Non-resident payment withholding: failure to deduct tax can trigger disallowance, subject to credit for tax actually deducted

Payments to a non-resident are subject to the payer's primary obligation to deduct tax under section 195, and the payer cannot finally decide that the recipient's income is not taxable without obtaining a nil or lower-deduction certificate under section 195(2) or section 197. In the absence of such certificate, failure to deduct tax can trigger disallowance under section 40(a)(i), while any portion on which tax was actually deducted is eligible for relief once verified.

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Issues: Whether reimbursement of mobilization and demobilization charges paid to a non-resident was disallowable under section 40(a)(i) for failure to deduct tax at source under section 195, and whether the assessee was entitled to credit for the amount on which tax had in fact been deducted.

Analysis: The Tribunal held that the payer is bound to comply with section 195 when making payments to a non-resident, and that it is not for the payer to determine finally whether the recipient's hands attract tax. Where no certificate for nil or lower deduction is obtained under section 195(2) or section 197, failure to deduct tax at source attracts the consequence under section 40(a)(i). Applying that principle, the Tribunal sustained the disallowance in principle in respect of the reimbursement. At the same time, it accepted the assessee's plea that tax had been deducted on a part of the disputed amount and directed verification of that factual claim.

Conclusion: The disallowance under section 40(a)(i) was upheld in principle, but the assessee was entitled to relief to the extent tax had already been deducted on the verified amount.

Final Conclusion: The appeal succeeded only to the limited extent of verification and allowance of the amount on which tax had already been deducted; otherwise, the expenditure disallowance was maintained.

Ratio Decidendi: For payments to non-residents, the payer's obligation under section 195 is primary, and failure to deduct tax where no nil or lower-deduction certificate exists justifies disallowance under section 40(a)(i), subject to credit for tax actually deducted and verified.

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