Income Tax Query

TDS on Other Sums- Section 195  

Here, we shall discuss the TDS implications of payments of other sums as per the Indian Income Tax Act. 


Ø Any person responsible for paying any interest or any other sum (not being salary) to a non-corporate non-resident or to a company other than a domestic company shall, deduct Income tax at source there from as per the rates specified in the Finance Act.  

Ø Any person includes a non-resident person also, whether or not he has a place of business or business connection in India. 

Ø Tax has to be deducted at source at the time of payment of the amount or at the time of credit of the amount to the payee’s account whichever is earlier.  

Ø In case of interest payable by the Government or a Public Sector Bank or a Public Financial Institution, tax has to be deducted at source only at the time of actual payment of the amount by way of cheque, cash or DD or by any other mode.  


Important Note: As per section 206AA, with effect from 1.4.2010, every person who receives income subject to TDS under chapter XVIIB (covers all TDS cases) shall furnish to the deductor, his PAN. If PAN is not so furnished, the rate of TDS will be at the rates specified in the Act or at the rates currently in force or at 20% whichever is higher. Please note that this applies to non-residents also. 


Rate of TDS: Rate as per the Finance Act of the relevant year or rate as per Double Taxation Avoidance Agreement or Agreement notified by the Central Government, whichever is more beneficial to the payee. 


Surcharge and Cess: In case of payment to non-residents, TDS shall be increased by surcharge and cess, as applicable. 


Higher rate of TDS in case payee is located in a “notified jurisdictional area” 

As per Section 94A, the Central Government has been given power to notify any country or territory outside India as notified jurisdictional area. In case the payee is located in any notified jurisdictional area, the TDS is the higher of the following: 

At the rate or rates in force 

At the rate specified in the relevant provisions of the Act 

At the rate of 30% 


However, it seems that there is no active country or territory notified by the Central Government as notified jurisdictional area. 


No TDS under Certain cases: 

Ø No tax deduction under this section for income chargeable under the head “Salaries” (since it is covered in another section) 

Ø No tax deduction under this section in respect of interest covered under Sections 194LB, 194LC or 194LD 

Ø  No deduction shall be made in respect of dividends on which dividend distribution tax is paid as per Section 115-O.  

Ø In case of payment towards software subject to the following conditions: 

·    Payment by any person for acquisition of software from a resident person and 

·    Software is acquired in a subsequent transfer and the transferor has transferred the software without any modification. 

·    TDS is made u/s 194J for any previous transfer of the software from a resident or u/s 195 for any previous transfer from a non-resident. 

·    The person paying (transferee) to obtain a declaration from the transferor that tax was deducted and also to obtain PAN of transferor. 

Ø Interest credited to NRE Account if the account is held by an individual and the interest is earned in accordance with the Foreign Exchange Management Act, 1999 and the holder is a person resident outside India as defined in clause (w) of Section 2 of FEMA. 


Application for non-deduction of tax 

Ø If the person responsible for paying any sum (not being salary) to a non-resident considers that the whole of such sum would not be taxable in the hands of the recipient, he can make application to the Assessing Officer to determine the portion of the sum that is chargeable, and upon such determination by the Assessing Officer, tax shall be deducted only on that portion of the sum that is chargeable to tax. (Section 195(2))  

Ø The person entitled to receive any sum under this section may make an application to the Assessing Officer for grant of a certificate to receive the said sum without deduction of tax at source. Upon granting of the certificate, the person responsible for paying shall, as long as the certificate remains in force, make payment of the said sum without deduction of tax at source.  


Other issues: 

Ø The orders passed by the Assessing Officer allowing payment of sum without deduction of tax are not conclusive. They do not pre-empt the department from passing appropriate orders of assessment. CIT Vs. Tata Engg. & Locomotive Co. Ltd.[2000] 245 ITR 823 (Bom).  

Ø While acting under section 195(2), the Assessing Officer is duty bound to make requisite enquiries, evaluate facts in the context of provisions of law and then pass a reasoned order. Board of Cricket Control for Cricket in India Vs. Director of Income Tax (Exemptions) [2005] 96 ITD 263 (Mum).  

Ø For deduction of tax at source under section 195 only consideration would be whether payment of sum to non-resident is chargeable to tax under provisions of Act; sum may or may not be income or income hidden or otherwise embedded therein; scheme of tax deduction at source applies not only to amount paid which wholly bears ‘income’ character but also to gross sums whole of which may not be income or profits of recipient - Headstart Business Solutions (P.) Ltd., In re [2006] 155 Taxman 639 (AAR - New Delhi).  

Ø Foreign collaborator must have rendered services in India - Where question of failure to deduct tax at source under section 195(1) is to be decided, the basic question to be considered is whether the foreign collaborator rendered any service in India in terms of the agreement on the basis of which it could be said that a portion out of the payments made to the foreign collaborator is income that accrued to such collaborator in India - CIT v. Fertilisers & Chemicals (Travancore) Ltd. [1990] 86 CTR (Ker.) 40.  

Ø Reimbursement of cost incurred by payee is not subject to tax deduction - To apply section 195, amount in question should be income of payee and not a mere reimbursement of cost incurred by payee - Danfoss Industries (P.) Ltd., In re [2004] 138 Taxman 280 (AAR - New Delhi).  

Ø Payments in kind are also liable to TDS - Where the assessee, an Indian company, engaged a non-resident company as a charterer in order to exploit fishing rights granted to the assessee, and the agreement provided for payment of charter fee in the form of 85 per cent of the catch of fish, such a payment will fall under ‘or any other mode’ mentioned in section 195, and hence tax is deductible at source - Kanchanganga Sea Foods Ltd. v. CIT [2004] 136 Taxman 8 (AP).  

Ø Remittances to country with which DTAA is in force - In the case of remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee —Circular : No. 728, dated 30-10-1995.  

Ø Payments to branches in India of foreign company/concern - Branch of a foreign company/concern in India is a separate entity for the purposes of taxation. Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by the provisions of section 115A of the Act. If the Double Taxation Avoidance Agreement with the country where parent company is assessed to tax provides for a lower rate of taxation, the same would be applicable. Consequently, tax would have to be deducted accordingly on the interest remitted as per the provisions of section 195—Circular : No. 740, dated 17-4-1996.  

Ø Where a non-resident agent operates outside the country, no part of his income arises in India. Since the payment is usually remitted directly abroad, it cannot be held to have been received by or on behalf of the agent in India. Such payments are, therefore, not taxable in India. No tax is, therefore, deductible under section 195. [Circular No. 786 dt.2-7-2000].  

Ø The assessee running software development centre utilized telecom services provided by a British Company for transmitting the data to the overseas customers. It was held that the amounts paid to non-residents were not their income accruing in India. As the assessee had paid the amounts to non-residents outside India for services rendered outside India, the liability for TDS under section 195 did not arise in the hands of the payer. Wipro Ltd. Vs. ITO [2003] 133 Taxman 149 (Bang.) (Mag.)  

Ø Where the assessee reimburses actual amount of salaries incurred by its foreign collaborator in deputing foreign technicians to India with the assessee, tax is deductible at source under Section 192 and not under Section 195. HCL Infosystems Ltd Vs. CIT [2002] 76 TTJ ( Delhi) 505.  

Ø When an income is not exigible to tax in India, by virtue of the provisions of the applicable DTAA, the deduction of tax under section 195 does not come into play at all. It leads to the conclusion that the expression ‘chargeable under the provisions of this Act’ cannot include an income, which in terms of the specific provisions of the applicable DTAA, is not exigible to tax in India. Maharashtra State Electricity Board Vs. CIT [2004] 90 ITD 793 (Mum)  

Ø Services rendered by lead managers in connection with GDR issue fall within the definition of “technical services” under section 9(1)(vii) read with Explanation 2 and, therefore, management commission and selling commission are income of the lead managers, deemed to accrue or arise in India and as such, liable to TDS under section 195(1). However, underwriting commission would not fall under section 9(1)(vii) and, therefore, no tax is deductible therefrom under section 195. Gujarat Ambuja Cements Ltd. Vs. CIT [2005] 2 SOT 784 (Mum).  

Ø An assessee Indian company entered into agreement to drill oil wells in Indian coastal waters. It entered into contract with a Norweigian company for procuring drilling unit on bare boat basis.  Assessee also availed rig management services etc., While making the payments assessee deducted tax only at the rate 4.2% on the ground that non-resident payee was covered by provisions of sec. 44BB in respect of supply of plant and machinery on hire basis for use in the business of prospecting    and extraction of mineral oil. Assessing officer disallowed proportionate total expenditure out of such payments corresponding to the reduction in TDS.Assesing officer opined that should have made application under sec 195(2) of the Act for implementing a lesser tax deduction.  Hon’ble Chennai Bench of the Tribunal concurred with the Assessing officer and relied on the Supreme court judgement in Transmission Corporation’s Case 239ITR 587 and Associated cement company’s case 201 ITR 434. It was held that Assessing officer was right in invoking sec 40(a)(i) for proportionate disallowance. However subsequent TDS compliance leads to grant of allowance of such expenditure. Frontier Offshore Exploration (India) ltd. vs. DCIT –ITA No.2037/Mad/2006- 2007 (TIOL) 192 ITAT (Mad)  

Ø An assessee-company was engaged in manufacturing of watches and was selling the same under brand name ‘Titan’.  An associated company was incorporated in Singapore to promote the sales of product in Asia-Pacific Region.  Assessee availed services of a firm of professionals, ‘C’ in Hong Kong to register its patent in Hong Kong for its sales overseas.  Payments to C were made without deduction of tax.  It was held that expenditure incurred by the assessee is for making income from a source outside India.  Amount paid to C was covered in exception provided in sec.9(1)(vii)(b) and therefore assessee was not required to deduct tax at source. Titan Industries Ltd. vs. ITO  (2007) 11 SOT 206 (Bang).  

Ø An issue came up before the Hon’ble Delhi Bench of the Tribunal as to applicability of sec.195 to payments which are reimbursement of expenditure to a non-resident.  Assessee-company reimbursed expenses to a non-resident-Hong Kong company (HK) towards service charges of consultancy agency incurred by HK company.  This was done to bear expenses for bidding a contract for operating GSM based cellular services in India.  It was argued by the assessee that the payment to non-resident did not include any element of income.  Hence, provisions of sec.195 should not apply.  HK company being one of the consortion partners took the lead of preparing pre-bid documents.  However, it did not have necessary expertise to do the same.  It engaged services of a consultancy firm in HK and got the job done.  Assessee-company reimbursed its share of such consultancy part by HK.  Revenue argued that the remittances are to be treated as payment of technical services fee. However, the transaction between assessee and HK is reimbursement of expenses simplicitor.  Therefore, it was held by the Hon’ble Tribunal that sec.195 has no application. ACIT vs. Modicon Network (P) Ltd. (2007) 14 SOT 204 (Delhi).  

Ø Payment made by an Indian Company to a U.S. company for providing access to information available in the database maintained by it is not subject to deduction of tax at source under section 195. Wipro Ltd. Vs. ITO [2005] 94 ITD 9 (Bang.)