Sec195- TDS on NRI
Sec 195- though its heading is ‘other sums’ it deals with payment to NRIs other then Salary income.
According to Sec 195 when payment is credited or paid to any NRI for interest or other sum excluding Salary is liable to deduct TDS. But if interest is payable by Government or Public sector bank 10(23D) then TDS will be applicable only on payment basis.
This section doesn’t cover dividend which are covered u/s 115-O.
If we study sec 195(2) then we found it says ” Where the person responsible for paying any such sum chargeable under this Act [(other than salary)] to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the [Assessing] Officer to determine, [by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable:” this shows that the objective of this section is if income of NRI is taxable in India only then TDS should be deducted. If it is not taxable in India then no TDS liability occurred. For this purpose Department issued circular no 786 dt 7th Feb 2000. Para 2 of this circular says “The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn where the taxability of ‘Foreign Agents of Indian Exporters’ was considered alongwith certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure.”
Finance Act 2008 introduced a e-filing of information for payment under this section. Now when a person paid u/s 195 he should filled 15CA online and get a certificate in From 15CB from a Chartered Accountant. 15CA can be filled by www.tin-nsdl.com. In this form detail of payer and NRI is compulsory in which Telephone no, E-mail id, Address etc. is compulsory. Form 15CB refers to remittance if tax is not deducted at source for any reason.But in practical some time agreement is like this that payer born TDS liability on him and pay full amount to NRI. For this sec 248 is there it says” Where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income.] So he can claim TDS refund by this.
In West Asia Maritime Ltd v ITO (2008) 111 ITD 155 (Coch) it was held that it is not open for a person who is paying NRI to take unilateral decision that payment is no chargeable to tax. So when there is any doubt for applicability of this section TDS should be deducted and paid.
Sec 204(iia) says “in the case of any sum payable to a non-resident Indian, being any sum representing consideration for the transfer by him of any foreign exchange asset, which is not a short-term capital asset, the authorised dealer responsible for remitting such sum to the non-resident Indian or for crediting such sum to his Non-resident (External) Account maintained in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any rules made thereunder” So now every agent is liable to deduct TDS u/s 195.
There is one more question which occurs many time when to deduct TDS on accrual basis or not. On reading of Section 195(1) we found it is on credited or paid whichever is earlier so no TDS on accrual basis. When person will credit or pay NRI only when he will deduct TDS but in Case of Government and sec 10(23D) PSB it is on payment basis in case of interest.