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. 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.

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