FAQs- Section 195: TDS on payments to non-residents

Introduction:

Tax deduction at source (TDS) is one of the most important mechanism of direct tax collection under Income Tax Act, 1961. TDS provisions have been prescribed in respect of residents as well as non-residents. Section 195 of the Income Tax Act provides that any person responsible for making payment of any sum to non-residents or foreign company shall deduct TDS at the rates in force if such amount is chargeable to tax in India. Special rates of TDS have been prescribed in case of non-residents. In this article, we will have a bird eye view of section 195 in form of FAQs relating to TDS on payments to non-residents.

Who are covered in section 195

Answer: Only payments made to non-residents or foreign companies are covered by section 195 of the Act. Residents but nor ordinarily residents (RNOR) are not covered here.

Who is liable to deduct TDS under section 195

Answer: Any person (whether resident or non-resident) who is responsible for making payment to a non-resident or a foreign company is liable to deduct TDS u/s 195 if such amount is chargeable to tax in India.

What type of payments are liable for TDS under section 195

Answer: Following amounts payable to non-residents or foreign companies are liable for TDS u/s 195:

• Any Interest (other than interest covered by section 194LB, 194LC & 194LD) or
• Royalty or
• Fees for technical services or
• Any other sum chargeable under Income Tax Act (except salary)

FAQ-4: When is TDS deducted under section 195?

Answer: TDS /s 195 has to be deducted at the time of credit of such income in the account of the payee or at the time of payment, whichever is earlier. There is one exception to this rule:

In case of interest payable by Government or a public sector bank or public financial institution, TDS shall be deducted only at the time of payment.

What is the threshold limit of deduction under section 195

Answer: No Threshold limit has been prescribed for TDS under section 195. Therefore, even payment of Rs. 1 to a non-resident or foreign company shall attract TDS.

What are the rates of TDS under section 195

Answer: TDS shall be deducted at the rates specified in this regard in the Finance Act of the relevant year or as per the rates specified in the DTAA, whichever is beneficial.

It should be noted that rates prescribed in DTAA shall not be subject to surcharge or cess.

Who can apply for deduction at lower rate u/s 195(2) of the Act

Answer: The payer i.e. the person responsible for making payment to a non-resident or foreign company may apply to A.O. in Form No. 15E (Rule 29BA) electronically to determine the appropriate portion of such sum which is chargeable to tax in India and accordingly, deduct tax on such portion before making payment to non-resident or foreign company. The A.O. shall issue a certificate to this effect.

Whether TDS to be deducted on whole amount or only on the income portion

Answer: TDS has to be deducted on the whole amount before making payment. Refer: Transmission Corporation of A.P. Ltd. vs. CIT (1999) 239 ITR 587 (SC), Headstart Business Solutions (P) Ltd. (2006) (285 ITR 530) (AAR)

 However, section 195(2) of the Act permits the person responsible for making payment (payer) to make an application to the A.O. to determine the appropriate portion of such sum which is chargeable to tax and upon such determination, tax shall be deducted by him, accordingly.

Is it obligatory to approach AO for non-withholding of taxes

Answer: If the amount payable to a non-resident or foreign company is even partially chargeable to tax in India, tax shall be withheld at the full rates as prescribed by Finance Act, unless an order u/s 195(2) or certificate u/s 197 is obtained. Refer: GE India Technology Centre (P) Ltd. vs. CIT (327 ITR 456) (SC)

Whether an application can be made u/s 195(2) for ‘Nil’ withholding order

Answer: No, the payer cannot make an application for ‘Nil’ withholding tax u/s 195(2). However, the payee may apply u/s 195(3) to the A.O. in Form 13 and obtain ‘Nil’ withholding tax certificate. Refer: Czechoslovak Ocean (81 ITR 162) (Cal HC), Graphite Vicarb India Ltd. (18 ITD 58) (Kolkata ITAT)

 When is non-resident eligible for getting ‘Nil’ deduction certificate

Answer: As per section 195(3) & Rule 29B, a non-resident can make the application to the AO if he fulfils the following conditions:

• The assessee has been regularly assessed to tax and has filed all returns of income due as on the date of filing of application
• No default in respect of any tax, interest, penalty or any other sum
• Not subject to penalty u/s 271(1)(iii)
• Carrying on the business in India continuously for at least 5 years and
• The value of fixed assets in India exceeds Rs. 50 Lakhs

What is the validity of the certificate issued under section 195(3)

Answer: The certificate issued by AO under section 195(3) shall be valid till the expiry period mentioned in the certificate unless it is cancelled by the A.O.

When can application be made for renewal of certificate u/s 195(3)

Answer: The payee can make application for renewed certificate u/s 195(3) after the expiry of the earlier certificate or within 3 months before the expiry thereof.

Is Section 195 applicable in case the payment to non-resident is exempted from tax

Answer: Section 195 is not applicable where the amount payable to non-residents or foreign company is exempt from tax. Refer: GE India Private Limited (327 ITR 456) (SC), Hyderabad Industries Ltd. (188 ITR 749) (Kar HC)

Enumerate the cases where the benefit of section 195(2) cannot be availed

Answer: The benefit of section 195(2) cannot be availed in the following cases where the entire amount shall be subject to a special rate of tax namely section 115A, 115AB, 115AC, 115AD, 115BBA and 115E.

Whether reimbursement of actual expenses covered under section 195

Answer: No TDS is required to be deducted on the reimbursement of expenses actually incurred by a non-resident or foreign company under section 195 as there is no profit or income element involved therein. There are a number of decisions of judiciary in support of the above opinion.

What is the status of TDS deducted if after deduction the contract or work gets cancelled

Answer: In the cases where TDS has been deducted on advance payments made to non-residents and later the work or contract is cancelled, the TDS so deducted can be claimed from the department. Refer Circular No. 7/2007 dated 23-10-2007.

Whether tax us/ 195 to be withheld on payments in kind

Answer: Yes, Tax is to be withheld on payments in kind. Refer: Kanchanganga Sea Foods (325 ITR 540) (SC)

Whether TDS is deductible on interest on income tax refund

Answer: Yes, withholding tax u/s 195 is applicable on interest on income tax refund.

What is the exchange rate for TDS on non-residents

Answer: SBI’s buying TT rate