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CA certification vs AO authorisation
October, 13th 2007
With the volume of trade rising exponentially, the Government has thought it fit to delegate to practising CAs the activity of passing orders specifying the percentage of withholding tax to be deducted before making payment overseas.

India is now an important player in global trade. But the big increases in international transactions also throw up problems on the taxation front. This article looks at the withholding tax implications of cross-border payment for services.

In the course of business, an organisation may be required to make a variety of overseas payments for services such as royalty, knowhow, technical services, commission for procurement of orders, reimbursement of expenditures, and so on.

Section 195 of the Income-Tax Act governs the withholding tax provisions concerning all payments to non-residents. Again, India has Double Tax Avoidance Agreements (DTAAs) with more than 70 countries. As per the Indian tax law, the withholding tax to be applied on payments to non-residents shall be as per the domestic law or the DTAA, whichever is more beneficial to the recipient.

Under Section 195(2), the payer can approach his assessing officer (AO) and request for an authorisation for a nil or a lower rate if he is of the view that the whole or part of the payment to be made would not be income in the hands of the non-resident recipient.

Delegation of work

Depending on the merits of the case, the AO would pass appropriate orders specifying the percentage of withholding tax to be deducted before making the payment overseas. With volume of trade increasing exponentially, thanks to liberalisation of the economy, the Government thought it fit to delegate this activity to practising chartered accountants (CAs), and thus the Central Board of Direct Taxes (CBDT) issued Circular 759 in November 1997.

As per this procedure, the overseas payment can be made with a CA certificate regarding the withholding tax along with an undertaking from the remitter. Copies of these documents are required to be sent by the bank to the AO of the remitter so that the Government will be in a position to know about the nature of the transaction and, if required, recover from the remitter the shortfall in the amount of tax deducted.

Subsequently, there have been a couple of Circulars (No. 767 dated May 22, 1998 and No. 10 of October 9, 2002) on this subject, improving upon the formats prescribed in Circular 759. These circulars clearly demonstrate the CBDTs efforts to streamline the procedures to be followed for payment to non-residents.

Indeed, the language of each of these circulars brings out the intention of CBDT to consider the CA certification as an alternative to the authorisation by the AO under Section 195(2). In fact, Circular 767 is explicit and says that if an order under Section 195(2) is obtained, then the procedure laid down in Circular 759, that is, getting a CA certificate, would not be applicable.

In a recent case (of Alstom) decided by the Income Tax Appellate Tribunal (ITAT) it was held that getting an authorisation from AO under Section 195(2) is a must, and that Circular 759 was in the context of sending the remittance only and that it in no way diluted the mandate contained in Section 195(2).

In this case, the remitter sought an authorisation from the AO but did not get the same for more than six months because of some organisational restructuring within the tax department. Unable to wait endlessly, the remitter made the payment with CA certificate.

It was rather unfortunate that the ITAT did not even go into the merits of non-deduction by the remitter and allowed the government appeal only because the remitter did not go for authorisation under Section 195(2).

A combined reading of the ITAT decision and Circular 767 (which mentions that authorisation under Section 195(2) is an alternative to CA certificate), clearly makes the various circulars of the CBDT on this subject redundant. Surely that cannot be the intention of the Government when multiple circulars have been issued on this subject, each circular being an improvement over the earlier one.

It may also be pertinent to mention that the Supreme Court in the AP Transmission Corporation (239 ITR 587) case held that the authorisation under Section 195(2) is a must and in the absence of the same, income-tax shall be deductible on the gross payment by the remitter. But this decision was rendered for the assessment year 1967-68 when none of these CBDT circulars was in existence.

Limited option

In the absence of CA certificate, the only option left to the remitter earlier was go to the AO for authorisation under Section 195(2) and when that was not done, the court took the view that it is not for the remitter to take a unilateral decision regarding deduction of tax.

This decision cannot be applied in the current scenario when so many circulars have been issued by the CBDT on this subject.

It is well settled law that a decision of the court should be understood in the context in which it is rendered and a few sentences or words should not be picked up from a judgment and quoted out of context (Sun Engg Works SC 198 ITR 297).

In the light of the confusion that is prevailing, it will be quite helpful if the CBDT can come up with a clarification on an urgent basis clarifying that the CA certificate is very much an alternative to the authorisation under Section 195(2).

Of course the final responsibility of withholding the correct rate of tax and the consequence of incorrect deduction will have to be faced by the remitter.

Indeed, it will be quite harsh to dismiss the remitters case without going into the merits and merely because he has not obtained the authorisation under Section 195(2).

L.V. Srinivasan
(The author is a Chennai-based chartered accountant.)

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