Section 195 of the Income Tax Act, 1961 deals with the deduction of tax at source (TDS) on payments made to non-residents, including foreign companies. It ensures that tax is collected on income that is chargeable to tax in India, even when payments are made outside the country.
🔹 Key Provisions of Section 195:
- Applicability:
- Applies to any person (resident or non-resident) responsible for paying to a non-resident (not being a company) or to a foreign company.
- Payments can include interest, royalty, fees for technical services, or any other sum chargeable to tax under the Act.
- Chargeability Condition:
- TDS is required only if the payment is chargeable to tax in India under the provisions of the Income Tax Act.
- Rate of TDS:
- Rates depend on the nature of payment and relevant provisions of the Income Tax Act or Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial to the non-resident.
- TDS Deduction Time:
- At the time of credit to the account of the payee or at the time of payment, whichever is earlier.
- Form 15CA/15CB:
- Before remitting funds to a non-resident, Form 15CA (online declaration) and Form 15CB (CA certificate, where required) must be furnished.
- Application to Assessing Officer (AO):
- The payer can apply to the AO under Section 195(2) to determine the appropriate portion of the sum chargeable to tax.
🔹 Common Payments Covered:
- Interest payments to foreign lenders
- Royalties for IP rights
- Technical and consultancy fees
- Payments for import of software or services
- Commission to foreign agents (if taxable in India)
🔸 Judicial Insights:
- The Supreme Court in GE India Technology Centre Pvt. Ltd. vs. CIT (2010) held that TDS is not required if the sum paid is not chargeable to tax in India.
🔹 Penalties for Non-Compliance:
- Failure to deduct or deposit TDS can result in:
- Interest u/s 201(1A)
- Penalty u/s 271C
- Disallowance of expense u/s 40(a)(i)