Chapter XVII-B of the Income-tax Act provides for deduction of tax at source on payments made by any assessee. These provisions are also applicable in case of payment made to non-residents. Section 195 casts an obligation on the person responsible for payment to non-resident to deduct tax at source at the time of payment or at the time of credit of the sum to the account of the non-resident. A dispute often arises when the payer of the amount to the non-resident feels that the amount to be remitted by him is not recipient’s income char-geable under the Indian Income-tax Act. Should the payer in such a case deduct tax at source? The Honourable Supreme Court in the case of Transmission Corporation of AP Ltd. v CIT 239 ITR 587 has clearly held that “the purpose of sub-section 1 of section 195 is to see that the sum which is chargeable under section 4 of the Act for levy and collection of inc-ome tax, the payer should deduct income tax thereon at the rate in force, if the amount is to be paid to a NR.” The Apex Court has further held that wherever a person feels that the income is not chargeable to tax or is cha-rgeable to tax at lower rate, then an application must be made under section 195(2), 195(3) or 197, as the case may be. “If no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation of tax deduc-tion at source.” There is however, no dearth of cases where the Income-Tax department takes a view which is generally against the non-resident taxpayer. Therefore, in doubtful situations, the non-residents are often advised to follow a conservative line and pay the tax by way of withholding tax even if the tax payer feels that their income is really not taxable. The difficulties of the non-residents tax payer get further multiplied because of the provisions contained in section 40(a)(i) of the Income-tax Act. Section 40(a)(i) provides that the entire expenses will be disallowed in the hands of the payer if tax has not been deduc-ted at source. Therefore, the resident assessee, in order to safe guard his own interest, may prefer to deduct tax on every payment made to the non-residents. In the above context, a recent judgment of Delhi High Court delivered on 15.03.2010 in ITA number 439/2008 in the case of Van Oord ACZ India (P) Ltd. needs to be seriously considered. The High Court analysed the true meaning and spirit of the Transmission Corporat-ion’s (Supra) case and held that the Hon’ble Apex Court in that case, was not concerned with the situation where no tax at the hands of recipient is payable at all.
The Hon’ble Court held
“It is clear from the above that the Supreme Court dealt with a situation where the sum paid to the non-resident was chargeable and opined that in such a situation tax at source is to be deducted on entire amount paid and not on the “pure income profits”, as it was not for the assessee to determine as to how much of the sum paid by the asses-see to the recipient would be taxable at the hands of the recipient. The Court was not confronted with the sit-uation where the amount paid was not chargeable to tax at the hands of non-residents at all.” It is thus clear that where the amount payable to non-resident is not chargeable to tax in India, there is neither any obligation to approach the assessing aut-hority under section 195 of the Income-tax Act to determ-ine the amount of tax to be deducted at source, nor there is any requirement to withhold the tax from out of the proposed remittance to non-resident.
