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:

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.
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:

Condition	Descripttion
💼 Commercial substance	There must be an actual reversal and repayment process — not just book entries.
📜 Documentary proof	Maintain refund communication, revised invoice, TDS challan, and proof of re-payment.
🧾 TDS return correction	File correct Form 27Q with TDS details after deduction.
📈 Timing	Preferably do this before assessment or in response to a notice.

⚠️ 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:

Question	Answer
Can assessee recover amount from non-resident and re-pay after TDS deduction to fix mistake?	✅ Yes, if genuine and well-documented.
Will this avoid disallowance under Section 40(a)(i)?	✅ Yes, provided TDS is correctly deducted & paid, and reflected in TDS return.