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To elucidate the concept, considered the following cases from TDS deduction perspective u/s 195 of the Income Tax Act:-

a. Rs. 10 lacs paid as Fees for Technical Services to Non-Resident (NR) and his expenses (Salary to staff and other admin expenses) were Rs. 6 lacs and Net profit to NR was Rs. 4 lacs. Whether TDS is deductible on Rs. 10 lacs or 4 lacs?

b. Rs. 10 lacs paid as fees for Technical Services to NR and he hire external consultant for Project at a cost of Rs. 6 lacs and Net Profit to NR was Rs. 4 lacs. NR claimed exemption for TDS on Rs. 6 lacs, as same is reimbursement of expenses.

c. Rs. 10 lacs paid as fees for Technical Services rendered by Permanent Establishment of NR in India. In rendering such services, PE incurred expenses of Rs. 6 lacs and its Net Profit was Rs. 4 lacs. Whether TDS is deductible on Rs. 10 lacs or 4 lacs.?

d. Rs. 10 lacs paid as fees for Technical Services to NR along with Rs. 1 lakh as reimbursement of Out of pocket expenses. NR claimed exemption for TDS on Rs. 1 lakh, as same is reimbursement of expenses.

e. Rs. 11 lacs paid as fees for Technical Services, all inclusive and incurred Rs. 1 lakh as expenses. Whether TDS is deductible on Rs. 11 lacs or 10 lacs?

f. Indian Entity purchases Machinery from outside Indian. It reimbursed Rs. 5 lacs to its foreign affiliate incurred on transportation of Machines to India. Whether TDS is deductible on Rs. 5 lacs?

Before dwelling upon the TDS on afore-said illustration, we need to look at scheme and mechanism envisaged in the Act for deduction of TDS on payments to NR.

Section 195 is principle section governing the provisions for deduction of TDS on payments to NR.

Section 195 (1) provides for deduction of TDS at rates in force on payment of interest or any other sum chargeable under the Act to Non-resident.

Section 195(2) enables NR to approach to AO to determine the appropriate income in entire sum paid to him, where NR considered that entire sum paid to him would not be income chargeable under Act.

The important points for consideration are as under:-

i. First to determine, whether amount paid to NR, represent income either in entirety or in part, which is chargeable under Act as per provisions of Act or DTAA.

ii. Second, where it is established that amount paid represent the income, it is essential to look at scheme provided in the Act for computation of Income of NR.

iii. In case of NR, Act provide for taxability of Income on Gross basis (without allowing deduction for expenses) in some cases and Net basis in the other cases.

iv. The object of section 195 is to ensure that tax due by non-resident on income remitted to him has been appropriately deducted by payer.

v. Thus for determining whether reimbursement of expenses to NR entails deduction of TDS, it is essential to look at whether Gross basis or net basis is prescribed for taxability of income to which reimbursement relates.

The provisions in Act providing for taxability of NR on Gross basis or net basis are summarised as under:-

S.No

Income Nature

Taxability Basis

Remarks

1

Fees for Technical Service to NR

Gross Basis

As per Provision of Section 115A, taxable @ 25% on Gross amount.

2.

Royalty to NR

Gross Basis

As per Provision of Section 115A, taxable @ 25% on Gross amount.

3.

Fees for Technical Service/Royalty paid to PE of NR in India

Net Basis

As per Provision of Section 44DA.

4.

Interest to NR

Gross Basis

As per Provision of Section 115A, taxable @ 25% on Gross amount, except interest referred to in section 10(47) , 194LC & 194LD, where interest is taxable @ 5%.

5.

Any Other Income

Net Basis

Normal Provision of Act.

Based on afore-said, TDS deduction on examples at top is summarised as under:

S.No.

Facts

TDS Deduction

a.

Rs. 10 lacs paid as Fees for Technical Services to Non-Resident (NR) and his expenses (Salary to staff and other admin expenses) were Rs. 6 lacs and Net profit to NR was Rs. 4 lacs

TDS is deductible on Rs. 10 lacs, as the Gross amount is taxable in India.

b.

Rs. 10 lacs paid as fees for Technical Services to NR and he hire external consultant for Project at a cost of Rs. 6 lacs and Net Profit to NR was Rs. 4 lacs. NR claimed exemption for TDS on Rs. 6 lacs, as same is reimbursement of expenses.

TDS is deductible on Rs. 10 lacs, as the Gross amount is taxable in India.

c.

Rs. 10 lacs paid as fees for Technical Services rendered by Permanent Establishment of NR in India. In rendering such services, PE incurred expenses of Rs. 6 lacs and its Net Profit was Rs. 4 lacs

TDS is deductible on Rs. 4 lacs, if NR furnished proof of expenses incurred to payer at the time of payment or better if NR approaches to AO u/s 195(2), to determine the income chargeable under Act, which shall be Rs. 4 lacs.

d.

Rs. 10 lacs paid as fees for Technical Services to NR along with Rs. 1 lakh as reimbursement of Out of pocket expenses. NR claimed exemption for TDS on Rs. 1 lakh, as same is reimbursement of expenses

TDS is also Deductible on Rs. reimbursement of Rs. 1 lacs as the same is part of fees of technical service and same is taxable in India on Gross basis.

e.

Rs. 11 lacs paid as fees for Technical Services, all inclusive and incurred Rs. 1 lakh as expenses.

TDS is deductible on 11 lacs as the Gross amount is a taxable in India.

f.

Indian Entity purchases Machinery from outside Indian. It reimbursed Rs. 5 lacs to its foreign affiliate incurred on transportation of Machines to India

No TDS is Deductible on Rs. 5 lacs, since amount paid to foreign affiliate is not the income chargeable under Act.

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