Advance determination of withholding tax
FOREIGN ENTERPRISE
Thus, for practical purposes, the payer of the money has to determine the tax liability of the non-resident payee. Such a determination is often very difficult. The legislature has, therefore, created a separate judicial body known as Authority for Advance Rulings (AAR) to decide the tax liability of non-residents in India.
Who can approach the AAR for determining non-resident's tax liability? Should such application be made by the non-resident himself or the person responsible for paying to the non-resident can also apply.
The above controversy was raised in a recent case of Mcleod Russel India Ltd (299 ITR 79). In the said case the foreign company had sold some shares to the Indian company. Therefore, the Indian company had to remit the sale proceeds from India. The Indian company approached AAR to determine the tax liability of the foreign company so that it could withhold the correct amount of tax.
The departmental view was that if the tax liability of the foreign company was the issue in question then the application to AAR should be made by the foreign company. It was however held "We find no force in this contention. Sub-clause (ii) of clause (b) of section 245 N refers to a resident applicant who has entered into a transaction with a non-resident. Inrelation to the tax liability of such non-resident arising out of such transaction resident applicant can very well file the application".
The view taken by the AAR is not only a correct view but is also very important from practical point of view. the liability to deduct correct amount of tax lies on the Indian party. The only practical way to resolve the problem is to allow the Indian party to approach the Authority for deciding the tax obligation of the foreign party.
The AAR has again reiterated the same position in case of Airports Authority of India (299 ITR 102). In this case, the Airports Authority had to remit money to an American company.
In fact, the American company had already raised this issue in its return of income, which matter was still pending in appellate proceedings. Therefore, the department opposed the reference to AAR on two grounds