Grossing up of non-resident tax liability applies where payer bears tax under a net-of-tax arrangement.

A retrospective amendment plea on TDS liability could not be raised for the first time at final hearing when the assessee had accepted the liability before the lower authorities and had only disputed quantum; the new ground was rejected as belated. In a net-of-tax arrangement for fees for technical services paid to a non-resident under the India-UK DTAA, the payer's assumption of tax liability had to be added to the recipient's income and grossed up for TDS purposes under Section 195A. The treaty fixed the tax rate but did not override the domestic computation mechanism, and absent a specific exemption, the challenge to grossing up failed.

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Issues: (i) Whether the assessee could be permitted, at the stage of final hearing, to raise an additional substantial question of law challenging liability to deduct tax at source in view of the retrospective amendment to the law; (ii) Whether, in a net-of-tax arrangement for fees for technical services paid to a non-resident under the India-UK DTAA, the tax liability borne by the payer had to be added to the recipient's income and grossing up applied for deduction of tax at source.

Issue (i): Whether the assessee could be permitted, at the stage of final hearing, to raise an additional substantial question of law challenging liability to deduct tax at source in view of the retrospective amendment to the law.

Analysis: The assessee had accepted the liability to deduct tax at source before the lower authorities and had only disputed the quantum of deduction. The belated plea based on the retrospective amendment to the law had neither been raised before the Assessing Officer nor adjudicated by the appellate authorities. The Court held that a party which was never aggrieved on that ground cannot be allowed to introduce a wholly new issue at the final hearing stage, especially after long delay.

Conclusion: The additional substantial question of law was not permitted and the memorandum raising it was rejected.

Issue (ii): Whether, in a net-of-tax arrangement for fees for technical services paid to a non-resident under the India-UK DTAA, the tax liability borne by the payer had to be added to the recipient's income and grossing up applied for deduction of tax at source.

Analysis: The agreement required payment net of Indian taxes, and the payer undertook the tax burden. Section 195A of the Income-tax Act, 1961 mandates grossing up where tax on income is borne by the payer. The India-UK DTAA fixed the rate of tax but did not provide a computational mechanism or define gross amount or income. In the absence of an exemption such as Section 10(6A) of the Income-tax Act, 1961, the tax borne by the payer formed part of the recipient's income under the inclusive definition in Section 2(24) of the Income-tax Act, 1961, and had to be added for TDS computation.

Conclusion: Grossing up was correctly applied, and the assessee's challenge failed.

Final Conclusion: The assessee's objections on maintainability and on the substantive tax computation were rejected, and the demand based on grossing up under the TDS provisions was sustained.

Ratio Decidendi: Where a payer contractually bears the non-resident recipient's tax liability, the amount so borne is part of the recipient's income for TDS purposes and must be grossed up under Section 195A unless a specific statutory exemption excludes it; a DTAA fixing the tax rate does not displace the domestic computation mechanism absent an express treaty provision.

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