SECTION 195 l PAYMENTS TO NON-RESIDENTS
[CORRESPONDING TO SECTION 18(3B)/(3C) OF THE 1922 ACT]

1164. Insertion of section 10(6A) by the Finance Act, 1983 prescribing exemption of tax paid on behalf of foreign company in respect of royalty, etc.  - Applicability of clarification contained in Circular No. 370, dated 3-9-1983 in spite of amendment

1. I am directed to refer to your Letter No. 1186, dated 12-6-1984 on the subject mentioned above and to say that under section 10(6A), introduced by the Finance Act, 1983 and made effective from April 1, 1984, exemption has been provided from income-tax of tax paid on behalf of a foreign company in respect of royalty of fees for technical services by an Indian concern or the Government. This applies only to such royalty or fees for technical services which are received by a foreign company from Government or an Indian concern in pursuance of an agreement made after March 31, 1976 which is approved by the Central Government.

2. The Board has issued Circular No. 370 [F.No. 391/3/78-FTD], dated 3-10-1983 on the subject mentioned above. In spite of the amendment referred to in para 1 brought in by the Finance Act, 1983, the contents of the circular would apply to payments of salaries, dividends, interest and other business income to the non-resident concern/individuals by the Government or the Indian concerns where the latter have taken upon themselves the tax liability of the former. Even the tax on the payments of royalty and fees for technical services by the Government or the Indian concerns to the foreign companies/concerns where the payment is made in pursuance of an agreement made before March 31, 1976 or an agreement which has not been approved by the Central Government.

Letter : F.No. 391/3/78-FTD, dated 9-7-1984 [Source: Bombay Chartered Accountants Journal, September 1984 issue, pp. 740-41].

ANNEX - LETTER DATED 12-6-1984 REFERRED TO IN CLARIFICATION

Your kind attention is invited to the Circular No. 370 [F.No. 491/3/78-FTD], dated 3-9-1983 issued by the Board re: deduction of tax at source under section 195 of the Income-tax Act, 1961 from payments to non-residents where tax is to be borne by the payer. It is stated in the circular that “where the amount  payable to a non-resident is stipulated to be paid to him net of taxes (i.e., where the tax payable by the non-resident is borne by the person making the payment), the income chargeable to tax in the hands of the recipient is determined by grossing up the net of tax payment to such an amount as would, after deducting the tax on such gross amount, leave the stipulated net amount of income”. Consequently, it may be noted that the tax has to be paid on the resultant gross amount.

It is also pertinent to note that clause (6A) to section 10 of the Income-tax Act, 1961 lately introduced by the Finance Act, 1983 provides that where a foreign company derives income by way of royalty or fees for technical services received from an Indian concern in pursuance of an agreement made by a foreign company with the Indian concern after March 31, 1976 and approved by the Central Government, the tax paid by the Indian company in respect of payment of royalty or fees for technical services is not to be included in the total income of the foreign company. However, the above said circular does not appear to be clear in respect of cases that may come under the purview of section 10(6A).

It is, therefore, submitted that a suitable clarification be issued to the effect that the circular, referred to above, is not applicable to cases covered under the provisions of section 10(6A).

1165. Clarification contained in Circular No. 155, dated 21-12-1974 reiterated to ensure proper computation of tax to be deducted at source in the case of non-resident whose tax liability is to be borne by payer

CLARIFICATION 1

1. It has come to the notice of the Board that in certain cases where payments are made to non-residents and the tax payable by the non-resident is borne by the person making the payment, the provisions of section 195 are not being followed. As a result such persons become liable to pay interest and penalty under section 201(1A) and section 221, respectively and also punishment under section 276B.

2. Board’s Circular No. 155, dated 21-12-1974 [Clarification 2] outlines the method of computation of tax to be deducted at source under section 195 in the case of a non-resident, whose tax liability is to be borne by the payer and its payment to the credit of the Central Government. Paras 2, 3 and 4 of this circular are reproduced below :

2. Where the amount payable to a non-resident is stipulated to be paid to him net of tax (i.e., where the tax payable by the non-resident is borne by the person making the payment), the income chargeable to tax in the hands of the recipient is determined by the grossing up the net of tax payment to such an amount as would, after deducting the tax on such gross amount, leave the stipulated net amount of income. Accordingly, the sum chargeable to tax in the hands of the non-resident recipient would be this grossed up amount and it is with reference to this grossed up amount that tax has to be deducted as required by the provisions of section 195.

3. Persons responsible for paying to a non-resident person, any sums which are stipulated to be paid net of taxes should carefully note that the calculation of tax to be deducted at source as required by section 195, should be made not with reference to the net of tax amount payable to the non-resident but should be made with reference to the gross amount as aforesaid. Deduction of tax at source in this manner should be made every time any such payment is made to the non-resident.

4. The tax so calculated and deducted should be paid to the credit of the Central Government as required by section 200, read with rule 30 of the Income-tax Rules, 1962 and should not be withheld on the ground that the tax will, in any case, be paid by the persons making the payment ultimately when regular assessments  are made in the case of non-resident payee.”

3. The contents of Board’s Circular No. 155, dated 21-12-1974 are being reiterated so as to ensure that the correct amount of tax is deducted at source under section 195 at the time of payment of non-residents and after deduction, such tax is paid to the credit of the Central Government within the prescribed time.

Circular: No. 370 [F.No. 391/3/78-FTD], dated 3-10-1983.

CLARIFICATION 2

1. Section195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being “interest on securities”) or any other sum (not being dividends) chargeable under the provisions of the Income-tax Act, to deduct income-tax at the rates in force unless he is himself liable to pay income-tax thereon as an agent. Payments to a non-resident by way of royalty and payments for technical services rendered in India are common examples of sums chargeable under the provisions of the Income-tax Act to which the aforesaid requirement of tax deduction at source will apply. The term “rates in force” means the rates of income-tax specified in this behalf in the Finance Act of the relevant year.

2. Where the amount payable to a non-resident is stipulated to be paid to him net of taxes (i.e., where the tax payable by the non-resident is borne by the person making the payment), the income chargeable to tax in the hands of the recipient is determined by grossing up the net of tax payment to such an amount as would after deducting the tax on such gross amount, leave the stipulate net amount of income. Accordingly, the sum chargeable to tax in the hands of the non-resident  recipient would be this grossed up amount, and it is with reference to this grossed up amount that tax has to be deducted as required by the provisions of section 195.

3. Persons responsible for paying to a non-resident person, any sums which are stipulated to be paid net of taxes should carefully note that the calculation of tax to be deducted at source as required by section 195, should be made not with reference to the net of tax amount payable to the non-resident but should be made with reference to the gross amount as aforesaid. Deduction of tax at source in this manner should be made every time any such payment is made to the non-resident.

4. The tax so calculated and deducted should be paid to the credit of the Central Government as required by section 200 read with rule 30 and should not be withheld on the ground that the tax will, in any case, be paid by the person making the payment ultimately when regular assessments are made in the case of non-resident payee.

5. Failure to deduct tax or failure to pay the tax as required by the provisions of the Income-tax Act would render a person liable to penalty under section 201 read with section 221. In addition he would also be liable under section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Attention is also invited to section 276B, wherein it is provided that if a person without reasonable cause or excuse fails to deduct or after deducting fails to pay the tax as required under the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which may extend to six months, and shall also be liable to fine which shall be not less than a sum calculated at the rate of fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

Circular: No. 155 [F.No. 484/31/74-FTD], dated 21-12-1974.

1166. Where whole payment would not be income chargeable to tax in the hands of recipient non-resident, person responsible for paying such sum may make application for determination of appropriate portion

1. I am directed to state that section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any interest (not being “interest on security”) or any other sum (not being dividends) chargeable under the provisions of the Income-tax Act to deduct income-tax at the “rates in force”, unless he is himself liable to pay income-tax thereon as an agent. Payments to a non-resident, by way of royalty for the use of, or the right to use, any copyright (e.g., of literary, artistic or scientific work including cinematograph films or films or tapes for radio or television broadcasting), any patent, trade mark, etc., and payments for technical services rendered in India are some of the typical examples of sums chargeable under the provisions of the Income-tax Act to which the aforesaid requirement of tax deduction at source will apply. The term “rates in force” means the rates of income-tax specified in this behalf in the Finance Act of the relevant year.

2. Where the person responsible for paying any such sum to a non-resident considers that the whole amount thereof would not be income chargeable under the Income-tax Act in the case of the recipient non-resident, he may make an application under section 195(2) to the Income-tax Officer for the determination of the appropriate portion of such payment which would be taxable and in respect of which tax is to be deducted under section 195(1).

3. The object of section 195 is to ensure that the tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment. Failure to deduct tax at source from payment to a non-resident may result in loss of revenue as the non-resident may sometimes have no assets in India from which tax could be collected at a later stage. Tax should, therefore, be deducted in all cases where it is required to be deducted under section 195 before the payment is made to the non-resident and the tax so deducted should be paid to the credit of the Central Government as required by section 200 read with rule 30. Failure to do so would render a person liable to penalty under section 201 read with section 221, and would also constitute an offence under section 276B.

Circular: No. 152 [F.No. 484/31/74-FTD-II], dated 27-11-1974.

1167. Whether non-deduction of tax is only in respect of interest credited to Non-resident (External) Account and not to all types of non-resident accounts

1. Attention is invited to the Board’s Circular Letter F.No. 12/29/65-IT(B), dated 1-6-1965 [Annex] instructing that there should be no deduction of tax at source from interest income credited to the account of any non-resident. This instruction was issued on the basis of the provisions of section 10(4A) as introduced from April 1, 1965 which exempted from tax interest falling within this category.

2. With the amendment of section 10(4A) by the Finance Act, 1968, the position has materially changed. The amendment, which is effective from April 1, 1969 has substituted the words “Non-resident (External) Account” for the words “Non-resident Account”. The change means that the exemption from tax, will now be available only in respect of a particular type of non-resident account designated as “Non-resident (External) Account”, which has been defined in accordance with the Foreign Exchange Regulation Act, 19471, and the rules made thereunder.

3. The Ministry of Finance, Department of Economic Affairs issued a Notification, dated 10-2-1970, defining the scope of the term “Non-resident (External) Account” [See Non-resident (External) Accounts Rules, 1970—vide [1970] 77 ITR (St.) 1]. A copy of the Notification was forwarded to the Commissioners of Income-tax with the Board’s Circular F.No. 1(10)/69-TPL, dated 2-4-1970.

4. In view of the amendment of section 10(4A) with effect from April 1, 1969 the instructions regarding the non-deduction of tax at source will apply only to interest credited to Non-resident (External) Accounts and not to all types of non-resident accounts.

5. A general question whether tax is deductible at source under the provisions of section 192, 193, 194, 194A or 195, from any income which is exempt from tax under section 10, is under the Board’s consideration. As soon as a decision is reached on this question necessary instructions will be issued.

Circular: No. 43 [F.No. 12/98/69-ITJ], dated 20-6-1970.

ANNEX - CIRCULAR, DATED 1-6-1965 REFERRED TO IN CLARIFICATION

1. A question has been raised whether interest accruing in a “non-resident accounton the money transferred from abroad through recognised banking channels and invested in any bank in India will be exempt from tax?

2. In this connection, it is clarified that in the case of a non-resident, any income from interest on moneys standing to his credit in a non-resident account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1947 and any rules made thereunder, will not be included in the total income in view of section 6(i) of the Finance Bill, 1965. As such no tax is to be deducted at source from such interest with effect from April 1, 1965.

1168. Persons wishing to make payments to branch office of foreign banks to apply to ITO having jurisdiction over such branches for a certificate authorising payment without deduction of tax at source

Under section 18(3B), any person paying any interest not being interest on securities or any other sum chargeable under the Act, to a non-resident has to deduct income-tax at the prescribed rate, unless he is himself liable to pay the tax thereon as an agent. It has been represented that this provision creates a hardship in the case of foreign banks which have a branch office in India and which are regularly assessed in the status of non-resident on the profits accruing in India. In such cases, it has been argued that the interests of revenue are adequately safeguarded by the existence of a branch responsible for the payment of the tax in India and the deduction of tax at source by so many payers and the subsequent adjustment of such deductions involved unnecessary work. The Board agree that there is considerable force in this representation but they are not in favour of a general permission to make payment to such concern without deduction of tax at source. It has been decided that persons who wish to make payments to such banks should apply to the Income-tax Officer having jurisdiction over the Indian branches of such banks for a certificate authorising payment without deduction of income-tax or super tax. The Income-tax Officer will issue a certificate if the following conditions are satisfied:

1. The payment is made to branch itself on its own account and not on behalf of any other person for whom the branch may be maintaining an account or on whose behalf it may be acting as intermediary or agent.

2. The branch is being regularly assessed to income-tax and is not in default of paying income-tax including advance tax under section 18A.

3. If the branch is newly established and has not been assessed hitherto, it has been paying advance tax on its own estimate under section 18(A)(1).

Circular : No. 20 (II-4), dated 3-8-1961.

1169. Deduction of tax at source in the case of non-resident shareholders and salaried employees - Non-resident exercising option of being assessed on the basis of world income - Procedure therefor

1. The following procedure may be adopted for deduction of tax at source in the case of non-residents (salaried employees, pensioners and shareholders of companies) excluding companies, who exercise option under section 17(1) of the 1922 Act of being assessed on the basis of world income.

2. For the assessment year 1951-52, where the assessee has exercised the option, the non-resident assessee will file an estimate of his total world income for that year supported by :

  (a)  an attested copy of a return for that assessment year filed before the taxing authorities of the country in which he resides; or

  (b)  a declaration of his total world income for the assessment year in which the option is exercised  before a Notary Public, Magistrate or a similar authority in the country of his residence.

3. On receipt of this, the Income-tax Officer will, so far as income-tax is concerned, issue a certificate under the proviso to section 18(3) of the 1922 Act for the deduction of income-tax at the appropriate rate in respect of pensions and salaries.

So far as super tax is concerned, the Income-tax Officer will issue a direction under section 18(3B) in respect of salaries or pensions and under section 18(3B) in respect of dividends.

4. On or before May 31 of the next year, the non-resident should file before the Income-tax Officer concerned a return under the Indian Income-tax Act regarding the total world income of the previous year with a copy of his latest assessment in the country of residence or a declaration of the total world income for the current year as indicated in paragraph 2(b) above, so that whenever necessary, the Income-tax Officer may modify his certificate and/or direction for deduction of tax at source.

5. Instructions in paragraph 4 above, will apply to all the subsequent years in which the non-resident has income from salary, pension or dividends in India.

6. In any case where the non-resident fails to comply with the directions in paragraphs 4 and 5 above, the certificate issued under section 18(3) may be cancelled and/or the directions given under section 18(3B) or 18(3D) may be modified.

7. While issuing a certificate under section 18(3) or a direction under section 18(3B) or 18(3D), the Income-tax Officer should inform the assessee to whom a certificate is issued under section 18(3B) or the person responsible for paying any income falling under section 18(3B) or the principal officer of the company, as the case may be, of the procedure outlined in paragraphs 4 and 5 with particular reference to the instructions in paragraph 6, so that the assessee may not complain later that he was not aware of the arrangements. For this purpose, the Income-tax Officer should attach to the certificate or direction a slip containing the requirements of paragraphs 4 and 5 and the consequences of failure to comply with them.

8. The above procedure may also be adopted in respect of non-residents in receipt of any other income (excluding interest on securities) chargeable under the provisions of the Income-tax Act.

Circular : No. 7(XLIII-4) [C. No. 56(I)(IT/52], dated 31-1-1952.

1170. Announcement by Finance Minister in Lok Sabha on 7-9-1990 regarding deduction of tax at source from payments in respect of systems software

1. In his statement made in the Lok Sabha on September 7, 1990 the Finance Minister had, inter alia, announced :

“At present, customs duty is levied on the value of computer software by treating it as a commodity import. The non-resident licenser or seller is also subjected to income-tax on royalty payment for licensing of the software. To avoid this dual levy for exporters, Government has decided that lump sum payment for systems software supplied by the manufacturer along with the hardware itself would be subjected only to customs duty and not to income-tax. Application software forming part of an approved software export scheme would be subjected only to income-tax on the licenser or seller.”

2. It has been decided that the concession, as above, insofar as it relates to income-tax, will be available in relation to imports made during the current financial year itself and subsequent years. Accordingly, where a taxpayer, engaged in the business of export of software for computer application, imports any systems software, supplied by the manufacturer of the computer hardware, along with the hardware itself, the lump sum payment made to the foreign supplier for acquisition of any right in relation to, or for use of, such systems software will not be liable to tax in India as payment by way of royalty or otherwise. Such lump sum payments will, henceforth, be allowed to be made without deduction of tax at source under section 195(1) of the Income-tax Act, 1961. Necessary amendment of the law in this  regard will be introduced before Parliament shortly.

Circular : No. 588, dated 2-1-1991.

1171. Streamlining the procedure for obtaining authorisation for payment of sums to non-residents after deduction of tax at source, under section 195(1)

1. The Board has had occasion to examine the procedure being followed for authorisation of remittances to non-residents.

2. Under section 195(1) of the Income-tax Act, any person responsible for paying to a non-resident any sum chargeable to tax under the Act excepting interest on securities and income under the head “Salaries”, is required to deduct tax at source at the rates in force. Such deduction should be made at the time of the credit of the income to the account of the payee or at the time of payment thereof, whichever is earlier. The proviso to section 195(1), however, lays down that in case of interest payable by the Government or a public sector bank or a public financial institution within the meaning of section 10(23D) of the Act, deduction of tax at source will be made at the time of payment.

3. The Department of Economic Affairs, Ministry of Finance issued a Press Note dated 17-5-1988 laying down the procedure for remittances to foreign companies by way of royalty and fees for technical services under approved agreements. This procedure is applicable only where income-tax @ 30% from such payments is deducted and paid into “designated” banks. As per this procedure the remitter has to furnish to the “designated” bank details of payments in the prescribed form certified by a chartered accountant along with the income-tax challan of payment. On payment of tax by the remitter, the designated bank would forward a certificate regarding such payment to the Reserve Bank of India. On receipt of the certificate of payment of tax from the concerned bank, the Reserve Bank of India would permit the remittance of the balance without insisting on a ‘No Objection Certificate’ from the income-tax authorities.

4. It is observed that the Reserve Bank of India insists on the production of a ‘No Objection Certificate’ from the income-tax authorities whenever there is a claim that the rate or rates for deduction of tax at source is lower than 30% in case of royalty or fees for technical services, or if the proposed remittance is in respect of other types of income.

5. In order to simplify and to bring uniformity in the form of application to be made by the remitter and the authorisation to be issued, the Board has considered the issue of non-statutory forms for such purposes. A copy of each of these forms is enclosed. These new forms may be used while applying for authorisation and for granting authorisation under section 195. The authority to whom the application for authorisation is made will verify the claims of the payers in the light of the Income-tax Act, the Double Taxation Avoidance Agreements and the specific facts of the transactions, before authorising the remittance.

Circular: No. 695, dated 29-11-1994.

Application seeking authorisation for payments to non-resident
[See section 195(1) of the Income-tax Act, 1961]

Notes:

    1.  This application relates to payments to a non-resident not being a company, or to a foreign company.

    2.  The payments covered by this application may be of interest (not being interest on securities) or any other sum chargeable to income-tax (excluding income chargeable under the head ‘Salaries’).

    3.  An authorisation from the income-tax authority will not be required for the payment of royalty and fees for technical services to foreign companies under approved contracts, where income-tax at 30% has been deducted and paid into designated banks as per instructions issued by the Economic Affairs Department. In all other cases, an authorisation is to be obtained for the proposed payment.

1.

Name and address of payer

2.

PA Number

 

 

 

2A.

TA Number

 

3.

Proposed payment :

 

 

 

 

(a) Nature

(b)

Amount

 

 

(Attach copy of agreement or document)

 

 

 

4.

Name and address of payee

5.

Payee is resident of

 

 

 

 

(name of country)

 

6.

Is the payment covered by Double Taxation Avoidance Agreement

 

 

   Yes

 

    No

 

If ‘yes’, give article/paragraph No.

 

 

 

7.

Rate of tax applicable under section 195(1) of the Income-tax Act, 1961, to  the payment :

 

 

 

8.

I, (name)............................................................................

 

 

 

 

(designation)......................................................................

 

 

 

being the person responsible for making this proposed payment request that I may be authorised to pay the sum mentioned at col. 3(b) to the non-resident mentioned at col. 4 after deduction of tax at the rate mentioned at col. 7 above.

I declare that what is stated in this application is correct and complete.

 

........................................

Place :............

Signature

Date :.............

........................................

 

Designation

Authorisation for payment of sums to non-residents after
deduction of tax at source under section 195(1) of the
Income-tax Act, 1961

Income-tax Office,

......................................

Dated...............19.......

To

....................................

....................................

....................................

Sir,

Please refer to your application dated ..................................................... requesting for authorisation to remit the sum of.............................................................being in the nature of........................................................................................to................................................................
........................................................................................................................................................................

(Name and address of the non-resident recipient)

2. You are hereby authorised to make payment of the aforesaid sum to...................................................................................................................................................................

(Name and address of the recipient)

being in the nature of*..................................., after deducting income-tax at source at the rate of ................... thereon under section 195(1) of the Income-tax Act, 1961.

3. Proof of payment of income-tax to the credit of the Central Government has to be produced before the concerned bank authorities at the time of the remittance of the said sum to the non-resident. A copy of the proof of payment of income-tax must be submitted to the undersigned (within a week of the payment) along with Form No. 27 read with rule 37A of the Income-tax Rules, 1962.

4. This authorisation shall remain in force for the financial year 19............., unless it is cancelled or modified before the expiry of the said financial year. The fact of the cancellation or modification will be intimated to you.

Yours faithfully,

(Assessing Officer)

.................................

(Seal)

    1.  *Please specify nature of payment, e.g., dividends, interest, royalty and fees for technical services.

    2.  The provisions regarding rates of exchange for the purpose of deduction of tax at source on income payable in foreign currency, are contained in rule 26 of the Income-tax Rules, 1962.

1172. Correct rates of tax applicable in case of remittance to a country with which Double Taxation Avoidance Agreement is in force

1. It has been represented to the Board that when making remittances of the nature of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.

2. The expression “rates in force” has been defined in section 2(37A) of the Income-tax Act. Under sub-clause (iii) of section 2(37A), for purposes of deduction of tax under section 195, the expression is to mean the rate or rates of income-tax specified in this behalf in the Finance Act in the relevant year, or the rates of tax specified in a Double Taxation Avoidance Agreement entered into by the Central Government, whichever is applicable by virtue of the provisions of section 90 of the Income-tax Act, 1961.

3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.

Circular: No. 728, dated 30-10-1995.

1173. Taxation of foreign telecasting companies - Guidelines for computation of income-tax, etc.

1. A number of representations have been received from foreign telecasting companies regarding their taxability and the extent of income that could be said to accrue or arise to them from their operations in India. A consequent issue raised is the method of computation of profits from their Indian operations, especially in the cases of those companies which do not have any branch office in India or are not maintaining country-wise accounts of their operations.

2. The matter has been examined in the Board and the assessment records of some of these companies have also been looked into. Since this is a new area of commercial activity, no uniform basis is being adopted by the Assessing Officers at different stations for computing the income in the absence of country-wise accounts of the foreign telecasting companies. It has, therefore, been decided by the Board to prescribe guidelines for the purpose of proper and efficient management work of the assessment of foreign telecasting companies.

3. It is seen that out of the gross amount of bills raised by a foreign telecasting company, the advertising agent retains commission @ 15% or so. Similarly, the Indian agent of the foreign telecasting company retains his service charges @ 15% or so of the gross amount. The balance amount of approximately 70% is remitted abroad to the foreign company. So far as the income of Indian advertising agent and the agent of the non-resident telecasting company are concerned, the same is liable to tax as per the accounts maintained by them. As regards the foreign telecasting companies which are not having any branch office or permanent establishment in India, tax has to be deducted and paid at source in accordance with the provisions of section 195 of the Income-tax Act, 1961 by the persons responsible for paying or remitting the amount to them.

4. In the absence of the country-wise accounts and keeping in view the substantial capital cost, installation charges and running expenses, etc., in the initial years of operations, it would be fair and reasonable if the taxable income is computed at 10% of the gross receipts (excluding the amount retained by the advertising agent and the Indian agent of the non-resident foreign telecasting company as their commission/charges) meant for remittance abroad. The Assessing Officers shall, accordingly, compute the income in the cases of the foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining country-wise accounts by adopting presumptive profit rate of 10% of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, i.e., 55% at present.

5. It has also been decided that while assessing the income in the aforesaid manner, penalty proceedings may not be initiated in the cases in which taxes due along with the interest are paid voluntarily within 30 days of the date of issue of this circular.

6. It is clarified that these guidelines would be applicable to all pending cases irrespective of the assessment year involved until 31st March, 1998 after which the position with regard to the reasonableness of the rate of profits of such companies will be reviewed.

Circular: No. 742, dated 2-5-1996.

 

Judicial Analysis

To the extent the guidelines as given in CBDT Circular No. 742, dated 2-5-1996 purport to extend the applicability of the presumptive rate of profits even to the cases where the foreign telecasting company has no permanent establishment in India, it cannot be treated as laying down the correct position in law- TVM Ltd. v. CIT [1999] 102 Taxman 578/237 ITR 230 (AAR – N. Delhi).

1174. Submission of No Objection Certificate in case of remittance to a non-resident

1. Section 195 of the Income-tax Act, 1961 provides that any person responsible for paying to a non-resident any sum chargeable under the Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by cheque or draft or any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

2. The Reserve Bank of India have provided in their Office Manual that no remittance shall be allowed unless a No Objection Certificate has been obtained from the Income-tax Department. It has since been decided that henceforth remittances may be allowed by the Reserve Bank of India without insisting upon a No Objection Certificate from the Income-tax Department and on the person making the remittance furnishing an undertaking (in duplicate) addressed to the Assessing Officer accompanied by a certificate from an Accountant (other than an employee) as defined in the Explanation below section 288 of the Income-tax Act, 1961 in the Form annexed to this circular. The person making the remittance shall submit the undertaking along with the said certificate of the Accountant to the Reserve Bank of India, who in turn, shall forward a copy thereof to the Assessing Officer.

3. The contents of this Circular may be brought to the notice of all the officers working in your charge.

Undertaking

To

               ..............................................................................

          (Designation of the Assessing Officer)

               ..............................................................................

               ..............................................................................

I/We........................................................................................................................................................... (Name, address & Permanent Account Number)

propose to make a remittance of..................................................................................................

(Amount)

being........................................................................................................................................................... (nature of payment)

to...................................................................................................................................................................

(name and complete address of the person to whom the remittance has been made)

after deducting a sum of Rs........................ being the tax @.............................., which is the appropriate rate of tax deductible at source on the said amount of remittance.

2. A certificate from the accountant as defined in Explanation below section 288 of the Income-tax Act, certifying the nature and amount of income, amount of tax payable and the amount actually paid, is also annexed.

3. In case it is found that the tax actually payable on the amount of remittance made, has either not been paid or has not been paid in full, I/we undertake to pay the said amount of tax along with interest found due in accordance with the provisions of the Income-tax Act.

4. I/We will also be subject to the provisions of penalty and prosecution for the said default as per the Income-tax Act.

5. I/We also undertake to submit the requisite documents, etc., for enabling the Income-tax Department to determine the nature and amount of income and tax, interest, penalty, etc., payable thereon.

(Name and Signature)

Date...............................

Place..............................

(The Undertaking shall be signed by the person authorised to sign the return of income of the person making the payment).

Certificate

I/We have examined the books of accounts of M/s............................................................

.......................................................................................................................................................................

(Name, address and Permanent Account Number of person making the remittance)

for ascertaining the nature of the remittance,

of..................................................................................................................................................................

                                 (amount of remittance)

to...................................................................................................................................................................

(Name and complete address of the person to whom the remittance is being made)

and the rate at which the tax is deductible at source thereon and hereby certify that a sum of Rs........................... has been deducted as tax at the appropriate rate and has been paid to the credit of the Government.

               .................................................

                                                                                                                   Accountant

Place......................

Date.......................

Circular : No. 759, dated 18-11-1997.

Clarification 1

1. Circular No. 759 dated 18-11-1997 was issued by the Board to dispense with the requirement of submission of a No Objection Certificate from income-tax authorities for remittance to a non-resident as required by the Reserve Bank of India (RBI). In paragraph 2 of the said Circular, it was stated that henceforth remittances may be allowed by the RBI without insisting upon a No Objection Certificate from the Income-tax Department provided the person making the remittance furnished an undertaking in duplicate addressed to the Assessing Officer which was accompanied by a certificate from an accountant other than an employee as defined in the Explanation below section 288 of the Income-tax Act, 1961 in the form annexed to the said Circular. The person making the remittance had to submit the undertaking along with the said certificate of the accountant to the RBI, who would, in turn forward a copy thereof to the Assessing Officer.

2. A number of references have been received by the Board stating that RBI had delegated powers to authorised dealers to allow certain types of remittances to non-residents without obtaining approval of RBI. In such cases, RBI cannot forward the undertaking and certificate of the accountant to the Assessing Officer as prescribed in Circular No. 759. The RBI has already issued a Circular - AD (MA series) Circular No. 48, dated 29th November, 1997 (see Annex)  to all authorised dealers in foreign exchange directing them to forward a copy of the certificate together with a copy of the undertaking to the office of the Assessing Officer of the Income-tax Department as indicated in the undertaking. In view of the foregoing, it is clarified that Circular No. 759 would also be applicable to remittances made through authorised dealers in Foreign Exchange.

3. In accordance with Circular No. 759, the undertaking to be submitted by the person making the remittance to a non-resident is required to be signed by the person authorised to sign the return of income of the person making the payment. The person authorised to sign a return of income in the case of a company, in accordance with section 140 of the Income-tax Act, 1961 is the Managing Director and each undertaking for each remittance has, therefore, to be signed by the Managing Director. Representations pointing out administrative difficulties experienced by companies have been received. It has, therefore, been decided that the undertaking to be submitted at the time of making a remittance to a non-resident shall be signed by the person authorised to sign a return or a person so authorised by him in writing.

4. It is also clarified that Circular No. 759 will cover those remittances for which RBI had prescribed the production of a No Objection Certificate from the income-tax authorities under its Exchange Control Manual. Further, if an order under section 195(2) has been obtained by a person responsible for deducting tax, the new procedure of filing an undertaking along with a certificate prescribed in Circular No. 759 would not be applicable.

5. The contents of this Circular may be brought to the notice of all the officers working in your charge.

Circular : No. 767, dated 22-5-1998.

Annex

A.D. (M.A. Series) Circular No. 48, dated 29-11-1997, issued
by the Reserve Bank of India.

1. Presently, authorised dealers have been delegated powers to allow certain types of remittances, subject to, among other things, production of NOC/Tax Clearance Certificate from income-tax authorities. Similarly, Reserve Bank also, while approving remittances for certain purposes, has been insisting on NOC/Tax Clearance Certificate from income-tax authorities. This procedure has been revised as notified by the Central Board of Direct Taxes, in their Circular No. 759 [F. No. 500/152/96-FTD] dated 18th November, 1997. In terms of the new procedure, a person making remittance of foreign exchange would not be required to produce NOC/Tax Clearance Certificate from income-tax authorities instead, the applicants have to submit an undertaking, in duplicate, addressed to the Assessing Officer, which should be signed by the person authorised to sign the income-tax returns of the applicant, together with a certificate (in duplicate) from the Accountant (other than the employee of the applicant) as defined in the Explanation below section 288 of the Income-tax Act, 1961 in forms prescribed in the Government Notification. Authorised dealers should, therefore, before allowing the remittance obtain the aforesaid Undertaking accompanied by a certificate from the Accountant for compliance with the income-tax provisions, where necessary.

2. Authorised dealers should, after making the remittance, immediately forward a copy of the certificate together with a copy of Undertaking to the office of Assessing Officer of the Income-tax Department as indicated in the Undertaking. The other copy each of the Undertaking and Certificate should be kept on record for verification by the Internal Auditors of the authorised dealer/Inspecting Officers of the Reserve Bank.

3. Amendments to the Exchange Control Manual will be advised separately. Meanwhile, authorised dealers may bring the contents of this circular to the notice of their concerned constituents.

4. The directions contained in this circular have been issued under section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.

Clarification 2

1. Circular No. 759 dated 18-11-1997 was issued by the Central Board of Direct Taxes to dispense with the requirement of a No Objection Certificate from income-tax authorities for remittance to a non-resident as required by the Reserve Bank of India. By the aforesaid circular, remittances were allowed to be made by the RBI without insisting upon a No Objection Certificate from the Department provided the person making the remittance furnished an undertaking in duplicate accompanied by a certificate from an accountant. The format of the application and the certificate has been circulated to the authorised dealers by the Reserve Bank of India through their Circular No. AD (MA Series) Circular No. 48 dated 29-11-1997.

2. However, it has recently been observed that often the certificates have been issued prescribing nil deduction of tax at source in certain cases where tax was liable to be deducted or prescribing deduction of tax at a lower rate than was payable on the basis of the provisions of the Act and the applicable DTAC. The certificate does not provide for necessary details or the reasons for adopting a certain rate for deduction of tax. This results in unnecessary calling of information from the assessees at a later stage and thus gives rise to an avoidable perception of grievance on the part of the tax payer. Therefore, in order to streamline the procedure as well as to ensure the correct deduction of tax at source, the proforma of the undertaking to be given by the remitter and the certificate to be issued by a chartered accountant have been re-considered and new formats are being prescribed which are enclosed as Annexures A and B to this circular. The revised proforma for ‘undertaking’ as well as the ‘certificate’ shall to apply in terms of Circular No. 759, dated 18-11-1997 of CBDT. Other requirements of the Circular remain unchanged. It is reiterated that the persons making the remittances shall submit the undertaking and certificate as per Annexures A and B to the Reserve Bank of India/authorised dealer banks, who shall in turn forward the same to the Assessing Officer mentioned in the undertaking.

3. The Reserve Bank of India is being requested to circulate the amended format of the ‘undertaking’ and the ‘certificate’ to their authorised dealers.

4. This circular comes into effect with immediate effect.

Annexure ‘A’

Form & Application for remittance under section 195
of the Income-tax Act

1.

Name and Address of the Applicant and principal place of business

:

2.

Name and Address of the Assessing Officer having jurisdiction over the  remitters

:

3.

Applicant’s PAN Number

:

4.

Name and address of the beneficiary of the remittance and the country towhich remittance is made

:

5.

Amount and nature of remittance

:

6.

Rate of deduction of tax at source

:

7.

Reference to provision of Act/DTAA under which the rate has been determined

:

8.

Certificate

 

   (i)   I/We propose to make the above remittance as per deduction of tax at source indicated above. We have obtained a certificate from M/s. ..... who is an accountant as defined in section 288 of the Income-tax Act, certifying the amount, nature and correctness of deduction of tax at source.

  (ii)   In case the income-tax authority at any time finds that tax actually deductible on the amount of remittance has either not been paid or not paid in full, I/we undertake to pay the said amount of tax along with interest due.

(iii)   I/We shall also be subjected to the provisions of penalty for the said default as per the provisions of Income-tax Act.

(iv)   I/We undertake to submit the requisite documents, etc., for enabling the income-tax authorities to determine the nature and amount of income of the beneficiary of the above remittance as well as documents required for determining our liabilities under the Income-tax Act as a person responsible for deduction of tax at source.

  (v)   The information given above is true to the best of my/our knowledge and belief and no relevant information has been concealed.

..............................................

Name and Signature

[To be signed by a person responsible for signing the return of income (as to provisions of section 139(A) of the Income-tax Act) of the person making the remittance].

Annexure ‘B’

Certificate

I/We have examined the agreement (wherever applicable) between M/s. ............................ ..................................................................... and M/s. ........................................................ requiring the

                     remitters                                            beneficiary

above remittance as well as the relevant documents and books of account required for ascertaining the nature of remittance and for determining the rate of deduction of tax at source as per provisions of section 195. We hereby certify the following :—

1.

Name and address of the beneficiary of the remittance and the name of the foreign country to which remittance is being made.

:

 

 

2.

Amount of remittance is foreign currency indicating the proposed date/month and bank through which remittance is being made.

:

 

 

3.

Details of tax deducted at source, rate at which tax has been deducted and date of deduction.

:

Foreign Currency

Indian Currency

 

Amount to be remitted

 

.....

.....

 

Tax deducted at source

 

.....

......

 

Actual Amount remitted

 

.....

.....

 

Rate at which deducted

 

.....

.....

 

Date of Deduction

 

......

.....

4.

In case the remittance as indicated in (2) above is net of taxes, whether tax payable has been grossed up? If so, computation thereof may be indicated.

:

 

 

5.

If the remittance is for royalties, fee for technical services, interest, dividend, etc., the clause of the relevant DTAA under which the remittance is covered along with reasons and the rate at which tax is required to be deducted in terms of such clause of the applicable DTAA.

:

 

 

6.

In case that tax has been deducted at a rate lower than the rate prescribed under the applicable DTAA, the reasons thereof.

:

 

 

7.

In case remittance is for supply of articles or things (e.g., plant, machinery, equipment, etc.) or computer software, please indicate :—

:

 

 

 

i. Whether there is any permanent establishment in India through which the beneficiary of the remittance is directly or indirectly carrying on such activity of supply of articles or things?

 

 

 

 

ii. Whether such remittance is attributable to or connected with such permanent establishment?

 

 

 

 

iii .If so, the amount of income comprised in such remittance which is liable to tax.

 

 

 

 

iv. If not, the reasons in brief therefor.

 

 

 

8.

In case remittance is on account of business income 

 

 

 

 

please indicate :—

:

 

 

 

i. Whether such income is liable to tax in India?

 

 

 

 

ii. If so, the basis for arriving at the rate of deduction of tax.

 

 

 

 

iii. If not, the reasons thereof.

 

 

 

9.

In case tax is not deducted at source for any other reason,  details thereof.

:

 

 

(Attach separate sheet duly authenticated wherever necessary)

.........................................................................................

Name, Address and registration numbers

(To be signed and verified by an Accountant as defined in section 288 of the Income-tax Act).

Circular : No. 10/2002, dated 9-10-2002.

1175. Procedure for refund of tax deducted at source under section 195

1. The Board has received a number of representations for granting approval for refund of excess deduction or erroneous deduction of tax at source under section 195 of the Income-tax Act. The cases referred to the Board mainly relate to circumstances where :—

   (i)  after the deposit of tax deducted at source under section 195,

  (a)   the contract is cancelled and no remittance is required to be made to the foreign collaborator;

  (b)   the remittance is duly made to the foreign collaborator, but the contract is cancelled and the foreign collaborator returns the remitted amount to the person responsible for deducting tax at source;

  (c)   the tax deducted at source is found to be in excess of tax deductible for any other reason;

  (ii)  the tax is deducted at source under section 195 and paid in one assessment year and remittance to the foreign collaborator is made and/or returned to the Indian company following cancellation of the contract in another assessment year.

In all the cases mentioned above, where either the income does not accrue to the non-resident or excess tax has been deducted thereby resulting in a refund being due to the Indian enterprise which deposited the tax, at present a refund can be issued only if valid claim is made by filing a return.

2. In the absence of any statutory provision empowering the Assessing Officers to refund the tax deducted at source to the person who has deducted tax at source, the Assessing Officers insist on filing of the return by the person in whose case deduction was made at source. Even adjustments of the excess tax or the tax erroneously deducted under section 195 is not allowed. This has led to a lot of hardship as the non-resident in whose case, the deduction has been made is either not present in the country or has no further dealings with the Indian enterprise, thus, making it difficult for a return to be filed by the non-resident.

3. The matter has been considered by the Board. It has been decided that in the type of cases referred to above, a refund may be made independent of the provisions of the Income-tax Act, 1961 to the person responsible for deducting the tax at source from payments to the non-resident, after taking the prior approval of the Chief Commissioner concerned.

4. The excess tax deducted would be the difference between the actual payment made by the deductor and the tax deducted at source or that deductible. This amount should be adjusted against the existing tax liability under any of the Direct Tax Acts. After meeting such liability, the balance amount, if any, should be refunded to the person responsible for deduction of tax at source.

5. Where the tax is deducted at source and paid by the branch office of the person responsible for deduction of tax at source and the quarterly statement/annual return of tax deduction at source is filed by the branch, each branch office would be treated as a separate unit independent of the head office. After meeting any existing tax liability of such a branch, which would normally be in relation to the deduction of tax at source, the balance amount may be refunded to the said branch office.

6. The adjustment of refund against the existing tax liability should be made in accordance with the present procedure on the subject. A separate refund voucher to the extent of such liability under each of the direct taxes should be prepared by the Income-tax Officer in favour of the “Income-tax Department” and sent to the bank along with the challan of the appropriate type. The amount adjusted and the balance, if any, refunded would be debitable under the sub-head “Other refunds” below the minor head “Income-tax on companies” major head “020 - Corporation Tax” or below the minor head “Income-tax other than Union Emoluments” major head “021 - Taxes on Incomes other than Corporation Tax”, depending upon whether the payment was originally credited to the major head “020 - Corporation Tax” or to the major head “021-Taxes on Income other than Corporation Tax”.

7. Since the adjustment/refund of the amount paid in excess would arise in relation to the deduction of tax at source, the recording of the particulars of adjustment/refund should be done in the quarterly statement of TDS/annual return under the signature of the ITO at the end of the statement, i.e., below the signature of the person furnishing the statement.

Circular : No. 769, dated 6-8-1998.

1176. Clarification regarding taxability of export commission payable to non-resident agents rendering services abroad

1. In their Audit Report for 1997-98 [D.P. No. 79(I.T.)] the Comptroller & Auditor General (C & A G) Raised an objection that the Assessing Officer in computing the profits and gains of business or profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not  been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C & A.G. the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the I.T. Act,  1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.

2. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn where the taxability of ‘Foreign Agents of Indian Exporters’ was considered alongwith certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller and Auditor General have agreed to drop the objection referred to above.

Circular : No. 786, dated 7-2-2000.

1177. Procedure for refund of tax deducted at source under section 195 to the person deducting the tax

1. The Board has issued Circular No. 769, dated 6-8-1998, laying down procedure for refund of tax deducted under section 195, in certain situations to the person deducting the tax at source from the payment to the non-resident. After reconsideration, Circular No. 769 is revoked with immediate effect and refund to the person deducting tax at source under section 195 shall be allowed in accordance with the provisions of this Circular.

2. The Board had received representations for approving grant of refund to the persons deducting tax at source under section 195 of the Income-tax Act, 1961. The cases referred to the Board mainly related to circumstances whereafter the deposit into Government account of tax deducted at source under section 195,—

  (a)  the contract is cancelled and no remittance is made to the non-resident;

  (b)  the remittance is duly made to the non-resident, but the contract is cancelled. In such cases, the remitted amount may have been returned to the person responsible for deducting tax at source.

In the cases mentioned above, income does not accrue to the non-resident. The amount deducted as tax under section 195 and paid to credit of Government, therefore, belongs to the deductor. At present, a refund is given only, on a claim being made by the non-resident with whom the transaction was intended.

3. In the type of cases referred to in sub-paragraph (a) of paragraph 2, the non-resident not having received any payment would not apply for a refund. For cases covered by sub-paragraph (b) of paragraph 2, no claim may be made by the non-resident where he has no further dealings with the resident deductor of tax. This resident deductor is, therefore, put to genuine hardship as he would not be able to recover the amount deducted and deposited as tax.

4. The matter has been considered by the Board. In the type of cases referred to above, where no income has accrued to the non-resident due to cancellation of contract, the amount deposited to the credit of Government under section 195 cannot be said to be ‘tax’. It has been decided that this amount can be refunded, with prior approval of Chief Commissioner concerned to the person who deducted it from the payment to the non-resident under section 195.

5. The refund being made to the person who made the payment under section 195, the Assessing Officer may after giving intimation to the deductor, adjust it against any existing tax liability of the deductor under the Income-tax Act, 1961, Wealth-tax Act, 1957 or any other direct tax law. The balance amount, if any, should be refunded to the person who made such payment under section 195. A separate refund voucher to the extent of such liability under each of the direct taxes should be prepared by the Income-tax Officer or the Assessing Officer in favour of the “Income-tax Department” and sent to the bank along with the challan of the appropriate type. The amount adjusted and the balance, if any, refunded would be debitable under the sub-head “Other refunds” below the minor head “Income-tax on Companies”—major head “020—Corporation Tax”or below the minor head “Income-tax other than Union Emoluments” major head “021—Taxes on Incomes other than Corporation Tax” depending upon whether the payment was originally credited to the major head “020—Corporation Tax” or to the major head “021—Taxes on Income other than Corporation Tax”. Since the adjustment/refund of the amount paid would arise in relation to the deduction of tax at source, the recording of the particulars of adjustment/refund, should be done in the quarterly statement of TDS/annual return under the signature of the Income-tax Officer or the Assessing Officer at the end of the statement, i.e., below the signature of the person furnishing the statement.

6. Refund to the person making payment under section 195 is being allowed as income does not accrue to the non-resident. The amount paid into the Government account in such cases, is no longer ‘tax’. In view of this, no interest under section 244A is admissible on refunds to be granted in accordance with this Circular or on the refunds already granted in accordance with Circular No. 769.

7. A refund in terms of this Circular should be granted only after obtaining an undertaking that no certificate under section 203 of the Income-tax Act has been issued to the non-resident. In cases where such a certificate has been issued, the person making the refund claim under this Circular should either obtain it or should indemnify the Income-tax Department from any possible loss on account of any separate claim of refund for the same amount by the non-resident.

8. The refund as per this Circular is permitted  only in respect of transactions with non-residents, which have either not materialised or have been cancelled subsequently. It, therefore, needs to be ensured by the Assessing Officer that they disallow corresponding transaction amount, if claimed as an expense in the case of person making refund claim.

9. It is hereby clarified that refund shall not be issued to the deductor of tax in the cases referred to in clause (i)(c) of paragraph 1 of Circular 769, dated 6-8-1998.

10. The limitation for making a claim of refund under this Circular shall be two years from the end of the financial year in which tax is deducted at source.

Circular : No. 790, dated 20-4-2000.