Blog

TDS on Non-Resident Payments: Section 195 of the Income-tax Act, 1961

Section 195 of the Income-tax Act, 1961 is one of the most important provisions dealing with Tax Deducted at Source (TDS) on payments made to non-residents. It ensures that any sum chargeable to tax in India, when paid to a non-resident, is subject to TDS at the time of payment or credit, whichever is earlier.
The purpose is to prevent tax evasion and to ensure India’s right to tax income that arises, accrues, or is deemed to accrue in India.

Applicability (When Section 195 Applies)

  • Applies to any person (resident or non-resident, including individuals, firms, companies, etc.) making payment to a non-resident or foreign company.
  • Applies only if the sum is chargeable to tax in India under the Income-tax Act.
  • Applicable at the time of credit to the account of the non-resident or at the time of payment, whichever is earlier.
  • Covers both:
    • Business payments (professional fees, royalty, interest, commission, etc.)
    • Non-business payments (dividends, rent, etc., subject to exemptions).

Legal Framework

  • Section 195 of the Income-tax Act, 1961.
  • Rule 37BB of the Income-tax Rules: Procedural aspects relating to Form 15CA/15CB.
  • CBDT Circulars & Notifications: Clarifications on applicability.
  • Judicial Pronouncements: Example – GE India Technology Centre Pvt Ltd v. CIT (SC) held that tax is to be deducted only if payment is chargeable to tax in India.

Types of Income/Expenses Covered

Section 195 applies to payments made to non-residents that are taxable in India, such as:

  • Interest (other than interest under section 194LB, 194LC, 194LD).
  • Royalty & Fees for Technical Services (FTS).
  • Dividend (subject to provisions after abolition of DDT).
  • Business income (if it accrues or arises in India).
  • Payments for purchase of immovable property from non-residents.
  • Any other sum chargeable to tax (including capital gains).

 

Limit & Chargeability

  • No threshold limit → Even a single rupee paid to a non-resident may attract Section 195 if chargeable to tax.
  • Chargeability depends on:
    • Whether income is taxable under the Act.
    • Whether DTAA provides relief or lower rate.

Rate of Deduction

  • The TDS rate depends on:
    1. Income-tax Act rate or
    2. DTAA rate (whichever is more beneficial to the assessee – Section 90).
  • Examples of rates under the Act (subject to surcharge & cess):
  • Interest (Sec. 115A) → 20%
  • Royalty / FTS → 10%
  • Dividend → 20%
  • Long-term capital gains (Sec. 112A) → 10%
  • Short-term capital gains (Sec. 111A) → 15%
  • Other income → 30% (for individuals) / 40% (for foreign companies)

Time of Deduction

  • TDS must be deducted at the time of credit to the account of the payee or at the time of actual payment, whichever is earlier.

Compliance: Forms 15CA & 15CB

  • Form 15CA: Declaration by remitter, filed online before remittance.
  • Form 15CB: Certificate by Chartered Accountant (CA) in cases where:
    • Payment is chargeable to tax, and
    • DTAA provisions or lower deduction certificate are applied.
  • Exemptions: For certain specified payments (as per Rule 37BB), Forms are not required.

DTAA (Double Taxation Avoidance Agreement)

  • India has signed DTAAs with many countries to avoid double taxation.
  • Under Section 90, an assessee can opt for DTAA rate if more beneficial.
  • Example:
    • Royalty under Act → 10%
    • Royalty under India-USA DTAA → 15% → Assessee can choose 10%.

Lower Deduction / Nil Deduction

  • Section 195(2): Payer can apply to the AO to determine appropriate proportion of sum chargeable.
  • Section 197: Non-resident payee can apply for lower or nil deduction certificate.

Documentation Required

  • PAN of non-resident (else higher TDS u/s 206AA @ 20%).
  • Tax Residency Certificate (TRC) from non-resident.
  • Form 10F (details of non-resident).
  • No PE (Permanent Establishment) declaration, if applicable.
  • Agreement/Invoice for payment.
  • Chartered Accountant Certificate (Form 15CB, if applicable).
  • DTAA copy (if relief claimed).

Checklist for Deduction u/s 195

Identify if payee is non-resident.
Determine nature of payment (interest, royalty, FTS, etc.).
Check if income is taxable in India under the Act.
Verify DTAA benefits (if applicable).
Collect documents (PAN, TRC, Form 10F, no-PE declaration).
Deduct TDS at correct rate (Act or DTAA, whichever beneficial).
File Form 15CA/15CB online before remittance.
Deposit TDS within due date (7th of next month).
File TDS return in Form 27Q.

Example

ABC Pvt Ltd (India) pays USD 10,000 as royalty to XYZ Inc. (USA).

  • Royalty under Act: 10% + surcharge + cess.
  • Royalty under India-USA DTAA: 15%.
  • Beneficial rate: 10% (Act).
  • TDS to be deducted = 10% of USD 10,000 = USD 1,000.
  • ABC to file Form 15CA & obtain Form 15CB before remittance.

 

 

Conclusion

Section 195 plays a crucial role in ensuring tax compliance on cross-border payments. It mandates that any payment to a non-resident which is taxable in India must suffer TDS at source, unless exempt under DTAA or certified otherwise.
For businesses and individuals, following the proper procedure—checking DTAA, obtaining TRC, filing Forms 15CA/15CB, and depositing TDS—is essential to avoid penalties and disallowance of expenses.
Thus, Section 195 ensures India’s right to tax while also allowing non-residents to claim treaty benefits, promoting global tax transparency.

Leave a Reply