In a decision that could have a bearing on all cross-border transactions, including those related to the Indian Premier League teams that are currently being probed by tax authorities, the Delhi High Court has ruled that any liability to withhold tax would arise only if payments to overseas entities is liable to be taxed in India.
The decision assumes significance in the background of a Karnataka High Court ruling last year that tax should be withheld from all payments made to overseas entities.
The Delhi High courts decision was given in the case of Maharishi Housing Development Finance Corporation. The ruling was on whether it should have deducted tax while making payment to an overseas entity. Maharishi did not deduct the tax, but the tax officer said that it should have. The tax department disallowed the expenditure under Section 40 a (ia) of Income-Tax Act. The Income-Tax Appellate Tribunal (ITAT) also decided in favour of the tax officer.
The Delhi High Court ruling differed from a Karnataka High Court judgement in the case of Samsung Electronics last October, in which the High Court held that tax has to be deducted in India from all payments made to overseas entities.
Its rationale was that since the taxpayer is not an expert in deciding whether a particular income is liable to be taxed in India, it would be wiser to allow the tax officer to do that.
In the case of Maharishi, the Delhi HC remanded the matter to ITAT to decide whether its payment to the overseas entity is liable to tax in India. The Delhi High Courts decision is the latest in a long line of decisions on the same issue. Apart from the Delhi High Court, the Karnataka High Court and a full bench of Chennai tax tribunal had also given decisions on similar issues.
In a note summarising the order, KPMG said: The Delhi High Court, after following its own decision in the case of Van Oord ACZ India, reaffirmed that the question of withholding tax arises only if payment made to non-resident is chargeable to tax in India.
Vispi T Patel of law firm Vispi T Patel & Associates said: If the payment to the non-resident is not chargeable to tax in India, the question of withholding tax does not arise. The full bench of Chennai ITAT too held a similar view in the case of Prasad Productions.