Chargeability a must for withholding of taxes

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ITO v M/s Prasad Production Limited Income Tax Appellate Tribunal ITAT
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In ITO v M/s Prasad Production Limited a special bench of the Income Tax Appellate Tribunal (ITAT) recently ruled that a resident is not required to deduct tax at source while making payments to a non-resident, if he believes that they are not chargeable to tax in India.

The ITAT Chennai was faced with the question of whether a taxpayer who has not applied to the assessing officer for a determination for deduction of tax at a lower or nil rate of tax under the provisions of the Income Tax Act, 1961, (ITA) is statutorily obliged to deduct tax at source on the entire payment. The ITAT held that if a taxpayer does not apply for a determination, believing that no part of the payment is chargeable to tax, he is not obliged to deduct tax at source on any part of the payment.

This ruling closely follows closely on the heels of a similar verdict passed by Delhi High Court in Van Oord Acz India (P) Ltd, where it was held that obligation to deduct tax under section 195 arises only where the payment is chargeable to tax under the ITA.

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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.

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