Tds not deducted on payment to non resident

Hi Atharv — good question. This scenario touches on TDS compliance on payments to non-residents under Section 195, and whether rectification by recalling the payment and re-issuing it after TDS deduction can cure the default.

Let’s break it down:

🔍 Situation:

• Assessee made a payment to a non-resident without deducting TDS, which is required u/s 195.

• To avoid disallowance under Section 40(a)(i) (for business expenditure), the assessee:

  • Requests the non-resident to refund the gross amount

  • Then deducts TDS and re-pays the net amount

✅ Is this rectification allowed?

Yes, courts have accepted this kind of rectification, provided the reversal and re-payment are genuine, properly documented, and compliant with law.

📚 Relevant Precedents & Principles:

1. CBDT Circulars & Case Law support this practice in substance-over-form scenarios, where the assessee:

   • Realizes the mistake,

   • Recovers the amount from the payee,

   • Deducts applicable TDS,

   • Pays net amount to payee, and

   • Deposits TDS to the government.

2. Key Case Law:

   • CIT vs. Emsons Gulf Ltd. (2008) 305 ITR 291 (Del)
     → Held that TDS compliance can be regularized if payment is recalled and TDS is properly deposited.

   • CIT vs. Siemens Aktiongesellschaft (310 ITR 320)
     → Emphasized substance over technical defaults when no revenue loss is caused.

✅ Conditions for Acceptance:

To make this rectification acceptable:

⚠️ Practical Caveats:

• If the non-resident refuses to refund, this path becomes difficult.

• If you’re audited, tax officers will scrutinize whether the refund & re-payment actually happened — mere book adjustment isn’t enough.

• In case of large transactions, consider applying to the AO for a certificate under Section 195(2) for future transactions.

✅ Summary: