TDS applicability

This query is : Resolved

Raghu Raman (Querist)
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14 May 2009 A foreign Investor had filed a suit before the CLB against the Company and its Directors for mismanagement. Later, the parties to the suit compromised and the Company and its Directors agreed to pay a certain sum to the Investor for which the Investor also agreed. Now foreign currency is to be remitted.
Is TDS applicable on this payment? Is it a capital receipt not liable for TDS? If TDS is attracted, under which section and at what rate?
Please advice.

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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14 May 2009 I am not sure but TDS should not be applicable as the nature of payment does not fall within any heads of TDS.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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27 July 2025 This is a nuanced and sensitive matter involving **remittance to a foreign investor** as part of a **settlement** arising from a **mismanagement suit** before the CLB (now NCLT). Let's analyze whether **TDS is applicable**.

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## ✅ **Key Issue:**

A **foreign investor** is being paid a **settlement amount** (in foreign currency) by an Indian company pursuant to a **compromise agreement**. The question is whether **TDS under the Income Tax Act** applies on this payment, and if so, **under what section and at what rate**.

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## 🔍 Step-by-Step Analysis:

### 1. **Nature of the Payment** – Revenue vs Capital

This is crucial. You need to determine:

> Is the settlement amount **a compensation for relinquishment of shares or rights (capital in nature)**,
> **or** a **payment for services, damages, or loss of income (revenue in nature)?**

* If it's **compensation for buying out shares** or relinquishment of ownership rights, it's generally considered a **capital receipt**.
* If it's **compensation for loss of income**, such as **future dividends**, management fees, etc., it could be **revenue in nature**.

📌 But since the suit was about **alleged mismanagement** and the parties **settled without admission of wrongdoing**, and a **lump-sum amount is being paid to the investor**, this is **likely to be compensation of a capital nature** — **possibly akin to buyout or waiver of shareholder rights**.

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### 2. **TDS Applicability — Section 195**

Section **195** of the Income Tax Act applies when:

> **Any sum is payable to a non-resident** that is **chargeable under the provisions of the Act**.

This means:

* If the amount is **not taxable in India**, **no TDS** is required.
* But if the amount **is taxable**, TDS must be deducted **before remitting**.

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### 3. **Is it Taxable in India?**

This depends on:

* The **nature of the payment** (capital gain, income, damages)
* Whether the income **accrues/arises in India**
* Whether any **DTAA relief** is available

Now, if the payment is:

* **Capital receipt for relinquishment of shares/rights**, and
* The investor is a **tax resident of a DTAA country**, and
* **No capital asset is situated in India** (depending on the structuring),

➡️ The amount **may not be taxable in India**
➡️ And therefore, **TDS may not apply**

But if:

* The payment is **linked to any transfer of capital asset situated in India** (e.g. Indian shares),
➡️ Then **capital gains provisions apply**, and
➡️ TDS is required under **Section 195**, even on capital gains

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### 4. **Rate of TDS**

If the payment is **taxable**, and **no DTAA benefit is available**, then:

| Nature of Income | TDS Rate under Income Tax Act |
| ----------------------------------------- | ---------------------------------------------------- |
| Capital Gains (long term unlisted shares) | 10% (plus surcharge and cess) |
| Capital Gains (short term) | 30% (for individuals) or 40% (for foreign companies) |
| Other income (fees, damages) | Up to 30% or DTAA rate |

> TDS must be deducted **after obtaining a CA certificate (Form 15CB)** and uploading **Form 15CA** before remitting.

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### 🔁 What You Should Do:

1. **Determine the exact nature of payment** (preferably via legal opinion or agreement language)
2. **Consult a CA for Form 15CB** to certify taxability
3. If taxable:

* **Deduct TDS under Section 195**
* Consider **DTAA rate** (if TRC, Form 10F, and declaration available)
4. If not taxable:

* CA can issue **Nil deduction certificate** in **Form 15CB**
* Submit **Form 15CA Part D**

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## ✅ Final Conclusion:

| Question | Answer |
| -------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ |
| Is TDS applicable? | **Depends on nature of payment**. If it is **capital in nature (buyout of rights)** and **not chargeable to tax**, then **TDS is not required**. |
| If taxable, under which section? | **Section 195** |
| What rate? | Depends on nature (capital gains or other income) and **DTAA** provisions |

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Let me know the **country of the foreign investor** and whether this involves **transfer of shares or rights**, and I can help you identify the **exact DTAA article and TDS rate**.

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