The income tax department has provided relief in certain cases where tax has not been withheld when payments are made to non-residents, a matter that has been cause of much litigation.

In such cases of default, any interest, royalty, fees for technical services or other sum chargeable is not allowed as an expense if the entity making the payment does not deduct tax in respect of such payments. Disallowing such expense will increase income and thereby tax. The dispute related largely to 'other sum chargeable' and centred on the issue whether the entire sum remitted out was to be disallowed as deduction or a portion that was chargeable as income. The department has clarified that not the entire payment but only the net income will be disallowed. "Board has clarified that in cases where tax is not deducted at source under section 195 of the Act, the Assessing Officer shall determine the appropriate portion of the sum chargeable to tax," a circular issued by the department said.

Tax experts welcomed the move. "This will ensure that the exposure of the tax withholder in his own income-tax assessment does not exceed the liability of the recipient of the income. This is in conformity with the principle that the primary liability for tax is of the recipient of the income and that deduction at source is only a mode of recovery of the tax," said Sunil Shah, Partner, Deloitte Haskins & Sells LLP