In view of increasing cross border transactions which Indian enterprises have with the non-residents, section 195 of the Income-tax Act, 1961 [the Act] dealing with deduction of tax at source from payments to non-residents has assumed huge importance over the years. Many amendments have taken place in the section(s), relevant rules and forms relating to deduction of tax at source from payments to non-residents. In addition, due huge litigation in this regard, there have been plethora of judicial pronouncements and cleavage of judicial opinions on various contentious issues. In this series of articles, we are dealing with the amended provisions as well as various important judicial pronouncements and practical issues relating to TDS u/s. 195.
In view of the vastness of the subject, plethora of issues, judicial pronouncements and space limitations, at various places we have only referred to relevant statutory provisions, CBDT Circulars and Instructions and judicial pronouncements. For a better understanding of the issues, reader is advised to study the same in detail.
1. Overview of Relevant Provisions
1.1 Relevant sections
Section |
Particulars |
195(1) |
Scope and conditions of applicability |
195(2) |
Application by the ‘payer’ to the Assessing Officer [AO] |
195(3), (4) & (5) |
Application by the ‘payee’ to the AO, validity of certificate issued by the AO, Powers of CBDT to make rules by issuing Notifications re s/s. (3) |
195(6) |
Furnish the information relating to the payment of any sum under s/s. (1) |
195(7) |
Power of CBDT to specify class of persons or cases where application to AO u/s. 195(2) compulsory |
195A |
Grossing up of tax |
197 |
Certificate for deduction at lower rate |
206AA |
Requirement to furnish Permanent Account Number |
90(2) |
Application of Act or Treaty, whichever more beneficial |
90(4) |
Tax Residency Certificate |
94A(5) |
Special Measures in respect of transactions with persons located in notified jurisdictional area |
1.2 Other TDS provisions for payments to non-residents
Section |
Applicable to |
Rate |
192 |
Payment of Salary |
Average Rate |
194B |
Winnings from lottery or crossword puzzle or card game and other game of any sort |
Rate in force |
194BB |
Winnings from horse races |
Rate in force |
194E |
Payment to non-resident sportsmen or sports associations |
20% |
194LB |
Interest to non-resident by an Infrastructure Debt fund |
5% |
194LBA (2) & (3) |
Income [referred in section 115UA of the nature referred in section 10(23FC) and 10(23FCA)] from units of a business trust to its unit holders |
5% /rate in force |
194LBB |
Income [other than referred in section 10(23FBB)]in respect of units of investment fund |
Rate in force |
194LC |
Interest to non-resident by an Indian company or a business trust under approved loan agreements or on long term Infra Bonds approved by Central Govt. |
5% |
194LD |
Interest to FIIs or QFIs on rupees denominated bonds or Government security |
5% |
196B |
Income from units u/s. 115AB purchased in foreign currency or Long-term capital gains [LTCG] arising from transfer of such units |
10% |
196C |
Interest, Dividends or LTCG from Foreign Currency bonds or shares referred in section 115AC |
10% |
196D |
Interest, Dividends or Capital Gains of FIIs from securities (Other than interest covered by section 194LD) referred in section 115AD (1)(a) |
20% |
1.3 Relevant Rules and Forms
Rule |
Particulars |
26 |
Rate of exchange for the purpose of deduction of tax at Source on income payable in foreign currency |
115 |
Rate of exchange for conversion into rupees of income expressed in foreign currency |
21AB |
Certificate (Form 10F) for claiming relief under an agreement referred to in section 90 and 90A |
28(1), 28AA, 28AB & 29 |
Application and Certificate for deduction of tax at lower rates |
29B |
Application for Certificate u/s.195(3) authorising receipt of interest and other sums without deduction of tax |
37BB |
Furnishing of Information for payment to a non-resident, not being a company, or to a Foreign Company |
37BC |
Relaxation from deduction of tax at higher rate u/s 206AA |
Form |
Particulars |
15CA |
Information to be furnished for payment to a non-resident, not being a company, or to a Foreign Company |
15CB |
Certificate of an Accountant |
13 |
Application for a Certificate u/s. 197 |
15C & 15D |
Application u/rule 29B by a Banking Company and by any other person |
10F |
Information to be provided u/s. 90(5) or 90A(5) |
27Q |
Quarterly statement of deduction of tax u/s. 200(3) in respect of payments (other than salary) made to non-residents |
2. Section 195 (1)
Other sums.
195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
Provided that ….
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.
Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with s/s. (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.”
2.1 Section 195(1) – Exclusions
The following are excluded from the scope of section 195(1):
(i) Interest referred to in section 194LB or section 194LC or section 194LD.
(ii) Income chargeable under the head “Salaries”.
(iii) Dividends referred to in section 115-O.
(iv) Sum not chargeable to tax in India.
a. Non-chargeability either due to Act or Double Taxation Avoidance Agreement [DTAA]. DTAA benefit subject to obtaining TRC/Form 10F from the non-resident payee.
b. Due to scope of total income u/s. 5 or exemption u/s. 10.
c. No TDS on amounts exempt u/s. 10 – Hyderabad Industries Ltd. vs. ITO 188 ITR 749 (Kar).
d. Income from specified services such as online advertisement, digital advertising space subject to Equalisation Levy (Chapter VIII of Finance Act 2016) – Exempt u/s. 10(50).
(v) Section 172 – Profits of non-residents from Occasional Shipping Business
a. CBDT Cir. No. 723 dated 19.09.1995 – Payments to shipping agents of non-resident ship owners – Provisions of section 172 apply and section 194C/195 will not apply.
b. CBDT Cir. No. 732 dated 20.12.1995 – Annual No Objection Certificate u/s. 172 to be issued by AO where Article 8 of DTAA applies – declaration that only international traffic during period of validity of certificate.
c. CIT vs. V. S. Dempo & Co (P) Ltd. 381 ITR 303 (Bom) – Section 195 not applicable to shipping profits governed by section 172 and section 44B.
(vi) Where certificate is obtained by the payee u/s 197 for non-deduction of TDS and such certificate is in force (not cancelled), then the payer cannot be treated as assessee in default for non-deduction of TDS – CIT vs. Bovis Lend Lease (I) Ltd. 241 Taxman 312 (SC).
2.2 Scope of section 195 (1) – Inclusions
(i) Any person responsible for paying to a non-resident, not being a company or a Foreign Company is covered in the scope of section 195(1). It includes all taxable entities and there is no exclusion for individual/HUF.
(ii) The term person includes a local authority. In CIT vs. Warner Hindustan Limited 158 ITR 51 (AP), the court while holding that the expression “person” includes a Department of a foreign government like USAID held that “As observed by us already the expression “person” is of wide connotation and it includes, in our opinion, the Department of a foreign Government like USAID. Learned counsel for the assessee invited our attention to a decision in Madras Electric Supply Corporation Ltd. vs. Boar land (Inspector of Taxes) [1935] 27 ITR 612 (HL), to support the proposition that the expression “person” includes Crown. We find that the above-referred decision supports the view that a Government falls within the meaning of the expression “person”.”
(iii) Section 195 includes residents as well as non-residents. Following the decision of the Supreme Court in the case of Vodafone International Holdings BV vs. Union of India 341 ITR 1 (SC), Explanation 2 has been inserted by the Finance Act, 2012 with retrospective effect from 1.4.1962, which clearly provides that ‘For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.
(iv) If a person is treated as agent of a non-resident u/s.163, the same person cannot be proceeded u/s. 201 at the same time for non-deduction of TDS on payment to non-resident. CIT vs. Premier Tyres Ltd. 134 ITR 17 (Bom).
(v) The term Non-Resident includes a Non-resident Indian. However, it does not include a person who is Resident but Not Ordinarily Resident [RNOR]. It is important to note that the term non-resident includes RNOR for the purposes of sections 92, 93 and 168 but not for the purposes of section 195.
(vi) Residential status of a person i.e. whether he is resident or non-resident based on the physical presence test in India of more 182 days in the current year may not be known till year end. A question arises as to in the initial months of a financial year, how it has to be determined as to a person is non-resident or not.
Whether earlier year’s residential status can be adopted in such cases? The Authority for Advance Ruling [AAR] in the case of Robert W. Smith vs. CIT 212 ITR 275 (AAR) and Monte Harris vs. CIT 218 ITR 413 (AAR), for purposes of determining the residential status of an applicant u/s. 245Q, held that it appears more practical and reasonable for purposes of determining the residential status of an applicant u/s. 245Q to look at the position in the earlier previous year, i.e., the financial year immediately preceding the financial year in which the application is made. In the Monte Harris’s case, the AAR observed as follows:
“An application may be presented soon after the commencement of the financial year. It may also have to be disposed of before the end of that financial year. In that event, both on the date of the application as well as on the date on which the application is heard and disposed of, it may not be possible in all cases to predict with reasonable accuracy whether the stay of the applicant in India during that financial year will exceed 182 days or not. In other words, it will be difficult to determine the residential status of the applicant with reference to the previous year of the date of application. The expression ‘previous year’ should be so construed as to be applicable uniformly to all cases. It cannot be said that a previous year should be taken as the financial year in which the application is made provided the stay of the applicant up to the date of the application or the estimated stay of the applicant in India in that financial year exceeds 182 days and that it should be the previous year preceding that financial year in case it is not possible to determine the duration of the stay of the applicant in India in the financial year in which the application is made. It appears more practical and reasonable for purposes of determining the residential status of an applicant under section 245Q to look at the position in the earlier previous year, i.e., the financial year immediately preceding the financial year in which the application is made. This is a period with reference to which the residential status of the applicant in every case can be determined without any ambiguity whatsoever. In the instant case, though the applicant was resident in India in the financial year 1994-95 during which the application had been made, he was non-resident in India during the immediately preceding financial year, i.e., 1993-94. The applicant must, therefore, be treated as a non-resident for the purposes of the instant application. The application was, therefore, maintainable.”
It remains to be judicially tested as to whether a similar stand can be taken for the purposes of section 195(1).
(vii) In respect of TDS from the payment to an agent of a non-resident in the following cases it was held that the payer is required to deduct tax at source:
– Narsee Nagsee & Co. vs. CIT 35 ITR 134 (Bom).
– R. Prakash [2014] 64 SOT 10 (Bang.)
However, in the case of Tecumseh Products (I) Ltd. [2007] 13 SOT 489 (Hyd.), the ITAT, on the facts of the case, held that the assessee was not liable to TDS as the primary responsibility for payment of interest was of the Bank and not of the assessee, though later on the bank may recover the amount of interest paid by it from the assessee. In this regard, the ITAT held as follows:
“In the instant case, the question for consideration was as to who was responsible for making payment of interest to the non-resident bank. Admittedly, the interest was paid by Andhra Bank and not by the assessee. The case of the department was that since the bank had paid interest on behalf of the assessee as an agent, the assessee was responsible for making deduction of tax before payment. It was not in dispute that in terms of letter of credit, non-resident bank negotiated with the Andhra Bank for payment of interest on late payment. When the supplier presented the letter of credit and negotiated the same through non-resident bank in terms of letter of credit, Andhra Bank was bound to pay interest in case of any late payment. The Andhra Bank might recover the payment from the assessee, but the immediate responsibility was that of Andhra Bank and not the assessee. The Legislature has used the words “any person responsible for paying”. In instant case, the responsibility was of Andhra Bank and not of the assessee. The payment might have been made on behalf of the assessee but that did not take away the responsibility of Andhra Bank from paying interest to the foreign bank. Therefore, it might not be proper to say that the assessee failed to deduct tax while paying interest to the foreign banker.”
(viii) The term ‘any person’ includes a foreign company, whether it is resident in India or not. It also includes Indian branch of foreign company.
a) Section 195(3) and Rule 29B contains relevant provisions regarding grant of a certificate by the AO authorising such a branch to receive interest or other sum without TDS as long as the certificate is force.
b) A foreign company having a branch or office in India is also covered. ITO vs. Intel Tech India P. Ltd. 32 SOT 227 (Bang).
However, it is to be noted that payments to foreign branch of an Indian company is not covered under the provisions of section 195.
c) Payment by a branch to HO/Other foreign branch.
There is a cleavage of judicial pronouncements on the subject. However, in respect of payment of interest by the PE of a foreign bank, the law has been amended by insertion of Explanation to section 9(1)(v), which has been explained below.
i. TDS Required: CBDT Circular 740 dtd 17.4.1996 – Branch of a foreign company is a separate entity and hence payment of interest by branch to HO is taxable u/s. 115A subject to provisions of applicable DTAA.
Dresdner Bank [2007] 108 ITD 375 (Mum.).
CBDT Circular No. 649 dated 31st March 1993 providing for treatment of technical expenses when being remitted to Head Office of a non-resident enterprise by its branch office in India requires that the branch – permanent establishment – should ensure tax deduction at source in such cases in accordance with the provisions of section 195 of the Act.
ii. TDS Not Required: In the following cases it was held that TDS u/s 195 is not applicable.
ABN Amro Bank NV vs. CIT [2012] 343 ITR 81(Cal),
Bank of Tokyo Mitsubishi Ltd vs. DIT 53 taxmann.com 105 (Cal),
Deutsche Bank AG vs. ADIT 65 SOT 175 (Mum), and
Sumitomo Mitsui Bank Corpn vs. DDIT [2012] 136 ITD 66 (Mum)(SB).
iii. Amendment vide Finance Act 2015 w.e.f 1.4.2016
Interest deemed to accrue or arise in India u/s. 9(1)(v). Explanation inserted to section 9(1)(v) reads as follows:
“Explanation: for the purposes of this clause,-
(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly;”
Thus,
– The aforesaid Explanation is applicable to non-resident engaged in business of banking.
– Interest payable by Indian PE to HO, any PE or any other part of such NON-RESIDENT outside India deemed to accrue or arise in India.
– Chargeable to tax in addition to any income attributable to PE in India.
– PE in India deemed to be separate and independent of the NON-RESIDENT of which it is a PE.
– Provisions relating to computation of total income, determination of tax and collection and recovery to apply accordingly.
2.3 Scope of section 195 (1) – Sum Chargeable to Tax
(i) Transmission Corpn of AP Ltd. vs. CIT 239 ITR 587 (SC)
a) Payment to non-resident towards purchase of machinery and erection and commissioning thereof.
b) Assessee’s contention – Section 195 applies only in respect of sums comprising of pure income or profit.
c) Held that:
• TDS applicable not only to amount which wholly bears income character but also to sums partially comprising of income.
• Obligation to deduct tax limited to portion of the income chargeable to tax.
• Section 195 is for tentative deduction of tax and by deducting tax, rights of the parties are not adversely affected.
• Rights of parties safeguarded by sections 195(2), 195(3) and 197.
• File application to AO – If no application filed, tax to be deducted.
(ii) GE India Technology Centre (P.) Ltd. vs. CIT [2010] 193 Taxman 234 (SC)
The interpretation of the decision of SC in the Transmission Corporation’s case (supra) was subject matter of litigation in many cases and the issue once again came up for resolution before the Supreme Court in this case. The SC held as under:
a) The moment there is a remittance out of India, it does not trigger section 195. The payer is bound to deduct tax only if the sum is chargeable to tax in India read with section 4, 5 and 9.
b) Section 195 not only covers amounts which represents pure income payments, but also covers composite payments which has an element of income embedded in them.
c) However, obligation to deduct TDS on such composite payments would be limited to the appropriate proportion of income forming part of the gross sum.
d) If payer is fairly certain, then he can make his own determination as to whether the tax is deductible at source and if so, what should be the amount thereof, without approaching the AO.
(iii) Instruction No. 2 of 2014 dated 26-2-2014 directing that in a case where the assessee fails to deduct tax u/s. 195 of the Act, the AO shall determine the appropriate proportion of the sum chargeable to tax as mentioned in sub-section (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default u/s. 201 of the Act, and the appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion.
(iv) Tax withholding from payment in kind / Exchange etc.
TDS u/s. 195 is required to be deducted.
a) Kanchanganga Sea Foods Ltd. vs. CIT 325 ITR 540 (SC).
b) Biocon Biopharmaceuticals (P) Ltd. vs. ITO 144 ITD 615 (Bang).
However, in the context of distribution of prizes to customers wholly in kind (section 194B) and receipt of Certificate of Development Rights against voluntarily surrender of the land by the landowner, it has been held in the following cases that TDS provisions are not applicable:
c) CIT vs. Hindustan Lever Ltd. (2014) 264 CTR 93 (Kar)
d) CIT(TDS) vs. Bruhat Bangalore Mahanagar Palike (ITA No. 94 and 466 of 2015)(Kar).
(v) Payments by one non-resident to another non-resident inside / outside India
a) Asia Satellite Telecommunications Co. Ltd. vs. DCIT 85 ITD 478 (Del) – Source of Income in India, are covered by section 195.
b) Vodafone International Holding B.V. vs. UoI [2012] 17 taxmann.com 202 (SC).
(vi) For non-compliance by a non-resident of TDS provisions, section 201 not applicable if recipient pays advance tax.
a) AP Power generation Corporation Ltd. vs. ACIT 105 ITD 423.
2.4 Sum Chargeable to Tax – TDS Guidelines
Situation |
Consequences |
Entire payment not chargeable to tax |
Not required to withhold tax. |
Entire payment subject to tax |
Tax should be withheld. |
Part of payment subject to tax |
Tax should be withheld on the appropriate proportion of sum chargeable to tax [CBDT Instruction No. 2/2014 dated 26 February 2014]. |
Part of payment subject to tax in India – Payer unable to determine appropriate portion of the sum chargeable to tax |
Apply to AO for determination of TDS. |
Payer believes that tax should be withheld but payee does not agree |
Approach the AO for determination of TDS. |
2.5 Chargeability to tax governed by provisions of Act/DTAA
Nature of Income |
Act (Apart from section 5, wherever applicable) |
Treaty |
Business/Profession |
Section 9(1)(i) – Taxable if business connection in India |
Article 5, 7 and 14 – Taxable if income is attributable to a Permanent Establishment in India |
Salary Income |
Section 9(1)(ii) – Taxable if services are rendered in India |
Article 15 – Taxable if the employment is exercised in India (subject to short stay exemption) |
Dividend Income |
Section 9(1)(iv), section 115A – Taxable if paid by an Indian Company (At present exempt) |
Article 10 – Taxable if paid by an Indian Company |
Interest Income |
Section 9(1)(v), section 115A – Taxable if deemed to arise in India |
Article 11- Taxable if interest income arises in India |
Royalties / FTS |
Section 9(1)(vi), section 115A – Taxable if deemed to arise in India |
Article 12 – Taxable if royalty/ FTS arises in India |
Capital Gains |
Section 9(1)(i), section 45 – Taxable if situs of shares / property in India |
Article 13 – Generally taxable if the situs of shares/ property in India. |
As per the provisions of section 90(2), provisions of the Act or DTAA, whichever is beneficial, prevails.
2.6 Scope of section 195 (1) – Time of deduction
(i) Twin conditions for attracting section 195
– For payer – credit or payment of income
– For payee – Sum chargeable to tax in India
(ii) On credit or payment, whichever is earlier
– CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC);
– United Breweries Ltd. vs. ACIT [1995] 211 ITR 256 (Kar);
– Flakt (India) Ltd. [2004] 139 Taxman 238 (AAR).
– Broadcom India Research (P) Ltd. vs. DCIT [2015] 55 taxmann.com 456 (Bang.).
(iii) Merely on the basis of a book entry passed by the payer no income accrues to the non-resident recipient
– ITO vs. Pipavav Shipyard Ltd. Mumbai ITAT – [2014] 42 taxmann.com 159 (Mum-Trib).
(iv) 1st Proviso to section 195(1) provides exception for interest payment by Government or public sector bank or a public financial institution i.e. deduction shall be made only at the time of payment thereof.
(v) TDS from Royalties and FTS at the time of payment:
– DCIT vs. Uhde Gmbh 54 TTJ 355 (Bom) [India-Germany DTAA]
– National Organic Chemical Industries Ltd. vs. DCIT 96 TTJ 765 (Mum) [India-Switzerland and India-USA DTAA]
(vi) When FEMA/RBI approval awaited,
– United Breweries Ltd. vs. ACIT 211 ITR 256 – Liability at the time of credit in the books even if approval received later on.
– ACIT vs. Motor Industries Ltd. 249 ITR 141 – It was held that the assessee was not liable to interest u/s. 201(1A) since it was not obliged to deduct tax at source in respect of amounts credited in its books for period when agreement was not in force as foreign collaborator would have got a right to enforce its right to receive payment only on conclusion of said agreement, (which was pending for approval).
(vii) TDS liability u/s. 195 when adjustment of amount payable to a non-resident against dues i.e. when no payment no credit.
– J. B. Boda & Co. (P.) Ltd. vs. CBDT 223 ITR 271
– An adjustment of the amount payable to the non-resident or deduction thereof by the non-resident from the amounts due to the resident-payer (of the income) would fall to be considered under “any other mode”. Such adjustment or deduction also is equivalent to actual payment. Commercial transactions very often take place in the aforesaid manner and the provisions of section 195 cannot be sought to be defeated by contending that an adjustment or deduction of the amounts payable to the non-resident cannot be considered as actual payment. Raymond Ltd. [2003] 86 ITD 791 (Mum).
(viii) Dividend is declared but not paid pending RBI approval, then the same accrues in the year of payment Pfizer Corporation vs. CIT (2003) 259 ITR 391 (Bom).
(ix) If no income accrues to non-resident although accounting entry incorporating a liability is passed, no liability for TDS. United Breweries Ltd. vs. ACIT 211 ITR 256.
(x) Payee should be ascertainable. IDBI vs. ITO 107 ITD 45 (Mum).
(xi) Time of Deduction from the point of view of the payer and not payee. Relevant in cases where one of them maintain the books on cash basis and the other on accrual basis – C. J. International Hotels Ltd. vs ITO TDS 91 TTJ (Del) 318.
2.7 Section 195(1) – Rates in force
(i) Section 2(37A)(iii) provides in respect of Rates in Force for the purposes of section 195.
(ii) Circular 728 dtd. 30-10-1995 – Rate in force for remittance to countries with DTAA.
(iii) Circular 740 dtd. 17-04-1996 – Taxability of interest remitted by branches of banks to HO situated abroad.
(iv) No surcharge and education cess to be added to Treaty rates.
– DIC Asia Pacific Pte Ltd. vs. ADIT IT 22 taxmann.com 310.
– Sunil V. Motiani vs. ITO IT 33 taxmann.com 252;
– DDIT vs. Serum Institute of India Ltd. [2015] 56 taxmann.com 1 (Pune Trib.).
(v) Section 44DA read with 115A – Special provision for computing income by way of royalties etc. in case of non-residents.
(vi) Section 44B – Non-resident in shipping business (7.5% Deemed Profit Rate [DPR])
(vii) Section 44BB – Non-resident’s business of prospecting etc. of mineral oil (10% DPR)
(viii) Section 44BBB – Non-resident civil construction business in certain turnkey power projects (10% DPR)
(ix) Presumptive provisions (44B, 44BB, 44BBB etc) – Section 195 applicable. Frontier Offshore Exploration (India) Ltd vs. DCIT 13 ITR (T) 168 (Chennai).
(x) Section 294 of the Act provides that if on the 1st day of April in any assessment year provision has not yet been made by a Central Act for the charging of income-tax for that assessment year, the provision of the Income-tax Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding assessment year or the provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee, were actually in force.
2.8 Section 195(1) – Sum Chargeable to tax-Exchange Rate Applicable
(i) Rule 26 provides for rate of exchange for the purpose of TDS on Income payable in foreign currency
(ii) TDS to be deducted on income payable in foreign currency.
– Value of rupee shall be SBI TT buying rate.
– on the date on which tax is required to be deducted.
(iii) Where rate of exchange on date of remittance differs from exchange rate on date of credit, no TDS to be deducted on exchange rate difference. Sandvik Asia Ltd vs. JCIT 49 SOT 554 (Pune).
3. Section 94A – Notified Jurisdictional Areas
(i) Section 94A(5) – Special measures in respect of transactions with persons located in notified jurisdictional area
‘(5) Notwithstanding anything contained in any other provisions of this Act, where any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following rates, namely:-
(a) at the rate or rates in force;
(b) at the rate specified in the relevant provisions of this Act;
(c) at the rate of thirty per cent.’
(ii) Notification No. 86/2013 [F. NO. 504/05/2003-FTD-I]/SO 3307(E), Dated 1-11-2013 – Cyprus Notified.
(iii) Validity of the notification upheld by the High Court of Madras in T. Rajkumar vs. Union of India [2016] 68 taxmann.com 182 (Madras).
(iv) The notification of Cyprus u/s 94A as a notified jurisdictional area for lack of effective exchange of information, has been rescinded with effect from 1.11.2013 [Notification No. 114/2016 dated 14.12.2016].
4. Grossing up of tax (195A)
(i) Section 195A – Income payable “net of tax”
“In a case other than that referred to in sub-section (1A) of section 192, where under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.”
(ii) TDS Certificate to be issued even in case of Grossing up – Circular 785 dt. 24.11.1999.
(iii) Absence of the words “tax to be borne by the payer” in case of net of tax payment contracts by conduct – Grossing up required. CIT vs. Barium Chemicals Ltd. [1989] 175 ITR 243 (AP).
(iv) Section 195A envisages multiple grossing-up. For eg. amount payable to non-resident is 100 and TDS rate is 10%; Gross amount for TDS purpose would be 111.11 (100*100/90)
(v) No multiple grossing-up in case of presumptive tax u/s. 44BB. CIT vs. ONGC [2003] 264 ITR 340 (Uttaranchal).
(vi) Exemption from grossing-up u/s.10(6BB) – Aircraft and aircraft engine lease rentals.
(vii) Section 192(1A) – Tax on non-monetary perquisite – Not covered by section 195A.
Conclusion
In this part of the Article, we have attempted to highlight various issues relating to section 195(1), 195A and section 90(4) relating to TDS from payments to non-residents.
In the subsequent parts of the Article, we will deal with the other parts of section 195 and other aspects thereof.