CBDT in its Instruction No. 2/2014 [F No. 500/33/2013-FTD-l], Dated 26-02-2014 issued in view of the judicial develpments in the cases of GE India Technology P Ltd. vs CIT  7 taxmann.com and Transmission corporation of AP Ltd v. CIT  105 Taxmann 742 decided by Supreme Court, has stated that a person who fails to deduct tax on payments made to non-residents, will be held as assessee in default only to the extent of tax actualy payable by such NRI and not in respect of TDS on the whole of amount.
It is pertinent to note here that while making any payment to Non resident, a tax u/s 195 is required to be deducted by the person making payment to such Non Resident, irrespective of the tax liability of such Non Resident. Such provisions sometime may prove bit harsh especially in cases where payment is of capital receipt in nature, say a sale of immovable property by Non resident.
To mitigate this hardship section 195(2) of Income Tax Act, provides an option to apply to the jurisdictional assessing officer for determination of actual tax liability on such payment made to Non resident, whereby tax is deducted only to the extent of tax determined by the assessing officer.
However, in cases where no application is made, tax is required to be deducted on the whole of amount. Now, in the instruction cited above, the CBDT has directed all its officers to treat the person making payment to a non-resident, who has not deducted any tax, as assessee in default u/s 201 only in respect of actual tax liability of non resident to whom the payment has been made.
The Instruction is a positive development. This Instruction clarifies that withholding tax liability of the payer is with reference to the sum subject to tax under the provisions of the Income Tax Act. Furthermore, the consequences of default proceedings for non-withholding under the Income Tax Act would be limited only to such tax liability.
Accordingly, a payer cannot be treated as an Assessee in Default for non-withholding from payments which are not subject to tax under the Act. This clarification is in line with the SC decision in the case of GE case(supra). Furthermore, for remittances where only a portion may be subject to tax in India (e.g., a portion of a composite contract or capital gains income), payers may determine their withholding tax liability with reference to the taxable portion of the remittance, if the payer is fairly certain about such determination.
However, considering the consequences of a tax withholding default, the payer may prefer to be cautious and may continue to approach the Tax Authority where the determination of taxability or portion of the taxable sum is not fairly certain.