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TDS on payments to non-residents

The decision of the Supreme Court in Transmission Corporation of AP Ltd. v CIT (1999) 239 ITR 587 (SC) is often misunderstood as requiring tax deduction in every case. The case deals with a composite payment, part of which was admittedly taxable and the remaining part not taxable. The assessee in this case went up to the Supreme Court claiming that no tax need be deducted where only part of the payment is taxable. The argument was that Sec. 195 contemplates tax deduction only for payments fully having a character of income.

It was this claim which was turned down by the Supreme Court pointing out that if there be any difficulty in ascertaining the taxable part there is already a provision in Sec. 195(2), which enables the assessee to get the taxable part determined by the assessing officer. There are a number of payments where tax is not deductible because the income is not chargeable to tax because of the statutory provisions or Board Circulars or precedents and not in the least, because of relief under double tax avoidance agreements even where there may be liability under the domestic law. Board Circulars have clarified that the benefit of double tax avoidance agreement can be recognised for purposes of tax deduction at source.

In fact, the requirement of the assessing officer’s No Objection Certification (NOC) for remittance of money abroad was dispensed with leaving the matter to a certificate from a chartered accountant in Board Circular No. 759 dated November 18, 1997, and Circular No. 767 dated May 22, 1998, providing for an indemnity from taxpayer himself so that Revenue is further protected. The expectation that the assessee should also get a nil deduction certificate over and above the undertaking by the assessee and certification by the chartered accountant would make nonsense of procedure required by the circulars.

The present confusion on the part of the assessing officers evident from some decisions of the Tribunal could have been avoided by the Central Board of Direct Taxes, if the correct position of law consequent on the procedure prescribed for remittance had been clarified. The advice of the Tribunal that tax may well be deducted as a matter of abundant caution overlooks that an enormous amount of working capital gets locked up in refundable deposits, unnecessarily deducted, with the government, apart from placing unnecessary burden on taxpayers for compliance and revenue in processing the applications for non-deduction and refunds.

The issue raised by the reader in respect of payment to non-resident is equally applicable for payment to residents. The Department’s anxiety to ensure tax deduction, where statutorily required, is understandable. This can be more reasonably ensured by having a system of advance ruling in all cases of doubts requiring disposal of all applications for nil deduction within a month of application for certificate of nil deduction or deduction at a lower rate, to be exercised by senior officers in a responsible manner.

As otherwise, the law is that the deductor takes the risk of non-deduction, where tax is required to be deducted. There cannot be another risk of non-application for certificates under Sec. 195(2) and (3) under the present procedure prescribed by the Board.

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