Section 195 of the Income-Tax Act casts an obligation on a person, who makes a payment to a non-resident, to deduct tax at source at the time of making the payment or at the time of credit of such income to the account of the payee, whichever is earlier.
The Supreme Court in the Transmission Corporation of AP Ltd vs Commissioner of Income-Tax case, 239 ITR 587, clarified that the scheme of tax deduction at source applied not only to the amounts, which could be regarded income, but also to gross sums, the whole of which might not be income or profits of the recipient.
The purpose of Section 195 is to see that the payer should deduct income tax at source if the amount is to be paid to a non-resident. When the parties consider that no deduction of tax should be made or tax should be deducted on lower income or at lower rates, an application is to be made under Section 195 or Section 197 to the assessing officer, who shall then determine the quantum of income and the rate of tax to be applied on that income, and issue a certificate accordingly.
The apex court further held that the provision for deducting tax at source was a tentative provision subject to regular assessment. Thus the actual tax liability of the recipient of income will be determined on completion of final assessment of the payee.
The certificate issued by the assessing officer under Section 195 or Section 197 is only to determine the amount of tax to be deducted by the payer. Such certificates do not determine the final tax liability of the recipient of income.
In the Ansaldo Engergia SPA vs Income Tax Officer case, 261 ITR 476, an interesting situation arose in which the assessing officer having issued a certificate for authorising the payer to deduct tax at a lower rate of 5 per cent subsequently cancelled the said certificate.
The payer challenged the assessing officer
