Some payments to non-residents not taxable

TAXATION OF OVERSEAS TRANSACTIONS

Generally speaking, all payments made to non-residents are subject to deduction of tax at source. Section 195 of the Income-tax Act casts an obligation on the person responsible for payment to deduct tax at source at the time of payment or at the time of credit of the income to the account of the non-resident, whichever is earlier. Failure to deduct tax has several implications including disentitlement of the payer to claim the amount paid as deduction from his income.

The issue for consideration is whether it is mandatory to deduct tax at source even if the amount to be remitted is not liable to tax. In case of IMT Labs (AAR 676 of 2005), the Authority for Advance Rulings held that scheme of tax deduction at source applies not only to the amount paid, which wholly bears “income” character, but also gross sums, the whole of which may not be income or profits of the recipient. In this regard, the authority relied on the decision of Supreme Court in case of Transmission Corporation of AP Ltd vs CIT (239 ITR 587).

 

But as held in a recent case of Mangalore Refinery & Petrochemicals Ltd. (113 ITD 85), the Mumbai Tribunal remarked that “Section 195 nowhere provides that any assessee would himself harbour the belief that payment made by him does not involve element of income chargeable to tax. It is the assessing officer only who can permit an assessee to make the payment without deducting tax under sub-section (2) of section 195. The powers and discretions of assessing officer cannot be substituted with the belief of an assessee.”

It has also been held recently by the Hyderabad Income-tax Tribunal in cases of Frontline Software and Call World Technologies that domestic call centers have to deduct tax at source on payments made to foreign companies on support services received from abroad.

In this context, it is however necessary to analyse whether the payment to be made to Foreign companies is liable to be taxed in India being in the nature of royalty or fees for technical services (FTS), or the nature of payment is such that the same is not liable for being taxed in India. In the cases of Frontline Software and Call World Technologies, the Tribunal held that the services provided by the foreign companies from abroad justifies the payments to be termed as royalty.

Therefore, even if the activities of the foreign companies were wholly located outside India, the income by way of royalty would be deemed to accrue or arise in India and therefore, be subjected to tax in India.

However, where the payment to be made to the non-resident is in the nature of business income, the same will not be liable for tax in India unless the non-resident has a permanent establishment in India. In another recent case of a Singaporean company, Cushman & Wakefield Ltd. (172 Taxman 179), the foreign company rendered services from Singapore and was paid a referral fee for its services.

The Income-tax department was of the view that the fees paid is in the nature of royalty or FTS and therefore tax should be deducted at source while making payments to the foreign companies.

The authority however ruled that in the backdrop of the factual as well as legal matrix, the referral fee is royalty income nor FTS. It is in fact business income in the hands of the foreign company and is taxable in Singapore only as the foreign company has no permanent establishment in India.

It appears that there is no obligation to deduct any tax at source if the remittance to the non-resident is not taxable in India. But the payer cannot decide the issue himself. It is the prerogative of the assessing officer to decide whether income is chargeable to tax or not.

The author is a Partner in SS Kothari Mehta & Co agar@bol.net.in