Deducting tax in case of non-residents

FOREIGN ENTERPRISES

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.

The issue for consideration is whether the payer is obliged to approach the tax authorities under Section 195 even if he is of the view that the non-resident is not liable to pay any tax in India at all.

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. In this connection, an observation of the Delhi Tribunal in the case of Lufthansa Cargo India (P) Ltd vs Deputy Commissioner of Income-tax is relevant.

"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)' which come within the purview of Section 195. If the payment is not chargeable to tax, the provisions of Section 195 are not attracted".

Similar views have also been expressed by Authority for Advance Ruling in case of Al NISR Publishing 239 ITR 879.

On the other hand, a contrary view has been taken in a recent case of Mumbai Tribunal reported in 99 ITD 91. Reference may also be made to another Delhi Tribunal decision reported in 95 ITD 157 wherein the hon'ble tribunal has held that reference to Section 195 is necessary even if the income of the non-resident is not taxable in India.

It is the prerogative of the assessing officer to decide whether income is chargeable to tax or not. The payer cannot decide the issue himself. It is obligatory for the payer to make an application to the assessing officer for determination of nil or lower tax liability of the non-resident.

As held by the apex court in the case of Transmission Corporation of AP Ltd vs CIT (1999) 239 ITR 587, if no application under Section 195 is filed, income-tax on the sum chargeable under the Income-tax Act, 1961, payable to a non-resident is required to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment.

There is yet another angle to the controversy. The Reserve Bank of India had earlier provided in its office manual 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 authorised accountants (also see circular no. 10/2002 dated October 9, 2002).

It, therefore, appears that a view that unless an application under Section 195 is made, the expenses will be disallowed u/s 40 (a) (i) is no longer sustainable. The decision of the Hon'ble Supreme Court in case of Transmission Corporation of AP Ltd vs CIT (1999) 239 ITR 587 should not apply to cases falling after issuance of the aforesaid circulars by the CBDT. This legal position has recently been confirmed by the ITAT Delhi in case of Modi Revlon (P) Ltd. in ITA No. 2107/D/01.

agar@bol.net.in