Section 195 cast an obligation upon the assessees to deduct tax on all payments (barring interest on securities or salary income for which separate sections hold application) to non-residents. The decision of the Hyderabad Bench of the Tribunal in the case of Cheminor Drugs Ltd. vs. Income-tax Officer (76ITD37) lay down a warning to all assessees to obtain a prior permission of the assessing officer under sub sections (2) or (3) of section 195 in all cases where it chooses not to deduct tax or choose to deduct tax at lower rate. Though this may cause some avoidable inconvenience in certain cases such as where the income is not chargeable yet the same found to be unavoidable. In this case the company had made certain remittances by way of legal charges to its Attorneys in USA and also to various non-residents towards commission against export sales.
The Bench held that the provisions contained in section 195 are strict and require an urgent compliance. It further clarified that the provisions of section 195(2) are not provisions of convenience, which the assessee may use or may not use.
In other words where the person making such payments to a non-resident thinks that the payments made by him to the non-resident would not be income chargeable in the case of the recipient, he can made an application to the Assessing Officer to determine the issue and decide whether tax is to be deducted at source or not and if it is to be deducted, to what extent. Similar such facility of consulting the Assessing Officer is available to the recipient non-resident.
In a resounding note the Bench held for the purposes of deciding whether any payment is in the nature of income chargeable or not, law provides an opportunity to the payer to approach the Assessing Officer under sub-section (2) of section 195. The consultation provided under sub-section (2) of section 195 is, therefore, to be mandatory followed by the person making the payment to the non-resident; he is otherwise liable to deduct tax at source under the provisions of sub-section (1) and thus the person making the payments to a non-resident cannot take a unilateral decision that the payments made by him are not sums chargeable to income-tax.
However the payer can take into account provisions in the Act, Circulars etc. where under the specified payments are explicitly declared exempt in which case he may desist from making any deduction. As a caution it is advisable to seek approval of the assessing officer in every case, which involve interpretation.