TDS

We have technical consultant in UK. We ask him our queries over email and he replies to our queries on email. He charges on hourly basis. He charges 25 pounds per hour and we directly remit the amount to his account in UK. Do we need to deduct tax at source. Amitabh, Roorkee

We have to made the Professional Advisory Payment to Hong Kong individual. Is there any provision regarding deduction of TDS on such Payment. Sachin Kedari, Pune

Both these question relate to same basic issue- TDS on payments to non resident consultant. Section 195 of the I T Act states that before any payment is made to a non resident , tax should be deducted at source.However , section 195 is applicable only if the payment to non resident is taxable in India under I T Act. Therefore , the issue whether the consultancy fee paid is taxable in India .

Section 5 provides that in case of non resident income deemed to arise or accrue shall be taxable under I T Act. The income deemed to arise or accrue is defined under section 9 which under Clause (vii) of subsection 1 of section 9 is specific to deeming provision in case of 'fees for technical services" under which your payments to US company certainly falls. The said clause provides as under

9(1) The following incomes shall be deemed to accrue or arise in India :

(vii) income by way of fees for technical services payable by

(a) ..............; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised 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 ; or

(c) ...........

The explanation is inserted in clause (vii) , which includes consultancy fee within the definition of technical fee. The explanation is as under :

Explanation 2.For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries.

Further it is also provided that for the purpose of section 9 , where income deemed to accrue or arise in India for technical fee , such income shall be included in total income of the non resident whether or not the non resident has a residence or place of business or business connection in India .

Double Taxation Avoidance Agreement between India & UK and India

As per DTAA , the consultancy fee is taxable in India @ 20 % .

What are your risk if you do not deduct the tax ?

1. The penalty u/s 221 may be imposed for non deduction of tax.

2. Interest u/s 201 (1A) shall be charged on amount of TDS not deposited .

3. Such expense may not be allowed u/s 40(a)(ia) if it is claimed as business or professional expense .

4. You and your bank which is also violating the RBI guideline under which the Bank has to eb satisfied that the tax has been deducted before making remittance.