Taxes withheld by determining the income of non-resident under special regime (section 44BB) without approaching the tax officer will not lead to violation of withholding tax provisions

Chennai Bench of Income-tax Appellate Tribunal (the “Tribunal”), in the case of  Frontier Offshore Exploration (India) Ltd. Vs DCIT ITA No. 200/Mds/2009, held that where payment to a non-resident is covered under the special regime of section 44BB, withholding of appropriate tax by the payer through the application of the special regime and without approaching the Assessing Officer (“AO”) will not lead to any violation of withholding tax provisions. Accordingly, expenses cannot be disallowed for short withholding of taxes.

Facts

The assessee, a provider of oil field services, entered into an agreement with ONGC and M/s Hardy Exploration & Production (India) to drill oil wells in Indian waters.

For this purpose, the assessee took two drilling units owned by two foreign companies. The assessee was to pay hire charges for the drilling units in the form of bare boat charges. The assessee considered these charges to be covered by special regime of section 44BB of the Act. Accordingly, the assessee deemed income at rate of 10% of gross receipts and withheld tax at a rate of 4.1% on the bare boat charges.

The AO contended that the entity responsible for making payment cannot itself decide the proportion of income chargeable to tax either by applying any special regime or general provisions. Instead it should make a mandatory application to the AO for the determination of appropriate proportion of income which is chargeable to tax. Accordingly, the AO disallowed the deduction of the hire charges on account of short withholding of taxes.

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