Table of Contents
Section 195 has gained more importance in days of globalization. The transactions with non residents has increased significantly for past few years. Section 195 is introduced to deduct TDS on income (payment made) of non residents. I have explained the section 195 in very simple language so that you can understand when you need to deduct TDS on payment to non residents.
When to Deduct TDS under section 195 ?
When any person making payment to any non resident other than a company or to a any foreign company by way of interest or any sum chargeable as income is liable to deduct tax at the rate specifies in Finance Act. However, section 195 shall not apply in respect of (a) salary as covered u/s 192 (b) interest on infrastructure debt fund as specified u/s 194LB (c) interest from Indian company covered u/s 194LC.
The obligation to deduct tax at source under section 195 applies and extends to all persons, resident or non -resident, whether or not the non -resident has (a) A residence or place of business or business connection in India (b) Any other presence in any manner whatsoever in India –
Time of deduction of tax
At the time of payment or time of credit whichever is earlier [Tax due from the NRI is collected at the earliest point of time]
In case of Government/ public sector banks/public financial Institutions/ interest payable by any of these entities deduction shall be made at the time of payment.
Who is a Non resident?
Where the individual does not satisfy both the conditions provided below then in that case he will be a non-resident.
- If Present in India for at least 182 days [6 months] during the FY – [Basic condition]
- If he present in india [60days] 2 months or more in PY and [365 days]1 whole year during the last 4 years [Additional condition].
|
Status |
Chargeability |
|
Resident |
Your global income is taxable in India |
|
NRI |
Income earned/accrued in India is taxable in India [Income earned outside India is not taxable in India] |
Example: Income earned/accrued in India, Income from House property situated in India, Capital gain on capital asset situated in India, Salary received for services provided in India
Note
- Filing of Income tax returns is same whether a person is NRI or Resident, if his Income exceeds 2,50,000 then he is chargeable to tax.
- Due date to file Income tax returns to NRIs is 31st July, same as for residents.
Taxability under income tax
First you need to check whether it is taxable under income tax or not. Section 9 states that when a person has business connection in India, the income earned in India is deemed to accrue or arise in India. So you will have to check the definition of business connection and find out that whether the non resident has any such business connection in India.
Taxability under Double Tax Avoidance Agreement (DTAA)
Then you need to check the Double taxation avoidance agreement with that country. In DTAA you need to check the whether the non resident has permanent establishment or not. The definition of permanent establishment will be given in article 5 of every DTAA.
You can find here link for DTAA agreement with different countries.
Circular No. 333 states that states that DTAA provision will prevails over income tax Act. So you need to check the permanent establishment status of non resident to find out taxability of income in India.
You can also take a declaration from the non resident with regard to its permanent establishment. If it has no permanent establishment in India, then the income is not taxable in India and no TDS under section 195 will be applicable.
Section 195(2)- Application to Assessing Officer (AO) by the Payer
When a person paying any money to a Non-resident chargeable under this act (other than salary), considers that such whole income is not chargeable to tax, according to payee, then the payer shall make an application to the AO to determine the appropriate amount chargeable to tax.
The form and manner of such application is prescribed by the CBDT.
[As per section 195(7) class of persons compulsorily required to make an application to the AO is notified]
Section 195(3)-Application to the AO by the recipient
Any person entitled to receive any interest or any other sum on which TDS has to be deducted under section 195(1) can apply to the AO for a certificate [15C or 15D] authorizing him to receive interest/any other sum without deduction of TDS, pertaining to a specified period.
As per section 195(4) this certificate shall remain in force till the expiry of period specified therein or till the cancellation by AO.
In view of section 195(5) CBDT is empowered to prescribe rules for this purpose (Rule 29B)
Section 195 (6) -obligation of the payer to furnish information
The person responsible to pay to non-resident any sum, whether or not chargeable under the act must provide information relating to payment of such amount in form/ manner as prescribed [Rule 37BB]
Section 195A- Income payable Net of tax
In case where a payer/ remitter bears the tax liability grossing up can be done for computation of TDS
Example: If the amount payable to Non resident is 100 and the rate is 10% , then the gross amount for TDS purpose will be 111.11 [100* 100/90]
Which Payment liable for TDS under section 195 ?
Only those payment to non resident liable for TDS which are taxable in India. So we need to check whether a particular payment is taxable in India or not.
What is TDS rates under section 195 ?
The section says the TDS will be deducted at rated in force in the particular finance act. So you need to check the TDS rates given for non residents in finance Act. The general rates of taxes is 40% (cess also) for foreign company. But if you are paying specific payment like royalty, technical fees etc. then you need to check chapter XII (tax in special cases) of income tax act. Theses rates are to be increase by Cess i.e EC & SHEC.
You will also will have to check the rates given in DTAA agreement with that country. These rates are not be increase by cess.
According to circular No. 734, dated 24-01-1996, the rate which is more beneficial to the assessee can be used by the assessee for computation of tax.
So the rate lower of income tax and DTAA will be TDS rates under section 195.
As per section 206AA, in case of non-availability of PAN, TDS will be deducted at 20% or rate whichever is higher.
The other points related to section 195 are as follows:
- For the purpose of deduction of tax at source under section 195 , rate of tax shall mean the rate of tax specified in (a) The finance act or (b) An agreement u/s 90 or (c) An agreement u/s 90 A
- For the purpose of TDS under section 195 on any income payable in foreign currency, the rate of exchange to be used shall be the telegraphic transfer buying rate of such currency as on the date on which tax is required to be deducted at source.
- Extent of coverage-
- There is no threshold exemption under section 195
- No exemption for Individual/HUF for personal payments
- No exemptions on the basis of legal status of the payer/remitter
- TDS under section 195 is a TAN based deduction and not a PAN based deduction therefore TAN Number is mandatory.
- In case of non availability of TAN . Form 49B can be applied online or offline
IMPORTANT ISSUES SECTION 195
| TDS on salary reimbursed for overseas employees. | Where employees of the overseas entity render services for their employer in India by working for a subsidiary or associate enterprise of their employer, it will give rise to a service PE . Reimbursement of salary to overseas company attracts TDS u/s 195 [ Centrica India offshore Pvt Lmt (AAR)(2012) 19 TAXMANN 214] |
| Agent service rendered abroad | Where non resident agents rendered services abroad by soliciting export order ,the right to receive commission arises in India when order is executed by the applicant in India .TDS u/s 195 shall apply.[SKF BOILERS AND DRIERS Vs AAR (2012) 18 TAXMANN 325 (DEL.)] |
| TDS liability only if income is taxable | TDS obligation arises only if the tax is assessable in India . if the interest is exempt under the Act , there was no question of TDS being deducted by the assessee [ VIJAY SHIP BREAKING COPERATION VS CIT (2009)313 ITR 309 (SC)] |
| Meaning of “any other sum” | The expression “any other sum chargeable under the provision of this act “ in sec 195 (1) contemplates not only amounts , the whole of which are taxable, but it shall also cover the whole such gross payment .TDS deduction shall be made on whole of such payments. TDS deduction shall be made on whole payment subject to section 195(2) and 195(3)[Headstart Business solution Pvt LMT 285 ITR 530 AAR] |
| Soliciting exhibitor outside India for an evnt in India – TDS u/s 195 applicable. | If the agent rendered services abroad and solicits exhibitors there , the right of the agent to receive commission arises only when the exhibitor participated in the show to be held in india and made a full payment to the applicant in India . So commission income would be taxable in India and the assessee would be required to deduct tax at source u/s 195[RAJIV MALHOTRA 284 ITR 564 (AAR)] |
| TDS mandatory obligation | TDS shall be made before making payment on any sum which is chargeable u/s 4 of the act at the rate in force ,if the amount is paid to a non resident . it is the statutory obligation of the person responsible for paying such sum. ( transmission corporation of AP) |
| No TDS on income earned before PE established in India | In a contract for fabrication, designing, hook up, and commissioning of platform in Bombay high, fabrication work was completed in korea. PE was established in India after the fabrication but before installation .Hence profits relating to fabrication in korea are not taxable in India but income relating to installation is taxable. (Hyundai Heavy Industries Co. Ltd.) |
| Marketing promotiom = fees for technical services =TDS liable | The services provided by the non resident both within India and outside India in the form of advertising ,marketing ,promotions, sales programme and special service for which payment was made by Indian company amounted to rendering managerial and consultancy services and therefore the requirement of the definition of fees for technical services were satisfied and the amount received by the non resident is taxable in India.[International hotel licensing co. S.A.R.L. 288 ITR 534 (AAR)] |
| Access to portal –TDS liable | Payment made by Indian subscriber to non resident for providing passwords to access and use the portal hosted from outside India are taxable in India and subject to TDS {Cargo community network pte ltd 298 ITR 355 AAR] |
| Consultancy service- used in India –attracts sec 195 | The non resident company had rendered consultancy services in India . Consultancy fees payable in respect of services utilized was not in connection with a business or profession carried on by the applicant outside India for the purpose of making or earning any income from sources outside India. Therefore, the consultancy fees would be income deemed to accrue in India for the non resident company and the applicant had to deduct at source there from u/s 195 |
| Payment in kind | Tax to be deducted at source where the payment contemplated u/s 195 is made in kind (i.e) sharing the fish catched |
| Payment to group company | Payment made by Indian company as per services fees to group company overseas are subject to withholding tax u/s 195 [Danfoss industries Pvt Ltd(2004)TIOL 5 (AAR)] |
| No TDS –commision on export | No tax at source to be deducted for retainership fees or commission payable to non resident on export earnings[ ind telesoft pvt ltd (2004) tiol 2 aar] |
| Services of sample analysis | Ores collected from India and tested in lab in Canada by non resident to be treated as rendered in India and is liable to TDS [south west mining Lmt (2005) TIOL 22 (AAR)] |
| Payment to consultant board | PAYMENT made to a consultant abroad by an Indian company is liable to TDS [ wallace pharmaceuticals p Ltd (2005) TIOL 20 (AAR)] |
Payment made for import of software is not taxable which is supplied along with hardware (circular 588, dated 2nd Jan 1991)
Refund of taxes under 195
Conditions to be satisfied
- Prior approval of Chief Commissioner of Income tax/Director general of Income tax is required.
- Claim to be made within 2 years from the end of the financial year in which the TDS was deducted.
- Undertaking is required by the Non-resident that no TDS is being claimed.
- Refund shall be granted only if Non-resident has not filed the return and the due date has expired.
- Refund shall be adjusted against existing liability of deductor and balance shall be granted
- No interest shall be permissible under such deduction. However, if a excess tds is made paid by the deductor then he shall be allowed for interest on refund from the date of the payment.
Consequences of Non-Compliance of TDS Provision
|
Section |
Nature of default |
Consequences |
|
40 (a)(i) |
Non deduction/Non-payment of TDS on interest/royalty/Fees for technical services or any sum payable to non-resident |
100% disallowance of expenditure [Shall be allowed in the year of deduction] |
|
201(1) |
TDS not deducted or deposited |
Deemed to be an assessee in default |
|
201(1A) |
TDS not deducted or deposited |
Interest per month or part of the month Non-deduction -1% Non-payment-1.5% |
|
221 |
TDS deducted but not paid |
Penalty [Not exceeding the amount of unpaid tax] |
|
271C |
Tax not deducted/ Short deduction |
Penalty [Not exceeding the amount of unpaid tax] |
Please comment for your query on TDS under section 195.
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How will you interpret words “a non resident, not being company or to a foreign company”.
It means payment made to a company other than foreign company are not covered.
Sir
You are requested to clarify whether gross amount of consideration or only capital gain part is to be taken for the pupose of TDS under section 195 regarding payment of sale consideration in regard to immovable property to NON Resident Indian @ the rate of 20% or 20.6% ( ie exclude surcharge)
Hello
The Word “any other sum chargeable under section 195” includes gross amount. so it covers the whole such payment made to non resident. The rates are increased by cess.
You can read the above article for more clearance.
Hi Mr Harish ,
I have taken a Car Loan from NBFC and i have been paying emi’s to them after deducting the TDS amount on the interest portion of the EMI .
Now the Problem here is the company is asking me to pay the TDS amount and provide them the certificate or else they will show the TDS amount as an overdue in my loan .
Can you please guide on same
Also please can let me know that even if i pay the TDS then how can i get income tax benefit in my Income Tax Returns
Hi Ashish,
The NBFC is right in their demand. If you are deducting TDS, then you should also file TDS return and give them TDS certificate.
You are just deducting TDS, Now pay it their account.
Learn here how to file TDS return.
https://www.investsaver.com/how-to-file-tds-return/
Harish,
We have questions on Payments to a Non Resident consultant (NRI) – in USD for two services that this consultant has provided to the Indian company (IT/ITES) –
1. Commission (for securing the contract + ongoing client engagement)
2. Ongoing Project Management
Based on your article above – it seems we can pay part 1 above as Non TDS payment. Secondly, part 2 will be subject to TDS since it will come under technical services. Is this correct? What would be the TDS %?
Our bank is also claiming that we cannot send USD to a non resident (only to a company). Not sure whether they are saying this because we were originally planning to pay at 10% TDS only. Please Advise.
I think you should check the taxability of above income in India and also check the double taxation agreement. Then check chapter XII for for tax rates.
DIRE SIR,
NRI PARTNER INTEREST & REMUNERATION PAID TDS LIABILITY A.Y. 2017-18
NRI PAID TO RENT TDS LIABILITY U/S.195
Dear Sir,
NRI income for service rendered outside India is taxable ? This income is generated other than his salary for service provided in different country where he is working presently. I’m presently working in Malaysia and income generated in Hong Kong by doing online job. Hong Kong company transfer money to my NRE account in India. Do I need to pay tax on this income.
any certain limit for exemption tds
WHETHER THRESH HOLD LIMIT IS APPLICABLE IN CASE PAYMENT OF FEES FOR TECHNICAL SERVICES IS MADE TO A FOREIGN COMPANY HAVING PE IN INDIA?