The Hindu Business Line : TDS, foreign to non-residents

The company in which I work has acquired shares in a foreign outfit from its shareholders who are non-residents under the Income-Tax Act. The consideration has been paid to the non-residents and this has been reflected as investment in the books of account of our company. Would we have to deduct tax at source on the payment made to the non-residents for acquiring the shares? — Satish

The answer will depend on whether the income from the sale of shares by the non-resident is chargeable to tax in India. Under Section 9(1)(i) of the Income-Tax Act, income is deemed to accrue or arise in India if it arises directly or indirectly through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset located situate in India.

According to you, your company has acquired shares of a foreign company. This will mean that the shares are not situated in India and hence there will be no income deemed to accrue or arise in India in the hands of the non-residents. Section 5 makes it clear that income that is not deemed to accrue or arise in India will not be charged to tax in the hands of a non-resident unless it is received or deemed to be received in India. If it is not so, the income will not be chargeable to tax in India in the hands of the non-residents. Consequently, since no part of the payment made by the Indian company to the non-residents is taxable in India, there would be no requirement to deduct tax at source while making payment to the non-resident.

In CIT v Fertilizers and Chemicals (Travancore) Ltd [1990] 185 ITR 398 (Kerala), the Kerala High Court held that if there is a payment on which no portion of the same is taxable in India, there would be no requirement to deduct tax at source in India while making such payment to a non-resident.

This has reference to a reply in this column that if a return is filed beyond the time allowed for filing the same under the Act and if there is a refund, it can be claimed by making an application before the Board, which has the power to condone the delay in claiming the refund. It may be noted that the Board has issued instructions permitting Assessing Officers/Commissioners/ Chief Commissioners of Income Tax to condone the delay in making a claim for refund. The last such note was in Instruction No 13/2006 dated December 22, 2006 reported in 157 Taxman 175 (St).

This Instruction clarifies that it will apply to all applications that were pending as on the date of this Instruction. This Instruction vests the Chief Commissioners of Income-Tax with the power to condone a delay in filing a return involving a refund claimed of over Rs 10 lakh and up to Rs 50 lakh. It also vests the power with the Commissioners of Income-Tax to condone a delay in filing income-tax returns involving refund claims of up to Rs 10 lakh. The Instruction further clarifies that the limit stated would be with reference to each assessment year and not the aggregate of all belated claims.

The Board retains the power to condone delays if the refund exceeds Rs 50 lakh. The Instruction further states that no fresh claim for refund will be entertained beyond six years from the end of the relevant assessment year and that the following conditions would apply:

1. The refund has arisen from excess tax deducted or collected at source or payments of advance,

2. The income of the assessee is not assessable in the hands of any other person, and

3. No interest will be admissible on the belated claims for refunds.

Also, it is unfair to restrict the time to six years from the end of the relevant assessment year and there is no justification in denying interest in such cases. — M. N. Srinivasan

The reader is right in pointing out the existence of such an Instruction. The columnist gratefully acknowledges the input given by the reader in this regard.

The reader is also right in pointing out that a delay beyond six years from the end of the relevant assessment year should not be a yardstick to deny completely the refund and also that interest should not be denied in such cases except where the delay in granting the refund is attributable to the assessee.

The Board is expected to favourably consider these suggestions of the reader, who is a retired Joint Commissioner of Income-Tax.

Are individuals and Hindu Undivided Families (HUFs) required to deduct tax at source while making payments to contractors?

Section 194C(1) provides for deduction of income-tax at source from any sum credited or paid to the resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the government, local authorities, statutory corporations, companies, co-operative societies, statutory authorities engaged in providing housing accommodation, etc., registered societies, trusts, universities and firms. The rate of TDS is 1 per cent in respect of advertising contracts and 2 per cent in other cases.

The provisions of Section 194C(1) do not provide for deduction of tax at source on payments made by an individual or a HUF to a contractor. The amendment proposes that individuals or HUF, whose total sales, gross receipts or turnover from the business or profession carried on exceed the monetary limits under clause (a) or clause (b) of Section 44AB during the financial year immediately preceding the financial year in which sum is credited or paid to the account of the contractor will also be required to deduct tax at source while making payment to contractors.

The amendment also proposes that the provisions of the said sub-section (1) shall not apply in respect of payments made to a contractor by any individual or a member of a HUF exclusively for their personal purposes. This amendment is proposed to be effective from June 1, 2007.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002)

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