Clarification contained in Circular No. 155, dated 21-12-1974 reiterated to ensure proper computation of tax to be deducted at source in the case of non-resident whose tax liability is to be borne by payer
Circular No. 370 was issued by the Central Board of Direct Taxes on 3 October 1983. Its subject is Clarification contained in Circular No. 155, dated 21-12-1974 reiterated to ensure proper computation of tax to be deducted at source in the case of non-resident whose tax liability is to be borne by payer.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Reiterates the grossing-up rule for deduction under section 195 where the tax on a payment to a non-resident is borne by the payer, restating paragraphs 2 to 4 of circular No. 155 dated 21 December 1974. Where the amount is stipulated to be paid net of tax, the income chargeable in the recipient's hands is the net payment grossed up to a figure which, after deducting tax on that gross figure, leaves the stipulated net amount; tax under section 195 must be deducted on that grossed up amount and not on the net amount, each time such a payment is made. The tax so deducted must be paid to the credit of the Central Government under section 200 read with rule 30, and cannot be withheld on the ground that the payer will in any case pay it when the non-resident is regularly assessed.
It had come to the Board's notice that in cases where the payer bore the non-resident's tax, section 195 was not being followed, exposing such payers to interest under section 201(1A), penalty under section 221 and punishment under section 276B.
Clarification contained in Circular No. 155, dated 21-12-1974 reiterated to ensure proper computation of tax to be deducted at source in the case of non-resident whose tax liability is to be borne by payer
1. It has come to the notice of the Board that in certain cases where payments are made to non-residents and the tax payable by the non-resident is borne by the person making the payment, the provisions of section 195 are not being followed. As a result such persons become liable to pay interest and penalty under section 201(1A) and section 221, respectively and also punishment under section 276B.
2. Board’s Circular No. 155, dated 21-12-1974 [Clarification 2] outlines the method of computation of tax to be deducted at source under section 195 in the case of a non-resident, whose tax liability is to be borne by the payer and its payment to the credit of the Central Government. Paras 2, 3 and 4 of this circular are reproduced below :
"2. Where the amount payable to a non-resident is stipulated to be paid to him net of tax (i.e., where the tax payable by the non-resident is borne by the person making the payment), the income chargeable to tax in the hands of the recipient is determined by the grossing up the net of tax payment to such an amount as would, after deducting the tax on such gross amount, leave the stipulated net amount of income. Accordingly, the sum chargeable to tax in the hands of the non-resident recipient would be this grossed up amount and it is with reference to this grossed up amount that tax has to be deducted as required by the provisions of section 195.
3. Persons responsible for paying to a non-resident person, any sums which are stipulated to be paid net of taxes should carefully note that the calculation of tax to be deducted at source as required by section 195, should be made not with reference to the net of tax amount payable to the non-resident but should be made with reference to the gross amount as aforesaid. Deduction of tax at source in this manner should be made every time any such payment is made to the non-resident.
4. The tax so calculated and deducted should be paid to the credit of the Central Government as required by section 200, read with rule 30 of the Income-tax Rules, 1962 and should not be withheld on the ground that the tax will, in any case, be paid by the persons making the payment ultimately when regular assessments are made in the case of non-resident payee."
3. The contents of Board’s Circular No. 155, dated 21-12-1974 are being reiterated so as to ensure that the correct amount of tax is deducted at source under section 195 at the time of payment of non-residents and after deduction, such tax is paid to the credit of the Central Government within the prescribed time.
Circular: No. 370 [F.No. 391/3/78-FTD], dated 3-10-1983.
In a section 201 and 201(1A) order against an Indian payer on a net-of-tax contract, and in the penalty proceeding that follows.
A contract provides for payment of Rs. 90 net of Indian tax to a non-resident, the rate in force being 10 per cent. The sum chargeable is the grossed up Rs. 100, tax of Rs. 10 is deducted and paid to the Government, and the non-resident receives Rs. 90. Deducting Rs. 9 on the net Rs. 90 leaves a shortfall carrying interest under section 201(1A).
Rules it names. Rule 30 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.
