[Opinion] Interpretation of the Expression – “Person Responsible for Paying” u/s 204

D.C. Agrawal – [2025] 176 taxmann.com 124 (Article)

1. Introduction

The Indian Income Tax Act, 1961 (‘the Act’) has, over decades, refined the obligations of withholding tax to ensure efficient tax collection at the stage of income accrual or remittance. Among its cornerstones is Section 195, which mandates deduction of tax at source for payments made to non-residents if such payments are chargeable to tax in India. However, to enforce this obligation, the Act presupposes the existence of a “person responsible for paying”. This expression has been defined in section 204 which determines the scope and identity of the “person responsible for paying” in the context of the tax deduction at source (TDS) regime and section 285 (obligation to furnish information). This concept is pivotal for the enforcement of TDS provisions as liability to deduct tax is imposed only upon this identified “person” This article undertakes a comprehensive analysis of the meaning, scope, and judicial interpretation of the term “person responsible for paying” as applicable to different sections (Section 192 to 196D).

2. Analysis of Section 204

Section 204 is a crucial operational provision in the Income Tax Act that underpins the TDS framework. It assigns responsibility based on legal status, control, and relationship with the payee. By codifying obligations across diverse contexts—from domestic salaries to international capital gains and remittances—it ensures tax is withheld at the source in a manner aligned with administrative control and statutory clarity. As judicial interpretations show, the provision must be read strictly and purposively to identify only those persons with real payment obligations as “responsible for paying”. Clause wise analysis of section 204 is made as under:

1. Clause (i) provides that for salary payments the responsibility rest with (i) The employer himself, if the employer is not a company and (ii) The company and its principal officer, if the employer is a company. However, payments made by the Central or State Government are excluded here and covered under clause (iv).
2. Clause (ii) provides that the person responsible for making TDS in case of interest on securities includes the local authority, corporation, or company, including their principal officer. But payments made by or on behalf of the Central or State Government are again excluded and addressed under clause (iv).
3. Clause (iia) provides that the person responsible for TDS on capital gains of non-resident Indians for covering cross border remittances are the authorised person (like a bank or financial intermediary under FEMA) remitting consideration to a non-resident Indian (NRI) on transfer of a foreign exchange asset, which is not a short-term capital asset, is treated as the responsible person. This links the obligation to deduct tax with persons governed by the Foreign Exchange Management Act, 1999 (FEMA).
4. Clause (iib) provides that person responsible for TDS to non-residents in general are the payer (including a company and its principal officer) who is deemed responsible for furnishing information related to payments made to non-residents, regardless of whether such payments are chargeable to tax. This enables administrative oversight and supports international tax transparency and exchange of information.
5. Clause (iii) provides that in case of other payments which are chargeable under the Act (other than those covered under clauses (i), (ii), (iia), and (iv)), the person responsible for TDS are the payer himself or, if a company, the company and its principal officer are responsible. This clause is typically invoked for TDS under Sections 194C (contractors), 194J (professional fees), 194H (commission), etc
6. Clause (iv) provides that where the Central or State Government makes payments chargeable under the Act, the person responsible for TDS is the Drawing and Disbursing Officer (DDO) or any person designated to make the payment is treated as the person responsible for deducting and depositing tax.
7. Clause (v) provides that where non-resident is a payer, then the person responsible for the TDS is the non-resident himself, or any authorised person, or even a deemed agent under Section 163, becomes liable.
8. The Explanation to section 204 provides the definition of non-resident Indian and foreign exchange asset which are the same as in Chapter XII-A. Further, the definition of authorised person is same as in section 2(c) of FEMA, 1999 which included banks and money changers.

3. The Substance of Section 204

On the basis of interpretation of section 204, following substance may be drawn:

• Substance over Form – The term is defined functionally – i.e., who has the power and obligation to make payment, rather than merely who holds the money.
• Inclusive of Principal Officer – For companies and corporations, not just the legal entity but the principal officer (typically decision-makers) are jointly liable.
• Delineation between Government and Private Payers – Government payments are dealt with separately via DDOs, recognising the administrative machinery involved.
• FEMA Linkage – The intersection with FEMA through “authorised person” highlights cross-border compliance mechanisms, particularly in payments to non-residents.
• Agency Principle Extended – Clause (v) and Section 163 deem agents and representatives in India responsible for non-residents, ensuring enforceability.
• Reporting Obligations Extended – Clause (iib) imposes responsibility even for non-taxable payments to non-residents, broadening India’s compliance regime to match OECD/G20 standards.

Click Here To Read The Full Article