Circular No. 7 — Section 239 of the Income-tax Act

What this is

Circular No. 7 was issued by the Central Board of Direct Taxes on 27 September 2011. Its subject is Section 239 of the Income-tax Act, 1961 - Refunds - Procedure for Refund of TAX Deducted at Source under section 195 to the Person Deducting the TAX - Amendment in Circular No. 7/2007, Dated 23-10-2007.

This one is about a tax treaty. India’s treaties enter Indian law by notification under section 90; where the instrument below is that notification, its date decides from when the treaty may be applied, and where it is a circular, it is the Board telling its officers how it reads the treaty — which is not the same thing.

What it does

Widens the refund route for a deductor who has over-deducted under section 195. Circular No. 7/2007 dated 23 October 2007 laid down the procedure by which the person deducting tax from a payment to a non-resident can obtain the refund himself, and para 2 of it listed the circumstances in which it applies. That list did not cover the case where tax was deducted at the rate in the relevant double taxation avoidance agreement and that rate was higher than the rate under the Act. Since the law requires deduction at the treaty rate or the rate under the Act, whichever is lower, excess deduction can occur in reliance on the treaty, and the Board extends Circular No. 7/2007 to those cases as well. That circular stands modified to this extent.

Why it was issued

The resident deductor is put to genuine hardship in such a case, and the earlier circular did not reach it.

Who it reaches

Resident deductors who withheld at a treaty rate higher than the domestic rate on a payment to a non-resident
Payers who bore the tax themselves under a grossing-up arrangement
Non-residents whose Indian payer over-deducted

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.195	s.393, s.395, s.397, s.400
s.239	s.433

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTION 239 OF THE INCOME-TAX ACT, 1961 - REFUNDS - PROCEDURE FOR REFUND OF TAX DEDUCTED AT SOURCE UNDER SECTION 195 TO THE PERSON DEDUCTING THE TAX - AMENDMENT IN CIRCULAR NO. 7/2007, DATED 23-10-2007
CIRCULAR NO. 07/2011 [F.NO. 500/135/2007-FTD-I], DATED 27-9-2011
The Board had issued Circular No. 7/2007, dated 23-10-2007 laying down the procedure for refund of tax deducted at source under section 195 of the Income-tax Act, 1961 to the person deducting tax at source from the payment to a non-resident.
2. Para 2 of the Circular lists the circumstances under which the provisions of the said Circular shall apply. This paragraph does not cover a situation where the tax is deducted at a rate prescribed in the relevant DTAA which is higher than the rate prescribed in the Income-tax Act, 1961. Since the law requires deduction of tax at a rate prescribed in the relevant DTAA or under the Income-tax Act, whichever is lower, there is a possibility that in such cases, excess tax is deducted relying on the provisions of the relevant DTAA. Since in these cases as well, the resident deductor is put to genuine hardship, the Board has decided that the provisions of Circular No. 7/2007, dated 23-10-2007 shall also apply to those cases where deduction of tax at a higher rate under the relevant DTAA has been made while a lower rate is prescribed under the domestic law.
3. Circular No. 7/2007, dated 23-10-2007 stands modified to this extent.

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What to watch

The rule the circular rests on is that deduction is at the treaty rate or the rate under the Act, whichever is lower — a treaty rate is a ceiling, not a mandate.
Only para 2 of Circular No. 7/2007 is enlarged; the procedure, conditions and time limits in the rest of that circular continue to govern the claim.
This gives the refund to the deductor; where the non-resident bore the tax the claim lies with him instead.
The excess must arise from the rate difference; other kinds of excess deduction have to be brought within the original circumstances of the 2007 circular.

Where you meet it

When a deductor seeks a refund of tax deducted under section 195 that he need not have deducted at the treaty rate, and the department relies on the original list of circumstances.

What it names

It mentions. Circular No. 07/2011, Circular No. 7/2007

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 15/2019 — Issues in respect of payment of third installment under the Income Declaration Scheme, 2016- clarification on certain pr 12 July 2019
Notification 59/2017 [F. No. 370 142/8/2017-TPL] / GSR 826(E) — Ministry of Finance 4 July 2017
Notification No.31/2016 [F. No.370142/3/2016-TPL]/SO 1655(E) — [To BE Published in the Gazette of INDIA Extraordinary, Part II, section 3, Sub-section (ii)] 5 May 2016
Notification: 21 Date of Issue: 13/6/2012 — [To BE Published in the Gazette of INDIA, Extraordinary, 13 June 2012
Press Release — CBDT clarifies "Vodafone was warned" 2 May 2012
Circular No. 9/2009 — Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident - Clarification regarding 30 November 2009

← ORDER [F.NO.225/72/2010/ITA-II] · Circular No. 8/FT&TR/2011 [F.NO. 500/15/2011-FT&TR-I] →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.