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When a non-resident is liable to tax in India: ITAT
April, 30th 2010

In a significant development, a recent decision of the Special Bench of Income Tax Appellate Tribunal (ITAT) provides a major relief to those making remittances to non-residents without deducting tax under a bona fide belief. It has analysed in detail the recent controversy regarding the correct procedure for complying with withholding tax in respect of foreign remittances.

In the past, when making any remittance to a non-resident, a person was required to obtain a no objection certificate from the tax officer. Later on, the Government relaxed the procedure by prescribing an alternative mechanism through a circular, by which a remitter could obtain a certificate from a chartered accountant instead of approaching the tax officer and make the remittance by presenting the certificate to the remitting bank.

Making the above comments, M G Ramachandran, Associate Director, Tax and Regulatory Services, PricewaterhouseCoopers, said, Currently, Form 15 CB is used to confirm compliance with the withholding tax provisions and it requires details such as the nature of remittance, the tax rate prescribed under the relevant tax treaty and whether tax is deducted at Nil or a lower rate and the reasons for that, etc. It must be certified by a chartered accountant.

Then the controversy arises whether it is mandatory for a remitter to approach the tax officer for a no objection certificate. In the case of Commissioner of Income Tax vs. Samsung Electronics Co. Ltd, a question arose whether, in a proceeding under section 201 of the Income-tax Act, 1961, for recovery of tax and interest for non-deduction of tax, the question of the taxability of a non-resident recipient can be examined.

In that case, the payer had remitted the sum to a non-resident without obtaining a certificate from the tax officer. The Karnataka High Court held that the question of the taxability of a non-resident was irrelevant and since the payer had not obtained a certificate from the tax officer, it reversed the favourable decision of the tribunal.

As a result, an uncertainty arose whether the alternative mechanism prescribed for remittance can be followed or not. Even before the High Courts decision, a Special Bench of ITAT was constituted in the case of ITO Vs. Prasad Productions Ltd. to decide on the issue.

The ITAT examined the issues involved, including the decision of the High Court and the alternative mechanism prescribed through circulars. It noted that the alternative mechanism was not brought to the notice of the court and also that the above decision was contrary to its own earlier judgments and the decisions of other courts.

After considering all of the above, ITAT held where the payer has a bona fide belief that the payment is not subject to tax, he is not required to approach the tax officer to obtain a no objection certificate.

However, care must be taken to ascertain the entire facts relating to non-residents whether they already have a tax presence in India or any other scenario which could lead to a situation where the non-resident is liable to tax in India.

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