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
1. Section 195 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