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Detailed Analysis of Section 195 of The Income Tax Act along with latest case laws favoring various area
Abut By Author
CA. Jeet Shah
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, shall deduct income-tax thereon at the rates in force is responsible to deduct tax u/s 195 of the act.
Nature of Payment
a) Any interest (not being interest referred to in section 194LB, 194LC and 194LD).
b) Any other sum chargeable under the provision of this Act (not being income chargeable under the head ―Salaries).
When to Deduct TDS under Section 195?
At the time of credit of such income to the account of payee or at the time of payment, whichever is earlier. For this purpose credit to ―Interest payable account or ―Suspense account or any other name shall be deemed to be a credit of such income to the account of the payee.
For this purpose, ―payment can be in cash or by issue of a cheque or draft of by any other mode.
If interest is payable by the Government or a public sector bank or a public financial institution, then tax deduction shall be made only at the time of payment thereof in cash or by cheque or draft or any other mode. Second Proviso to Section 195(1) exempting TDS on dividend referred to in Section 115-O has been deleted.[Finance Act 2020].
No threshold limit. However, tax shall be deducted on sum chargeable to tax. Therefore, if no sum is chargeable to tax in India, then no tax is required to be deducted.
Let’s Understand Chargeability?
As per the provisions of Section 5(2)(b) of the Act, the total income of a non-resident also includes all income which accrues or arises or is deemed to accrue or arise in India to the non-resident.
To check whether the income of the non-resident is deemed to accrue or arise in India–We have to refer Section 9.
If the income is deemed to accrue or arise in India, then the payer is liable to withhold taxes in India.
Following shall be deemed to accrue or arise in India:
- Section9(1)(ii)– Income which falls under the head “Salaries” ,if it is earned in India, i.e. when the services are rendered in India [Tax deductible u/s. 192]
- Section9(1)(iii)– Salary payable by the Central Govt. to a citizen of India for services rendered outside India [Tax deductible u/s. 192]
- Section9(1)(iv)– Dividend paid by an Indian company outside India.
- SECTION 9(1)(v) –INTEREST
Income by way of interest payable by a Resident shall be deemed to accrue or arise in India except if amount used for business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India.
- SECTION 9(1)(vi) –ROYALTY
Income by way of royalty payable by a Resident shall be deemed to accrue or arise in India except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India.
- SECTION 9(1)(vii) –FEES FOR TECHNICAL SERVICES
Income by way of fees for technical services payable by a Resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India.
- SECTION 9(1)(viii) –SUM OF MONEY
Income arising outside India, being any sum of money referred to in Section 2(24)(xviia), paid on or after 5th July, 2019 by a resident to a non-resident /foreign company shall be deemed to accrue or arise in India. Section 2(24)(xviia) includes in Income-any sum of money covered u/s. 56(2)(x) of the Act.
However, Gift of any sum of money from relative shall not be liable for withholding tax obligation u/s. 195.
For the removal of doubts, it is here by declared that for the purposes of this section, income shall be deemed to accrue or arise in India under clause (v) [Interest] or clause (vi) [Royalty] or clause (vii) [Fees for technical services] of sub-section (1) and shall be included in the total income of the non-resident, whether or not:
- The non-resident has a residence or place of business or business connection in India; or
- The non-resident has rendered services in India.
If the payment to non-resident or a foreign company is covered u/s. 9 of the Act and chargeable to tax, the provisions of Section195 of the Act shall come into play.As per Section 195 (1)–Tax is required to be deducted at the time of payment or credit, whichever is earlier at the rates in force.
Section 2(37A)(iii)Rate or Rates in force means-The rates of income tax specified in the
Finance Act of the relevant previous year, or DTAA (Double Taxation Avoidance Agreement)
Further, TDS u/s. 195 is also required to be withheld at the time of making provision on accrual basis the payee is identified and amount is ascertainable.
“Any person who is responsible for paying any sum being royalty or fees for technical services to a non-resident / foreign company carrying on business through a Permanent Establishment (PE) in India shall deduct tax u/s. 195 of the Act at the rate of tax at applicable rates.”
Some of the judgements that give more clarity on applicability of this section
- Deputy Commissioner of Income-tax, Circle- 16(1), New Delhi Taj International (P.) Ltd.  96 taxmann.com 222 (Delhi – Trib.). Where payments were made by Indian company on account of commission for procuring sales orders to non-resident from parties outside India, tax was not required to be deducted at source under section 195.
- Deputy Commissioner of Income-tax, International Taxation, Circle-1 (2), Bangalorevs IBM India (P.) Ltd.* 100 taxmann.com 230 (Bangalore – Trib.). There being no provision in DTAA to tax fees for Technical Services, payment made by assessee to avail technical service of its AE, would be taxed as per article 7 but in absence of PE in India, said income was not chargeable to tax in India.
- BYK Asia Pacific Pte. Limited [ITA No.2110/PUN/2019] is one of the major judgement came which clarified the scope of applicability and section 195 of the Act. This can be termed as landmark bringing clarity in many matters and welcoming area for Multinational Companies
Following are main observations in the judgement:
- ITAT explicated that ‘chargeability’ of the amount to tax in India, in the hands of recipient, is essential to trigger TDS under section 195 of the Act. Further, chargeability pre-supposes some profit element imbued in the receipt. Mere reimbursements without any profit element cannot be characterized as ‘sum chargeable to under the provisions of the act’ hence would be outside the purview of tax deduction at source under section 195.
- Essentially, two elementary requirements must be fulfilled in order to construe a payment as “reimbursement”. There should be a one-to-one direct correlation between the outgo of the payment and inflow of the receipt, i.e. there should be a directly identifiable amount which is spent on behalf of another which is duly recovered later. The receipt and payment must be of identical amount i.e. the reimbursement must not be laced with any mark-up and exact amount incurred should be recovered.
“Based on the above, the ITAT separately determined whether each payment was in the nature of reimbursement of expenses or not.”
- Following service are undertaken by PE from other PE’s outside India:
- Seminar expenditureSuch seminar expenses included expenses for business entertainment, overnight accommodation, etc. and were incurred by a third party and the assessee was charged with the amount without any mark-up. Indian PE paid to other PE outside India without any mark-up,Hence, such expenses were classified as ‘reimbursement’, not requiring deduction of tax at source.
- Training, Printing and Staff Welfare Expensesexact amount incurred was recovered from the assessee(PE in India) without any mark-up by PE outside India. Such expenses were consequently classified as ‘reimbursement’, not requiring deduction of tax at source.
- Information Technology Expenses ,PE in India was provided technical support from PE outside India for services to customers in India being a nature of reimbursement not requiring deduction of tax at source.
Overall take of this judgement The ruling reiterates that mere reimbursements without any profit element are not in the nature of any income and therefore such payments cannot be made subject to provisions of deduction of tax at source and consequent disallowance under section 40(a)(i) of the Income Tax Act. ITAT elaborately explained that to qualify as reimbursement, one-to-one correlation between outflow and receipt and absence of profit element is paramount.
On the onset we can discover that the services explained in case of BYK Asia Pacific gives an guidelines that any expenditure falling under Section 195 paid without any mark-up would qualify for the definition of reimbursement and such would not be liable for deduction of TDS on the end of Assessee, thus for any other expenses with same nature can become qualified for framing the guidelines for future tax advisory.
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