessing Officer that such  sum  would  not be chargeable to tax in  the  case  of recipient, or for determination of appropriate proportion of such  sum  so  chargeable,  or   for  grant  of  certificate authorising   recipient  to  receive   the  amount   without deduction  of  tax, or deduction of income-tax at any  lower rates  or  no  deduction.   On such  determination,  tax  at appropriate  rate  could be deducted at the source.   If  no such  application  is filed income tax on such sum is to  be deducted  and  it is the statutory obligation of the  person responsible  for  paying  such sum to deduct  tax  thereon before  making payment.  He has to discharge the  obligation of tax deduction at source.

     The  High Court of Calcutta considered and interpreted similar  provision  Section  18(3B) of the Income  Tax  Act, 1922,  in  the case of Ray and Co.  (India) Private  Limited Vs.   Mukherjee,  ITO [1959] 36 ITR 365, and  rightly  held: if  chargeable  under  the provisions of this  Act  means actually  liable  to be assessed to tax, in other words,  if the  sum  contemplated  is taxable income, a  difficulty  is undoubtedly  created as to complying with the provisions  of the section.

     The  High  Court  further  held  that  section  18(3B) contemplated  not  merely  amounts, the whole of  which  was taxable   without   deduction,  but   amounts  of  a   mixed composition,  a  part  of which only might turn  out  to  be taxable  income, as well;  and the disbursements, which were of  the  nature  of gross revenue receipts,  were  yet  sums chargeable  under  the provisions of the Income Tax Act  and came within the ambit of Section 18(3B) of the Act.

     Hence,  in  our  view  there is no  substance  in  the contention of the learned Counsel for the Appellant that the expression any other sum chargeable under the provisions of this  Act would not include cases where any sum payable  to the  non-resident is a trading receipt which may or may  not include  pure income.  The language of Section 195(1)  for deduction   of  income  tax  by   the  payee  is  clear  and unambiguous  and  casts an obligation to deduct  appropriate tax  at  the  rates  in force.  We make it  clear  that  the learned  counsel  for  the  parties have  not  advanced  any submissions  with regard to other findings given by the High Court.   In this view of the matter, the answer given by the High  Court  that (i) the assessee who made the payments  to the  three non-residents was under obligation to deduct  tax at  source  under Section 195 of the Act in respect  of  the sums  paid  to them under the contracts entered  into;   and (ii)  the  obligation of the respondent- assessee to  deduct tax  under  Section  195  is  limited  only  to  appropriate proportion  of income chargeable under the Act, are correct. In  the  result  these  appeals   fail  and  are  dismissed, accordingly with costs.