A plain reading of Section 195 of the Income-tax Act shows that any person responsible for paying to a foreign company (i) any interest or (ii) any other sum chargeable under the provisions of the Act (except salary), is required to deduct income-tax at the time of credit of such sum to the account of the payee or at the time of actual payment thereof, whichever is earlier. Non-compliance of the above provision leads to disallowance of expenditure in the hands of the payer [see Section 40 (a)(i)].
The issue for consideration is whether it is mandatory to make application to Income Tax Department under Section 195 even if the amount to be remitted is not liable to tax. In a recent case of IMT Labs (AAR 676 of 2005), the Authority for Advance Rulings held that scheme of tax deduction at source applies not only to the amount paid, which wholly bears income character, but also to gross sums, the whole of which may not be income or profits of the recipient. In this regard, the authority relied on the decision of Supreme Court in case of Transmission Corporation of AP Ltd vs CIT (239 ITR 587).
Earlier, in case of Al Nisr Publishing (239 ITR 879), the Authority for Advance Rulings had expressed a entirely contrary opinion. On the question whether the advertising revenue remitted out of India by the agent(s) of the applicant is subject to deduction of tax at source under Section 195 or any other provision of the Income-tax Act, 1961, the Authority held that the remitter of money was not required to deduct tax at source.
It was observed that the commission received in India is not taxable in the hands of the applicant in view of Article 7 read with Article 5 of the DTAA. There is, therefore, no obligation to deduct tax at source from the remittances made to the non-resident applicant.
Furthermore, in several cases, the different benches of Income-tax Appellate Tribunal have held that if the payment made to non-resident is not chargeable to tax, the provisions of Section 195 are not attracted. In Lufthansa Cargo India (P) Ltd 91 ITD 133, the tribunal, relying on the apex courts decision in Transmission Corporation (supra), held as under: The language of Section 195 (1) is unambiguous on the subject.
It is only such sums which are chargeable under the provisions of this Act (not being income chargeable under the head Salaries) that come within the purview of Section 195. If the payment is not chargeable to tax, the provisions of Section 195 are not attracted.
In this context, it will also be relevant to note that earlier no remittance out of India was allowed unless a no objection certificate was obtained from the Income-tax Department. This procedure has been amended vide Circular No. 759 dated November 18, 1997.
Under the revised procedure, remittance can be made on the basis of a CA Certificate. It is, therefore, felt that the Supreme Court case discussed above will not be applicable after amendment of the procedure.
It is, however, curious that the decision of the apex court in Transmission Corporation (supra) is being referred to both in favour of the proposition and also for against the proposition.
Therefore, it is necessary that the contradiction in judicial interpretation of Section 195 should be quickly resolved because the same is creating great amount of confusion to foreign enterprises doing business in India.
H P Aggarwal