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CBDT clarifies on scope of disallowance
February, 20th 2015

The Central Board of Direct Taxes (CBDT) has clarified on the scope of disallowance on payments made to non-residents on which tax ought to have been withheld.

It has now issued a clarificatory circular, which will help bring certainty in the law so as to avoid potential litigation, say tax experts.

The CBDT circular basically seeks to link two independent sections of the income tax law—one relating to TDS on payments to non-residents (Section 195) and the other related to disallowance of expenditure (Section 40(i)(a)).

So far, the assessing officer tended to look at these two provisions independently, leading to situations where an officer took revenue based approach and disallowed entire amount paid to non-residents, said tax experts.

The latest CBDT circular clarifies the definition of ‘other sum chargeable’ to tax under Section 40(a)(i).

This is done in order to bring certainty in the law in order to avoid any potential litigation, Partho Dasgupta, Partner-Direct Tax, BDO India LLP told Business Line.

This section (40(i)(a)) has been aligned with another Section 195 which deals with withholding of tax for any payment to non-resident, he said.

Doubts had been expressed as to whether the term ‘other sum chargeable’ refers the whole sum being remitted or only the portion representing the sum chargeable to income-tax under relevant provisions of the Act.

Aseem Chawla, Partner, MPC Legal, a law firm, said the latest CBDT circular reaffirms the legal position that all payments to non residents need not be sum chargeable to tax under the income tax law.

“This should assist in determining the payment obligations to non-residents under section 195”, Chawla said.

Now that the CBDT has issued such a circular, Dasgupta felt it would be advisable to file an application with the tax authorities for determining whether the sum is chargeable to tax or not in India.

This should be based on an earlier instruction by the CBDT whereby only such amounts which is chargeable to tax in India is subject to withholding instead of the entire sum payable to non-residents.

Sunil Shah, Partner, Deloitte Haskins & Sells LLP, said the CBDT has rationalized the provisions for disallowance of payments to non-residents where tax has not been withheld.

“In cases where the payment is chargeable to tax in the hands of the non-resident on a net income basis (due to deduction for expenses), it is only the net amount that will be the subject matter of disallowance. The entire payment will not be disallowed”, Shah said.

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