The Income Tax Act casts an obligation on a person who makes a payment to any foreign enterprise (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.
It may, however, be noted that where the payer does not credit the account of the payee but credits some other account by some other name it shall be deemed to be credit of such income to the account of the payee. Provisions requiring deduction of tax at source are quite stringent.
There are severe penalties for no deduction or lower deduction of tax at source.
Although the responsibility for deduction of tax at source is for payment to the non-resident, the payer is not absolved from his liability to deduct tax at source even where the non-resident nominates an Indian agent to whom the amount is to be paid in India.
The provisions apply even where the money is paid into a court under a decree obtained by the non-resident. (See 48 ITR 653). Even where the amount payable to a non-resident is adjusted against a sum receivable from him, such adjustment amounts to payment, and tax is deductible on the same. (See 46 ITR 466).
Section 195 contemplates deduction of tax at source only on such income as is chargeable to tax in India. Therefore, where the payment does not wholly represent the taxable income, a question arises as to whether tax should be deducted on the gross amount of payment or only on such portion of payment which represents taxable income.
Several high courts have held that tax should be deducted on the gross amount because it is the gross amount which represents
