Since payment to non-resident is covered under the special regime of section 44BB, withholding of appropriate tax by payer without approaching the AO does not lead to any violation of withholding tax provisions, expenses cannot be disallowed u/s.40(a) (i) on the ground of short deduction of tax.
Facts:
ICO (ICO), an oil field services provider, took drilling units on bareboat hire from two Norwegian companies. ICO was advised that bareboat charges were covered under special regime of presumptive taxation of section 44BB of the Act. Accordingly, ICO deemed income at the rate of 10% of gross bareboat charges and withheld tax @ 4.1% on the same.
The AO held that there was short deduction of tax at source and hence payment was disallowable u/s.40(a)(i) by observing that:
(a) Once amount is chargeable to tax, the payer is obligated to make an application to the Tax Department for determination of appropriate proportion of income chargeable to tax.
(b) The payer cannot on its own decide the proportion of income chargeable to tax either by applying any special or general provisions stipulated under the Income-tax Act.
(c) In ICO’s own case1 for an earlier year, ITAT had held that the determination of the applicability of special provisions of section 44BB to a payee cannot be made by ICO itself while discharging its withholding obligation and that TDS w.r.t. 10% presumed income resulted in disallowance u/s.40(a)(i).
ICO contended that:
Section 40(a)(i) applied only to the cases of absolute failure and not to short deduction.
The obligation to deduct tax is to be limited to appropriate portion of income chargeable under the Act forming part of the gross amount payable to the non-resident.
In terms of non obstante provision in section 44BB, the maximum appropriated portion of income chargeable under the Act in the hands of recipient Norwegian company was 10%.
ICO had rightly deducted tax at source on such statutorily presumed income of 10%.
Held:
The Tribunal held as follows:
In terms of SC decision in case of Transmission Corporation2, if payment represents sum chargeable to tax, ordinarily, ICO is required to withhold tax on gross basis unless there is appropriate quantification of income by the AO.
Although normally the payer cannot quantify the income of a non-resident which is subjected to withholding, section 44BB being a presumptive taxation provision stands on a different footing as it overrides the provisions of sections 28 to 41 and 43.
The recipient need not file the return of income if he is not desirous of assessment lower than what is contemplated by presumptive rate of section 44BB.
Where the statute has provided a special provision for dealing with a particular income, such a provision would exclude general provisions for dealing with incomes accruing or arising out of any business connection.
ICO’s own case for the earlier year is no longer a valid precedent in view of SC decision in case GE India Technology, which held that TDS obligation is limited to appropriate portion of income chargeable under the Act.
