No TDS liability on income received on non-technical services outsourced to foreign company

Last updated: 21 February 2023

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The Karnataka High Court has ruled that payments made for non-technical services, such as payroll support, outsourced to a foreign company are considered business income and are not subject to Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act. The court found that these services did not constitute technical services and that the foreign company did not have a permanent establishment in India. Consequently, the payer was not deemed an 'assessee in default'.

Court :
Karnataka High Court

Brief :
The Hon'ble Karnataka High Court in The Director of Income-Tax v. IBM India Private Limited [I.T.A NO. 218 of 2014 dated January 16, 2023] has held that, the pay roll related services by assessee outsourced to its foreign companywould be treated as business income earned by the foreign companyand not a technical service therefore, would not be liable for Tax Deducted at Source ("TDS") under Section 195 of the Income Tax Act, 1961 ("the IT Act"). Further held that, the payments received by foreign company, would be chargeable to tax outside India.

Citation :
I.T.A NO. 218 of 2014 dated January 16, 2023

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