14 taxmann.com 167 (Article)
CA certificate does not determine taxability of non-resident in India
In this article the author examines the issue whether the certificate from a Chartered Accountant can determine the taxability of a non-resident in India in the light of recent decision of the ITAT in the case of Dy. CIT v. Rediff.com India Ltd.  47 SOT 310/13 taxmann. com 61 (Mum.).
1. Tax deduction at source is one of the methods by which the Government collects tax on payment/sum as and when the same is paid or credited to the account of the payee. The person making the payment is required to deduct tax and deposit the same with the Government within the prescribed time-limits. The Income-tax Act (ITA) contains various provisions relating to TDS on various payments including the payments made to non-residents and foreign companies.
As per the provisions of section 195(1) of the ITA, every person making payment to a non-resident or a foreign company in respect of any interest or other sum chargeable under the provisions of the ITA (other than salaries) is required to deduct TDS at the rates in force. While making the actual remittance to the non-resident, the payer is required to comply with the provisions of the Foreign Exchange Management Act (FEMA) including rules and regulations made thereunder and directions of the Reserve Bank of India (RBI).
Section 195(2) provides that in case the payer considers that whole of the sum payable to non-resident is not chargeable to tax, he can make an application to the Assessing Officer (AO) for determination of appropriate portion of such sum, which may be chargeable to tax. In other words, this section enables a payer to make an application to the AO for determination of appropriate TDS rate if he feels that either such sum is not taxable or is taxable at rate lower than the rate prescribed in ITA or the relevant Double Taxation Avoidance Agreement.
With the increase in foreign investments in India over the years and consequent increase in the number of remittances being made to non-residents, the Government has over a period of time liberalized the process of making remittances.
In the past, as per the RBI guidelines, prior to making remittance the payer was required to obtain a No Objection Certificate (NOC) from the Income-tax (IT) Department. This was done to ensure that all remittances were examined by the Assessing Officer. However, this process was cumbersome, long drawn and resulted in inordinate delays in making remittances as the AO took a long time to examine details of these remittances. To overcome these difficulties and delays, the Government liberalized the scheme of making remittances. In this regard the Central Board of Direct Taxes (CBDT) issued Circular No. 759, dated November 18, 1997 (as modified by the CBDT Circular No. 10 of 2002, dated October 9, 2002). As a part of the scheme, the payers were authorized to remit the funds by furnishing an undertaking addressed to the Assessing Officer and obtain certificate from an independent Chartered Accountant (CA).
DECISION OF THE MUMBAI BENCH OF THE ITAT IN DY. CIT v. REDIFF.COM INDIA LTD.
2. The Mumbai Bench of the ITAT in its recent decision in the case of Dy. CIT v. Rediff.com India Ltd.1 has held that the certificate issued by a CA as per the above mentioned guidelines has no impact on the determination of taxability or otherwise of income of a non-resident in India.
FACTS OF THE CASE
3. The assessee was engaged in the business of internet related services and was a prominent online provider of news, information and shopping services. The AO observed that TDS was not deducted on payments made to persons outside India in respect of legal fee, photography charges and bandwidth charges. The AO held that TDS was required to be deducted under section 195 of the ITA. However, as the same was not done the AO disallowed the amounts paid to non- residents under section 40(a)(i).
The Commissioner of Income-tax (Appeals) [CIT(A)] on appeal by the assessee held as under:
◆ That the assessee did not have any obligation to deduct tax as the income of non- residents is not taxable in India.
◆ That the assessee had made payment to non-resident after duly obtaining certificate from CA to the effect that no tax was deductible on these payments and, therefore, it could not be said that the assessee had any doubt regarding non-taxability of the amounts in India.
◆ That as long as the CA had certified in terms of the CBDT's circular that no tax was deductible on the payments, disallowance under section 40(a)(i) could not be made. Since the certificate from CA was duly obtained in respect of all payments in absence of which remittances could not be made the disallowance was not sustainable.
DECISION OF THE INCOME TAX APPELLATE TRIBUNAL (ITAT) ON AN APPEAL BY THE REVENUE
4. The ITAT on an appeal by the revenue against the order of the CIT(A) was required to consider as to whether the certificate from CA could be the basis for determining the tax liability of non-resident. The ITAT held as under:
(a) TDS is a vicarious liability on behalf of the recipient and if the recipient does not have primary liability to be taxable in respect of income embedded in the payment, the vicarious liability also cannot be invoked. So tax cannot be deducted unless the non-resident is liable to tax in India in respect of the receipt. Reliance was placed on the decision of the Supreme Court in the case of GE India Technology Center Pvt. Ltd.2, where the Supreme Court held that TDS obligations under section 195 arises only when the payment is chargeable to tax in the hands of non-resident in this regard.
(b) The ITAT analyzed the scheme as per which the process of making remittance was simplified. The ITAT observed that under the new scheme of remittance set out by the Circular No. 759 of 1997 issued by the CBDT, it is not necessary for the assessee to obtain prior determination of tax withholding liability. He could approach an independent CA for determination of his tax withholding liability and make the remittance on the basis of CA's certificate, provided he furnishes requisite undertaking to the AO which is reproduced as under (relevant extracts only)
"3. In case it is found that the tax actually payable on the amount of remittance made, has either not been paid or has not been paid in full, I/we undertake to pay the said amount of tax along with interest found due in accordance with the provisions of the Income-tax Act.
4. I/We will also be subject to the provisions of penalty and prosecution for the said default as per the Income-tax Act.
5. I/We also undertake to submit the requisite documents, etc., for enabling the Income-tax Department to determine the nature and amount of income-tax, interest, penalty, etc., payable thereon."
(c) If the person making remittance is of the view that TDS is not required to be deducted or is required to be deducted at certain rate, he can approach the CA for certifying in prescribed format the rate at which TDS is to be deducted. However, the remittance on the basis of CA's certificate is on the payer's own risk since he has to face consequences in case of any short deduction/non-deduction of TDS.
(d) The new scheme was different from old scheme (as per which the payer was required to obtain a NOC from the IT Department) in the sense that real time control mechanism for revenue collection from foreign remittance which was in the nature of steering control is given up, though the right of the revenue to take suitable measures in case of revenue loss due to tax deductors remained. The new scheme of allowing remittance on the basis of CA's certificate is not in substitution of scheme envisaged under section 195(2) of the ITA. It is only meant to supplement the same. This is clear from the clarification from CBDT in Circular No. 767, dated May 22, 1998 wherein it has been mentioned that procedure of filing undertaking as mentioned in Circular no 759 of 1997 is not applicable to the case where order under section 195(2) has been obtained by the person making the remittance.
(e) The certificate issued by a CA has no decisive impact on the determination of tax liability of receipt in the hands of recipient-non-resident. It is only a prima facie evidence about the taxability status. The acceptability of the CA's certificate by the revenue authorities is only confined to allowing remittance. The CA's certificate cannot substitute adjudication of taxability in the hands of non-resident by the AO. Also, it cannot be used as a shield by the assessee to thwart any probe by the AO into the taxability.
(f) The undertaking furnished by the assessee at the time of remittance also clearly shows that taxability of receipt in the hands on non-resident remains open and the assessee is required to furnish all details and documents before the AO for determination of such a liability.
(g) Therefore, the ITAT held that a certificate from a CA does not determine taxability or otherwise of a non-resident and reversed the finding of CIT(A) in this regard.
5. The decision of the Tribunal that TDS is only a prima facie liability and final tax liability of non-resident is to be determined pursuant to assessment has been laid down by various judicial precedents. Certificate obtained from CA cannot determine the taxability or otherwise of a non- resident.
It is also worth noting that the Finance Act, 2008 has inserted sub-section (6) in section 195 which empowers the CBDT to prescribe form and manner in which the person deducting TDS on payments to non-residents is required to furnish information related to these payments. Pursuant to insertion of this sub-section, Rule 37BB along with Forms 15CA and 15CB have been introduced. Rule 37BB(1) of the Income-tax Rules provides that information in section 195(6) is to be furnished after obtaining a certificate from a CA. The information in Form 15CA is to be furnished based on details mentioned in Form 15CB. Form 15CB requires the CA to ascertain the nature of remittance to be made to a non-resident and determine the rate of TDS applicable. The format of certificate also requires furnishing of details of any order passed under section 195(2) of the ITA.
The undertaking now required to be furnished by the assessee in Form 15CA, is as under :
"In a case where it is found that the tax actually deductible on the amount of remittance has not been deducted or after deduction has not been paid or not paid in full, I/we undertake to pay the amount of tax not deducted or not paid, as the case may be along with interest due. I/We shall also be subject to the provisions of penalty for the said default as per the provisions of the IT Act, 1961. I/We further undertake to submit the requisite documents for enabling the Income-tax authorities to determine the nature and amount of income of the recipient of the above remittance as well as documents required for determining my/our liability under the Income-tax Act as a person responsible for deduction of tax at source."
As can be observed, the above mentioned undertaking in Form 15CA is similar to the undertaking which was to be furnished as per the requirements of Circular No. 759 of 1997. The decision of the ITAT would also apply to Form 15CA and Form 15CB as well. Form 15CB cannot be said to determine the taxability of non-resident. The same would be determined at the time of assessment.
Accordingly, it can be concluded that the assessees making payment to non-residents cannot escape their liability in case of non-deduction/short deduction of TDS by merely pleading that they have obtained a certificate from CA in this regard. They are required to produce all the documents and information to the AO and cooperate with him while the income of the non-resident is being assessed.
1. Dy. CIT v. Rediff.com India Ltd.  47 SOT 310/13 taxmann.com 61 (Mum.)
2. GE India Technology Center Pvt. Ltd. v. CIT  193 Taxman 234 (SC)