Withdrawal of Cir 786/2000

Following is the text of circular no. 7/2009

Circular no 7 /2009
F. No 500/135/2007-FTD-I
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Dated 22nd Oct, 2009

Sub: Withdrawal of Circulars No 23 dated 23rd July, 1969, No 163 dated 29th May,
1975 and No 786 dated 7th February, 2000
The Central Board of Direct Taxes had issued Circular No 23 (hereinafter called
“the Circular”) on 23rd July 1969 regarding taxability of income accruing or arising
through, or from, business connection in India to a non-resident, under section 9 of the
Income-tax Act, 1961.
2. It is noticed that interpretation of the Circular by some of the taxpayers to claim
relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or
the intention behind the issuance of the Circular.
3. Accordingly, the Central Board of Direct Taxes withdraws Circular No 23 dated
23rd July, 1969 with immediate effect.
4. Even when the Circular was in force, the Income-tax Department has argued in
appeals, references and petitions that-
(i) the Circular does not actually apply to a particular case, or
(ii) that the Circular can not be interpreted to allow relief to the taxpayer which is
not in accordance with the provisions of section 9 of the Income-tax Act or
with the intention behind the issue of the Circular.
It is clarified that the withdrawal of the Circular will in no way prejudice the aforesaid
arguments which the Income-tax Department has taken, or may take, in any appeal,
reference or petition.
5. The Central Board of Direct Taxes also withdraws Circulars No 163 dated 29th
May, 1975 and No 786 dated 7th February, 2000 which provided clarification in respect
of certain provisions of Circular No 23 dated 23rd July, 1969.
(Kamlesh C. Varshney)
Secretary, Central Board of Direct Taxes

My Question--
.....Now what exact section or circular should be quoted for foreign remittance transactions that are exempt from TDS

You will not be quoting any of these circulars.The payment should be exempt from TDS by virtue of Section 9 itself or by virtue of DTAA with country of Tax residence of Payee. If either of these exempt the payment then you can quote the relevant Section 9 or DTAA.

Usually PROVIDED there is no royalty or technical fee involved, Taxable income is not accrued in India if there is no work performed in India and there is no PE in India and the payment is not received in India by the recepient. This is clearly implied in Section 9 itself. However, you can also use the provisions of Article 5 (For PE) and Article 7 for Business Income in the DTAA. They usually give right to tax business income only in state of residence of payee. In case payee has a PE in the source state then only the source state can tax to the extent of income attributable to the PE of the non resident. Per Indian Tax law, if there is a PE, the payer is not to decide what the profit of PE is. The payer has to deduct 30% in case of individual or 40% in case of non domestic company and the payee has to file return of actual income and claim refund from Indian Government. Usually the payee in such case applies for certificate for lower deduction u/s 197. In this case the Form 15CB is a mere formality.

If the income is not taxable you write reference to Section 9 (paragraph number or explanation number) and / or the Article 5, 7, 12, 13, 14, 15. Normally Royalty and Fees for technical Services are taxable irrespective of PE Status. In DTAA with some countries, they may link the Article 12, 13, 14 or 15 for Royalty, FTS and Independent Personal Service (Lawyer, Accountant, Doctor, Engineer, Actor) to the condition of having PE or the Independent Personal Services may be linked to duration of stay in the source state. Some DTAA may prescribe a maximum rate of taxation for these services irrespective of PE. You will use whatver is most beneficial to the payee. However, you will need PAN if lower than 20% in any case whether you apply DTAA or Section 9. Therefore if any of these Articles 12-15 are linked to PE / duration of stay and are exempt by virtue of these, quote the Article number of the DTAA.