Deductor to be deemed as assesee in deafult only in respect of actual tax liability of Non-Resident

[AMIT BAJAJ ADVOCATE]

CBDT in its instruction No. 2/2014 [F No. 500/33/2013-FTD-l], Dated 26-02-2014 issued in view of the judicial develpments in the cases of GE India Technology P Ltd. vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA and Transmission corporation of AP Ltd v. CIT 1999 (8) TMI 2 - SUPREME Court decided by Supreme Court, has stated that a person who fails to deduct tax on payments made to non-residents, will be held as assessee in default only to the extent of tax actualy payable by such NRI and not in respect of TDS on the whole of amount.

It is pertinent to note here that while making any payment to Non resident, a tax u/s 195 is required to be deducted by the person making payment to such Non Resident, irrespective of the tax liability of such Non Resident. Such provisions sometime may prove bit harsh especially in cases where payment is of capital receipt in nature, say a sale of immovable property by Non resident.

To mitigate this hardship section 195(2) of Income Tax Act, provides an option to apply to the jurisdictional assessing officer for determination of actual tax liability on such payment made to Non resident, whereby tax is deducted only to the extent of tax determined by the assessing officer.

However, in cases where no application is made, tax is required to be deducted on the whole of amount. Now, in the instruction cited above, the CBDT has directed all its officers to treat the person making payment to a non-resident, who has not deducted any tax, as assessee in default u/s 201 only in respect of actual tax liability of non resident to whom the payment has been made.

The Instruction is a positive development. This Instruction clarifies that withholding tax liability of the payer is with reference to the sum subject to tax under the provisions of the Income Tax Act. Furthermore, the consequences of default proceedings for non-withholding under the Income Tax Act would be limited only to such tax liability.

Accordingly, a payer cannot be treated as an Assessee in Default for non-withholding from payments which are not subject to tax under the Act. This clarification is in line with the SC decision in the case of GE case(supra). Furthermore, for remittances where only a portion may be subject to tax in India (e.g., a portion of a composite contract or capital gains income), payers may determine their withholding tax liability with reference to the taxable portion of the remittance, if the payer is fairly certain about such determination.

However, considering the consequences of a tax withholding default, the payer may prefer to be cautious and may continue to approach the Tax Authority where the determination of taxability or portion of the taxable sum is not fairly certain.

The Instruction issued by CBDT in this regard is as follows:

SECTION 119, READ WITH SECTION 195 OF THE INCOME-TAX ACT, 1961 - INCOME-TAX AUTHORITIES - INSTRUCTIONS TO SUBORDINATE AUTHORITIES - CLARIFICATIONS AS TO WHETHER TAX IS TO BE DEDUCTED UNDER SECTION 195(1) ON WHOLE SUM BEING REMITTED TO A NON-RESIDENT OR ONLY PORTION REPRESENTING SUM CHARGEABLE TO TAX, PARTICULARLY IF NO APPLICATION HAS BEEN MADE UNDER SECTION 195(2) TO DETERMINE SUM

INSTRUCTION NO.2/2014[F.NO.500/33/2013-FTD-I], DATED 26-2-2014

Section 195 of the Income-tax Act (hereafter referred to as ' the Act') provides that any person, responsible for paying to a non-resident not being a company or to a foreign company, any sum chargeable under the provisions of this Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates in force. Section 201 of the Act inter alia provides that any person who is required to deduct tax in accordance with the provisions of the Act, does not do so, shall be deemed to be an assessee in default and shall also be liable to pay simple interest at the specified rate.

2. References were received from field officers on the issue of deduction of tax at source under section 195 of the Income-lax Act, 1961 in the tight of the decisions of the Supreme Court of India in the case of GE India Technology P Ltd. vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA and Transmission corporation of AP Ltd v. CIT 1999 (8) TMI 2 - SUPREME Court and the decision of the Madras High Court in CIT v. Chennai Metropolitan Water tax Cases Appeals Nos.500-501 of 2005, 2011 (9) TMI 224 - CHENNAI, HIGH COURT  with a request for clarification as to whether the tax is to be deducted under sub-section (1) of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargeable to tax, particularly if no application has been made undo sub-section (2) of section 195 of the Act to determine the sum.

3. The matter has been examined in the Board and accordingly, in exercise of powers vested under Section 119 of the Act, the Board hereby directs that in a case where the assessee fails to deduct tax under section 195 of the Act, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax as mentioned in sub-section (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act, and the appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion.

4. The undersigned is directed to state that the above position may be brought to the notice of all officers concerned.