Payments to non-residents may not attract tax

The Supreme Court has stayed recovery proceedings ordered by Karnataka High Court in the case of CIT v Samsung Electronics Co Ltd, following the filing of a special leave petition before it. In a recent judgment that shook the software industry, the high court held that every person making a payment for the importation of shrink-wrapped software is obliged to deduct tax at source.

Though the case concerned the characterization of payments to foreign suppliers for the purchase of shrink-wrapped software, the high court did not focus on the specific questions surrounding software taxation. Instead, the court addressed a broader issue: withholding tax obligations arising out of payments made to non-residents by payers in India.

The high court held that every resident making such a payment to a non-resident was obliged to withhold tax under section 195(1) of the Income Tax Act (ITA), 1961. It further observed that section 195(1) of the ITA is not a charging provision, and the assessing officer cannot embark on an exercise to determine the actual nature of the income or the tax liability of the non-resident assessee.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.