The Supreme Court on Thursday rejected the income-tax departments contention that companies based in India were liable to deduct tax when they make any payment overseas, offering relief to domestic firms and multinational companies based here that would have had to cough up huge amounts as tax on payments made to overseas suppliers.

The apex court rejected the sweeping interpretation of law on withholding tax, or tax deducted from overseas payments. The judgement clears the air on the contentious issue and removes uncertainties faced by companies that have overseas dealing.

Taxation experts and companies welcomed the ruling. The ruling settles the issue of withholding tax on payments made to non-residents, said Kaushik Mukherjee, partner at consulting firm PwC.

For GE, Samsung Electronics, Hewlett-Packard, Sonata Software and other firms, which had approached the Supreme Court against a Karnataka High Court decision, the issue is far from over. They will have to approach the high court to decide whether they will have to pay tax on payments made for shrink-wrapped software.

Had the high court order been upheld, Sonata would have had to pay more than `200 crore to the income-tax department immediately, said B Ramaswamy, president and managing director, Sonata Software.

Sonata had made a financial disclosure for a contingent liability of Rs 252 crore. The companys auditors would now take a call on how to treat it under the accounting standards, said N Venkatraman, head of strategic finance at Sonata.

The Karnataka High Court ruling had allowed the tax authorities to take a larger interpretation of a provision that any import from a non-resident is an income to the seller, hence the buyer needs to deduct tax.

If the buyer does not want to withhold tax, he has to get an approval from a revenue officer, instead of an auditor at present.

In this particular issue the goods concerned were software and buyers of software, the concerned companies, assuming that tax was not to be withheld in India on the payments made to the supplies of software, made the payment without deducting the tax.

However, the tax authorities treated the payments as royalty which is taxable here since those software packages had copyrights. The income tax department also declared that those who have not withheld taxes were assessee in default and hence liable to pay interest, penalty.

Samsung India was among the first batch of companies which had appealed against the I-T departments decision. The company even got relief from the Income-Tax Appellate Tribunal. But, the Karnataka HC reversed the ITAT judgement and accepted the contention of tax authorities opening a pandoras box with regard to taxation of overseas payments.

The judgement has large ramifications not only on the applicability of withholding tax on payments towards packaged software but on cross-border payment towards goods or services, said Mukesh Butani, partner, BMR Legal.

The Thursdays judgement given by a bench comprising chief justice of India, justice S H Kapadia, and justice K S Radhakrisnan, has made it clear that withholding tax has to be deducted only if the non-residents income was chargeable to tax in India.

Senior advocates including Fali S Nariman, Harish Salve, Atul Chitale and S Ganesh represented the companies while additional solicitor general V Tankha appeared for the income-tax department. Interestingly, the new Direct Taxes Code bill, that seeks to replace the present income tax act, has a provision in line with todays apex courts decision.