The tax deduction at source (‘TDS’) is one of the methods of collecting Income tax. The other methods are:
- Advance tax
- Self assessment tax
- Regular collection after assessment
- Tax collection at source.
Under the TDS method, the person who makes the payment or credit the amount to non-resident, he requires to deduct the prescribed amount of tax from such payment/credit and deposit the same with the Central Government.
Payment to non-resident sportsmen or sports association [Section 194E]
Section 194E enjoins upon a person responsible for making any payment of any income, referred to in section 115BBA or to a non -resident sportsman (including an athlete) or to an entertainer who is not a citizen of India and who is a non- resident or to a non resident sports association or institution to deduct 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 issue of cheque or draft or by any other mode, whichever is earlier, income tax thereon at the rate of 20 per cent plus surcharge and cess.
The following payments to non-resident sportsman (including an athlete are covered by section 115BBA:
- income by way of participation in India in any game or sport;
- income by way of advertisements; and
- income by way of contribution to articles relating to any game or sport in India in newspapers, magazines or journals.
- Any income by way of winnings from lotteries, cross word puzzles, races including horse races and gambling or betting are not covered by this section.
The amount guaranteed to be paid or payable to any non-resident sports association or institution in relation to any game (other than winnings from lotteries, cross word puzzles, races including horse races and gambling or betting) or sports played in India are subject to tax deduction under section 194E.
Income by way of interest from infrastructure debt fund [Section 194LB]
An infrastructure debt fund, which is responsible for paying to a non-resident shall deduct tax @ 5%, at the time of credit or payment whichever is earlier.
Income by way of interest from Indian company [Section 194LC]
Indian company is required to deduct tax @5% on interest payable in the following cases to non- resident, at the time of credit or payment whichever is earlier.
- in respect of monies borrowed in foreign currency, from a source outside India, in any of the following forms-
- under a loan agreement on or after July 1, 2012 but before July 1, 2020 or
- by way of issue of any long-term bond (including long-term infrastructure bond) at any time on or after October 1, 2014 but before July 1, 2020 as approved by the Central Government in this behalf; and
- in respect of monies borrowed by issue of rupee denominated bond from a source outside India before July 1, 2020 and to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or the bond and its repayment.
Other sums [Section 195]
Section 195(1) enjoins upon any person responsible for paying to a non-resident, or to a foreign company, any interest (other than interest on securities under section 194LB or 194LC or 194LD) or any other sum chargeable under the provisions of the Act (not being income chargeable under the head “salaries”) to deduct tax at rate in force 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.
The first proviso to section 195(1) provides that in the case of interest payable by the Government or a public sector bank within the meaning of section 10(23D) or a public financial institution within the meaning of section 10(23D), deduction of tax is to be made only at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode and not at the time of credit.
The second proviso to the section provides that no deduction shall be made in respect of any dividends referred to in section 115-O. This is because domestic companies are required to pay tax on distributed profits and therefore dividend is exempt in the hands of recipient under section 10(34)
The Explanation to section 195(1) enacts deeming provisions for the purpose of this section and provides that any interest or other sum as aforesaid 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, the provisions of section 195 would apply accordingly.
For this purpose, the payer himself is treated as “person responsible for paying” such amount. If however, the payer is a company, the company itself including the principal officer thereof, is the person responsible for paying such amount.
Where the sum payable to a non resident Indian represents consideration for the transfer of any foreign exchange asset (other than a short term capital asset), the “authorized dealer” responsible for remitting such sum or crediting such sum to Non-resident (external) Account of the payee shall be the “person responsible for the paying”.
Explanation 2 to section 195(1) which clarifies that obligation to deduct tax under section 195(1) has always meant to extend to all persons resident or non-residents, whether or not the non-resident has –
- A residence or place of business or business connection in India; or
- Any other presence in any manner whatsoever in India
Section 195(2) provides that, where the person responsible for paying any such sum chargeable under the Act, other than interest on securities and salary, to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, then, he may make an application to the Assessing Officer to determine by general or special order, appropriate proportion of such sum so chargeable and upon such determination, tax is to be deducted under section 195(1) only on that proportion of sum which is so chargeable.
Section 195(3) enables, subject to the rules made under section 195(5), any person who is entitled to receive any interest or other sum on which income tax has not to be deducted under section 195(1) to make an application in Form No. 15C or Form No. 15D as per the provisions of rule 29B to the Assessing Officer for the grant of a certificate in Form no. 15E authorizing him to receive such interest or other sum without deducting tax thereon under section 195(1).
A certificate granted under section 195(3) shall remain in force till the expiry of the period specified therein or if is cancelled by the Assessing Officer before the expiry of such period, till such cancellation [Section 195(4)].
Section 195(5) empowers the Board to make rules having regard to the convenience of assessee or the interest of revenue, by notification in the Official Gazette specifying:
- in the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under section 195(3) and
- the condition subject to which such certificate may be granted and providing for all other matters connected therewith.
Under Section 195(6), deductor of tax at source is required to file the information relating to payment in the forms 15CA and 15CB and in the manner prescribed in rule 37BB.
As per section 195(7), by which CBDT is authorized to issue the notification specifying the class of persons or cases where the person responsible for paying to non-resident, any sum, whether or not chargeable under the provisions of this Act, shall make an application to AO to determine the appropriate proportion of sum chargeable, and tax shall be deducted on sums so chargeable.
Important judicial precedents & board circulars:
In DCIT v. Tata Yodogawa Ltd.  68 ITD 47 (Patna Tribunal), the assessee entered into technical collaboration agreement, duly approved by the GOI and the RBI, with Austrian company. In terms of the agreement, the assessee was required to remit by way of lump sum technical knowhow fees to the foreign company in three installments. The Assessing Officer asked the assessee to deduct taxes on the installments of payments being made to the said company as they were fees for technical services. On appeal, the Commissioner (Appeals) held that the deduction of tax at source was not called for in view of the provisions of Double Taxation Agreement between India and Austria.
The Patna Tribunal on appeal by the Department held that in the instant case the technical services for which the payment were made, were rendered in Austria and not in India and in view of the article 7 of Double Taxation Agreement between India and Austria are taxed in Austria and not in India. In view of this there was no question of deduction of tax at source from the payment in question. The same has been reiterated by Madras Tribunal in the case of TVS Suzuki Ltd. v. ITO  73 ITD 91.
In Kanchanaganga Sea Foods Ltd. v. CIT  325 ITR 540 (SC), assessee-company was engaged in sale and export of sea food and for that purpose it obtained permit to fish in exclusive economic zone of India. To exploit fishing rights, it entered into an agreement, chartering two fishing vessels with a non-resident company. Charter fee was payable from earnings from sale of fish and for that purpose 85 per cent of gross earnings from sale of fish was to be paid to non-resident company. Actual fishing operations were done outside territorial waters of India but within exclusive economic zone. Thereafter, chartered vessels with entire catch were brought to Indian Port, catch were certified for human consumption, valued, and after customs and port clearances, non-resident company received 85 per cent of catch. The apex court has held that the non-resident company effectively received charter fee in India and same would be chargeable to tax under section 5(2). Therefore, assessee was liable to deduct tax under section 195 on payment made to non-resident company.
In BIOCON Biopharmaceuticals (P.) Ltd. v. ITO  144 ITD 615, the Bangalore Tribunal held that:
- Where non-resident company provides technology/know-how in form of capital contribution, tax is required to be deducted at source on issue of shares;
- Where there was no transfer of capital asset, and joint venture agreement allowed assessee only right to use know-how, issue of shares for same constitutes royalty.
The Mumbai Tribunal in Raymond Ltd v. ITO,  86 ITD 791, has opined that 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’ indicated in section 195(1). Such adjustment or deduction also is equivalent to actual payment. Commercial transactions very often takes place in the aforesaid manner and the provisions of section 195 could not be defeated by contending that an adjustment or deduction of the amount payable to the non-resident could not be considered as actual payment.
The assessee cannot deduct tax at lower rate without getting an authorization or certificate from the assessing officer under section 195(2). [CIT v. Chennai Metropolitan Water Supply & Sewerage Board  348 ITR 530 (Madras High Court)]
The apex court in the case of G.E. India Technology Centre (P) Ltd v CIT  327 ITR 456 distinguishing the SC decision in the case of In Transmission Corporation of A.P. Ltd. And Another Vs. CIT [239 ITR 587 (SC)] has held that obligation to withhold tax is limited to the appropriate portion of income which is chargeable to tax under the provisions of Act and forms part of gross amount payable. It was held that:
In Transmission Corpn. of A.P. Ltd.’s case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented “income chargeable to tax in India ”, then it was necessary for him to make an application under section 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. of A.P. Ltd.’s case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court in Samsung Electronics Co. Ltd.  185 Taxman 313 to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India ”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the Income-tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income-tax Act.
In Vodafone International Holdings B.V. v. Union of India  341 ITR 1, the Supreme Court held that section 195 casts an obligation on payer to deduct tax at source from payments made to non-residents which payments are chargeable to tax and, therefore, where sum paid or credited by payer is not chargeable to tax then no obligation to deduct tax would arise. Section 195 would apply only if payments are made from a resident to non-resident and not between two non-residents situated outside India. Where there was a transaction of 'outright sale' between two non-residents of a capital asset (share) outside India and moreover, said transaction was entered into on principal to principal basis, no liability to deduct tax at source arose under section 195.
The Chennai Tribunal in the case of Hyundai Motor India Ltd. v. DCIT,  81 taxmann.com 5, held that where assessee took loans from foreign banks, mere fact that loan agreements were signed in local offices of said banks in India, those local affiliates did not constitute their PE in India and, thus, interest paid to foreign banks was not taxable in India. Accordingly, the assessee did not have any tax withholding obligations, under section 195, in respect of these payments.
The Madras High Court (‘HC’) in the case of CIT v. Farida Leather Company  287 CTR 565 has held that no tax withholding (‘TDS’) liability arises on payment of commission to non-residents abroad if the services are rendered outside India. The HC also held that such services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services" under section 9(1)(vii) of the Income-tax Act; thus, provisions of section 195 of the Act would not apply in the instant case.
The Mumbai High Court in the case of Marks & Spencer Reliance India Pvt. Ltd. (ITA No.893 of 2014) held that the cost reimbursement made by the taxpayer to the overseas entity under a secondment agreement is not chargeable to tax in India and that the taxpayer has not defaulted in withholding any tax in India on such payments.
The Central Board of Direct Taxes vide its circular no. 740 dated April 17, 1996 has clarified that the branch of a foreign company/concern in India is a separate entity for purpose 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 DTAA with the country of the parent company is assessed to tax provides for 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 of the Income tax Act, 1961.
The CBDT vide Instruction No 2/2014 instructed that in cases where the assessee does not withhold taxes under section 195 of the Act, the AO is required to determine the income component involved in the sum on which the withholding tax liability is to be computed and the payer would be considered as being in default for non-withholding of taxes only in relation to such income component.
Income from Units [Section 196B]
Section 115AB of the Income tax Act provides that in a case of an Offshore Fund, the income in respect of units purchased in foreign currency and income by way of long term capital gains arising from the transfer of such units shall be taxed at the rates of ten percent thereof.
Section 196B therefore, enjoins on the person responsible for making such payment to deduct tax @ 10% plus surcharge 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 earlier.
Income from foreign currency bonds or Global Depository Receipts (‘GDRs’) [Section 196C]
Section 115AC provides that, where the total income of an assessee, being a non-resident includes income by of interest on bonds or dividends (other than dividends referred to in section 115-O) on GDRs issued in accordance with such scheme as the Central Government may, by notification in the Gazette specify in this behalf or on bonds or shares of public sector company, sold by the Government and purchased by a non-resident in foreign currency or income by way of long term capital gains arising from the transfer of such bonds as referred therein is to be taxed @ 10%.
By virtue of section 196C the person responsible for making the payment has to deduct tax @ 10% plus surcharge at the time of making payment thereof in cash or by issue of cheque or draft or any other mode, whichever is earlier.
The proviso clarifies that no such deduction is to be made in respect of any dividends referred to in section 115-O
Income of Foreign Institutional Investors from securities [Section 196D]
Section 115AD provides that where the total income of a Foreign Institutional Investor includes any of the following kinds of income, then, tax shall be payable at the rate specified against the income.
Income (other than income by way of dividends referred to in section 115-O) received in respect of securities (other than units referred to in section 115AB) @ 20%. It also excludes interest under section 194LD, which shall be taxable @5%.
Income by way of short term capital gains arising from the transfer of such securities @ 30%. In case of the short term capital gains covered by section 111A i.e. short term capital gain arising on equity share in a company or unit of an equity oriented fund and the transaction is chargeable to securities transaction tax, the rate applicable will be @15%.
Income by way of long term capital gains arising from the transfer of such securities @ 10%.
In consequence, section 196D provides that the person responsible for making the payment shall, at the time of credit of such income (no deduction for dividend) to the account of payee or at the time of payment in cash or by the issue of a cheque, or draft or by any other mode, whichever is earlier, deduct income tax thereon @ 20% plus surcharge.
However, as per section 196D(2), no deduction shall be made from any income, by way of capital gains arising from the transfer of securities referred to in section 115AD, payable to a Foreign Institutional Investor.
Non furnishing of PAN [Section 206AA]
In case of non-availability of the PAN, tax is to be deducted at higher of the following-
- Rates specified in the Act;
- Rates in force;
The provisions of section 206AA shall not apply to a non-resident for any payment of interest on long-term bonds under section 194LC.
Further, the Finance Act 2016 provides relaxation effective 1 June 2016 whereby, tax shall not be deducted at a higher rate in case of non-residents not having PAN, subject to prescribed conditions as covered below:
The deductee to furnish following details for non-deduction of tax at higher rates:
- name, e-mail id, contact number;
- address in the country or specified territory outside India of which deductee is a resident;
- a certificate of his being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate
- Tax Identification Number of the deductee in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.
In case of DDIT v. Serum Institute of India Ltd.  68 SOT 254, the Pune Tribunal held that where tax has been deducted on the strength of the beneficial provisions of DTAAs, the provisions of section 206AA of the Act cannot be invoked to insist on tax deduction at 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act.
In case of DCIT v. Infosys BPO Ltd.  154 ITD 816, Bangalore Tribunal held that there is no scope of deduction of tax at the rate of 20% as per section 206AA (when assesse does not have tax identification number –PAN) of the Income-tax Act, 1961 when the benefit DTAA is available to the assessee.
Above propositions were also upheld in the decision of Hyderabad Special bench tribunal in the case of Nagarjuna Fertizers & Chemicals Ltd.  55 ITR(T) 1 and the Delhi High Court in the case of Danisco India (P.) Ltd. v. Union of India  301 CTR 360.
In the case of Bosch Ltd. v. ITO  141 ITD 38, the Bangalore Tribunal held that grossing up of the amount under section 195A is to be done at the rates in force for the financial year in which such income is payable and not at 20 per cent as specified under section 206AA.