CBDT Directive On Scope Of Disallowance U/s 40(a)(i) For Failure To Deduct TDS U/s 195 On Payment To Non-Residents

The CBDT has issued a letter dated 26.10.2016 in which it has drawn attention to its Circular No 3/2015 dated 12.2.2015. In the said Circular it was clarified that for the purpose of making disallowance of “other sums chargeable” under Section 40(a)(i) of the Income-tax Act, 1961, in the case of non-residents, the appropriate portion of the sum chargeable to tax under the Act, i.e. income component therein shall form the basis of such disallowance. The CBDT has noted that this Circular is not being kept in view by administrative Commissioners & Commissioners (Appeal) while filing further appeals and while deciding cases. Further, the Circular is not kept in view by departmental representatives in ongoing litigation cases, who still take a position that the disallowance should be based on the gross amount of offshore payments such as purchases. The CBDT has directed the departmental officers including representatives of the department in litigation before ITAT/Courts etc. to be sensitized to the content of this circular.

F.No.500/39/2015 (US FT & TR-V)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Foreign Tax & Tax Research –II
FT & TR-V Division
New Delhi, 26th of October, 2016.

To

All the Pr. Chief Commissioner of Income Tax / Pr Director General of Income Tax

Sir Madam,

Sub: Withholding of tax on “Other sum chargeable” in the case of non residents – Disallowance Ws 40(a)(i) of the Income-tax Act 1961 – reg.

Reference is invited to Circular No 3/2015 dated 12.2.2015 issued by the CBDT clarifying that for the purpose of making disallowance of “other sums chargeable” under Section 40(a)(i) of the Income-tax Act, 1961, in the case of non-residents, the appropriate portion of the sum chargeable to tax under the Act, i.e. income component therein shall form the basis of such disallowance.

2. It has been brought to the notice of the Board by various forums, that this Circular is not being kept in view by administrative Commissioners & Commissioners (Appeal) while filing further appeals and while deciding cases. Further, the Circular is not kept in view by departmental representatives in ongoing litigation cases, who still take a position that the disallowance should be based on the gross amount of offshore payments such as purchases. In this connection, I am directed to request you that the departmental officers including representatives of the department in litigation before ITAT/Courts etc. may be sensitized to the content of this circular.

3. This issues with the approval of Member (IT), CBDT.
(Tatung Padi)

DCIT(OSD), FT&TR-V, CBDT