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] 7 taxmann.com and Transmission
corporation of AP Ltd v. CIT [1999] 105 Taxmann 742 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. v. CIT [2010] 7
taxmann.com 18/193 Taxman 234/327 ITR 156 (SC) andTransmission
Corporation of AP Ltd. and another v. CIT [1999] 105
Taxman 742/239 ITR 587 (SC)and the decision of the Madras High Court in CIT v. Chennai
Metropolitan Water tax Cases Appeals Nos.500-501 of 2005, [2011]
14 taxmann.com 73/202 Taxman 454/[2012] 348 ITR 530 (Mad.) 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.
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