Direct Tax Alert - Form notified for making application under section 195(2) of the IT Act

Section 195(1) of the Income-tax Act, 1961 (IT Act) requires any person, responsible for paying certain interest income or any other sum chargeable to tax (except salary income) to non-resident or to a foreign company, to withhold tax at the rates in force. Further, where the said amount includes certain portion not chargeable to tax, the taxpayer (i.e., payer) can approach the Tax Officer under section 195(2) of the IT Act for determination of the appropriate portion of income chargeable to tax. Section 195(7) of the IT Act has granted power to the Central Board of Direct Taxes (CBDT) to prescribe Rules and Form for making application to the tax officer for determination of portion on which tax is to be withheld.  

Recently, the CBDT notified¹ new Rule 29BA and Form 15E for the purpose of making an application under section 195(2) of the IT Act. We, at BDO in India, have analysed and summarised the said notification and provided our comments on its impact hereunder.

From when will the Rule 29BA of the Income-tax Rules, 1962 (IT Rules) be applicable?

The new Rule 29BA of the IT Rules shall be applicable from 1 April 2021.

What is the procedure prescribed under by Rule 29BA of the IT Rules?

1. Application in Form 15E to be filed electronically either using digital signature or through electronic verification code.
2. Tax Officer to examine whether the sum being paid or credited is chargeable to tax under the IT Act read with relevant Double Taxation Avoidance Agreement (DTAA).
3. If the sum is chargeable to tax, the Tax Officer to determine the appropriate proportion of such sum chargeable to tax.
4. Tax Officer to examine the application and on being satisfied that the whole of such sum would not be income of the recipient, may issue a certificate determining appropriate proportion of such sum chargeable under the IT Act, for the purposes of tax withholding under section 195(1) of the IT Act.
5. While examining the application, the Tax Officer shall take into consideration the following information in relation to the recipient:
   • Tax payable on estimated income of the fiscal year (FY)
   • Tax payable on the assessed or returned income, as the case maybe, of preceding four FY
   • Existing liability under the IT Act and Wealth-tax Act, 1957
   • Advance tax payment, tax deducted at source and tax collected at source for the FY till the date of making application under section 195(2)

Which is the Form prescribed for making application?

The application is to be filed in Form 15E.

What will be the validity of certificate issued?

The certificate shall be valid for the payment to non-resident named therein and for such period of the FY as maybe specified in the certificate unless it is cancelled by the tax officer at any time before the expiry of specified period.

When can application for fresh certificate be made?

Application for a fresh certificate can be made after the expiry of the earlier certificate or within three months before the expiry thereof.

BDO Comments

With no format prescribed for making an application under section 195(2) of the IT Act, the applications were being drafted by the taxpayer on a plain paper. Now, with the notification of the Form and the guidance on the procedure for making the application will give the taxpayer a clarity on the procedure that should be followed. Considering that the application is to be filed by the payer and not the recipient, certain information requested in the form may be difficult to be obtain. Also, the requirement (though not mandatory) of a Tax Officer to ask for the tax liability of the preceding four FY may pose a challenge. Also, with respect to interest income the Form 15E specifically provides information as to whether the interest is covered by section 194LB, section 194LBA, section 194LC and section 194LD of the IT Act. Thus, it appears that the payer can approach for lower tax withholding rate in respect of interest covered under these sections as well.