Withholding tax obligation applies on payments to non-residents only if there is income chargeable to tax in India

The Special Bench of the Tribunal, departing from the Karnataka High Court’s decision in the case of Samsung Electronics, rules that withholding tax obligation on payer applies on payments to nonresidents only if there is income chargeable to tax in India. Further obtaining CA’s certificate is an alternative procedure for lower or nil withholding cases.

The Special Bench of the Income Tax Appellate Tribunal, Chennai (SB), in the case of ITO Vs. Prasad Production Ltd. (ITA No. 663/ Mds/2003) has held that withholding tax obligation on payer under Section 195 of the Income-tax Act, 1961 (the Act) applies only if the payments to non-residents are chargeable to tax in India. Further, the payer has a first right to decide whether a particular payment bears any income character or not.

The SB chose not to follow the Karnataka High Court decision in the case of CIT v. Samsung Electronics Co Ltd and others [2009] 185 Taxman 313 (KAR) and followed various decisions of Supreme Court, High Courts and Mumbai SB decision in the case of Mahindra and Mahindra Ltd. Vs. DCIT [2009] 313 ITR 263 (Mum) (SB). The SB clarified that the Supreme Court in Transmission Corporation of A.P. Ltd. and Ors. Vs. CIT [1999] 239 ITR 587 (SC) dealt with tax deduction in a case where fraction of income stood embedded in the payments to nonresident and thereby it did not apply to cases where no part of payment has any character of income.

The SB, based on various Central Board of Direct Taxes (CBDT) circulars, held that obtaining a CA’s certificate is an alternative procedure for nil or lower withholding certificate cases.

Facts of the case

Please become a Premium member. If you are already a Premium member, login here to access the full content.