1167. 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.

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October 2020