CBDT clarifies on tax withholding obligation in respect of payments made to non-resident

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Published on March 12, 2014

Author: kpmgindia

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The CBDT has recently issued Instruction on the issue of whether tax is to be deducted under the withholding tax provisions of the Income-tax Act, 1961 (the Act) on the whole sum being remitted to a non-resident or only the portion representing the sum chargeable to tax particularly in absence of an application being made under the provisions of the Act to determine the sum chargeable.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA  CBDT clarifies on tax withholding obligation in respect of payments made to non- resident 11 March 2014 Background Under the Income-tax Act, 1961 (the Act) 1 , the person responsible for paying any sum chargeable under the Act to a non-resident shall deduct tax thereon at the rates in force. It is further provided that where the person making the payment of any such sum chargeable under the Act considers that the whole of such sum would not be income chargeable of the recipient, he may make an application to the Assessing Officer (AO) to determine the appropriate proportion of such sum so chargeable to tax. Further, such a person may become ‘an assessee in default’ if he does not deduct such tax and consequently may become liable to interest and penalty. _________________ 1 Section 195 of the Act. Judicial developments The Supreme Court in the case of Transmission Corpn. of A.P. Ltd. 2 , held that scheme of tax deduction at source applies to gross sums, whole of which may not be income or profits of recipient. Further, the obligation of a taxpayer who makes payments to non-residents is limited only to appropriate proportion of income chargeable under Act. Subsequently, the Supreme Court in the case of GE India Technology Cen. (P.) Ltd. 3 held that Section 195 casts an obligation on payer to deduct tax at source from payments made to non- residents which payments are chargeable to tax. Therefore, where sum paid or credited by payer is not chargeable to tax, no obligation to deduct any tax would arise. _________________ 2 Transmission Corpn. of A.P. Ltd. v. CIT [1999] 105 TAXMAN 742 (SC) 3 GE India Technology Cen. (P.) Ltd. v. CIT [2010] 193 TAXMAN 234 (SC)

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The Madras High Court in the case of Chennai Metropolitan Water Supply & Sewerage Board 4 held that the taxpayer cannot deduct tax at lower rate without getting an authorisation from the Assessing Officer (AO) under section 195(2). Central Board of Direct Taxes (CBDT) Instruction In view of above decisions references were made to the CBDT for clarification on whether tax is required to be deducted on the whole sum remitted or only the portion representing the sum chargeable to tax, particularly if no application has been made to determine the appropriate sum so chargeable to tax. The CBDT has by way of Instruction No. 02/2014 5 , directed the AOs that in a case where the taxpayer fails to deduct tax under Section 195 of the Act, the AO shall determine the appropriate sum chargeable to tax as mentioned in Section 195(1) of the Act to ascertain the tax liability on which the deductor shall be deemed to an ‘assessee in default’ under Section 201 of the Act. Further, such 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. Our comments The instruction issued by the CBDT provides clarity to the tax deductors while making payments to non-residents. This instruction clarifies that withholding tax liability of the payer is with reference to the sum chargeable to tax under the provisions of the Act. Furthermore, the consequences of default proceedings for non-withholding under the 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 chargeable to tax under the Act. The above instruction is in line with the Supreme Court decision in the case of GE India Technology Cen. (P.) Ltd. ________________ 4 CIT v. Chennai Metropolitan Water Supply & Sewerage Board [2012] 246 CTR 402 (Mad) 5 F. No. 500/33/2013-FTD-1 dated 26 February 2014 Further in respect of remittances where only a portion may be chargeable to tax in India, the payer may continue to approach the Tax Authority where determination of chargeability or portion of the chargeable sum is not fairly certain.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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