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Practical aspects of withholding tax
August, 18th 2008

When any payment is to be made to a non-resident, the payer is obliged to deduct tax at source. Section 195 of the Income-tax Act casts an obligation on the person responsible for payment to deduct tax at source at the time of payment or at the time of credit of the income to the account of the non-resident. Failure to deduct tax disentitles the payer to claim the amount paid as deduction from his income.

A dispute often arises when the payer of the amount to the non-resident feels that the amount to be remitted by him is not recipients income chargeable under the Indian Income-tax Act. Should the payer in such a case deduct tax at source?

It has been held in a number of cases that the obligation to invoke section 195 arises only if the income of the non-resident is chargeable to tax in India. This view has also been upheld by the Authority for Advance Ruling (AAR) in case of Al NISR Publishing (239 ITR 879).

The Honble Supreme Court in case of Transmission Corporation. Of A.P. Ltd. v. CIT (239 ITR 587) has clearly held that the purpose of sub-section (1) of section 195 is to see that the sum which is chargeable under section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a NR.

The said provision is for tentative deduction of income tax thereon subject to regular assessment andby the deduction of income tax, the rights of the parties are not, in any manner, adversely affected.

The Apex Court has further held that wherever a person feels that the income is not chargeable to tax or is chargeable to tax at lower rate, then an application must be made under section 195(2), 195(3) or 197, as the case may be.

If no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.

The above principle has been recently reaffirmed by the Mumbai Tribunal in case of Mangalore Refinery & Petrochemicals Ltd. v. Dy. DIT (113 ITD 85).

There is however, no derth of cases where the income tax department takes a view, which is generally against the non-resident taxpayer. Therefore, in doubtful situations, the non-residents are advised to follow an alternate route rather than approaching Assessing Officers. The Reserve Bank of India had earlier provided that no remittance shall be allowed unless a no-objection certificate has been obtained from the Income-tax Department.

However, it has since been decided vide Circular No. 759, dated November 18, 1997, that henceforth, remittances may be allowed by the Reserve Bank of India on the basis of a certificate issued by authorized accountants (also see circular no. 10/2002 dated October 9, 2002).

The non-residents may also consider filing reference before the Authority for Advance Ruling to expeditiously decide such matters. Section 245N specifically empowers the AAR to determine the tax liability of a non-resident arising out of a transaction undertaken with an Indian resident. As recently held by AAR in case of Airport Authority of India (299 ITR 102), the concept of tax deduction at source under the IT Act has its own scheme and nuances.


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