Manshi Baid

TDS Default On Payment Of Any Nature Other Then Salary, To A Non-Resident / Foreign Company

In this article, I am going to have a discussion on Section 40(a)(i) of the Income Tax Act, 1961. Which deals with disallowance of certain business expenditure in case of TDS default is made by the Payer at the time of making payments to a non-resident or foreign company. Clear understanding of all the sections of disallowance is very much important as it captures its place in the Audit Report as well as its effects the tax liability of the assesses also. We will discuss the complete scenario one by one. Lets have a look on that:-

1. TDS Deduction Liability

Section 195 of the Income Tax Act, 1961 provides that every person whether Individual, HUF, Partnership Firm, company etc whether liable for Tax audit or not, is required to deduct TDS at the specified rates in respect of any payments made, other than salary, to a non-resident or a foreign company if the following conditions are satisfied:-

i) Amount payable is of the nature of Interest, Royalty, Fees for Technical services or any other sum other than salary

ii) Amount payable is taxable in the hand of recipient in India

2. Consequences In Case TDS Is Not Deducted

100% of the amount paid/payable will be disallowed in the hand of payer.

3. Relief In Respect Of Disallowance

In case the assessee has not deducted TDS on the payments made to a non-resident or a foreign company during the relevant FY or after deduction fails to deposit the same before the due date of submission of ROI u/s 139(1) but the same was deducted and deposited by the assessee in the subsequent year, then so much of the amount disallowed in the year of TDS default will be allowed as deduction from the NP of the FY in which the tax was actually deposited. Lets have a clear understanding of this fact with the help of some examples:-

Example. : Laxminath Enterprises is a resident firm. An amount of Rs. 100000.00 as interest is payable by the firm to a foreign company. Tds is required to be deducted upto Dec 2018.Due date of filing of ROI by the firm is 30.09.2019

Condition I: Tds is not deducted by the resident firm during the FY 2018-19

The interest amount will be disallowed in the hand of resident firm during the FY 2018-19

Condition II: TDS is deducted by the Firm on 28.12.2018 and deposited on 14.04.2019

Whole of the Interest amount will be allowed as Deduction during the FY 2018-19 as the tax is deducted during the FY 2018-19 and payment is made before the due date of filing of ROI.

Condition III: TDS is deducted by the firm on 05.04.2019 and deposited on 13.04.2019

Whole of the amount will be disallowed in the FY 2018-19 as although the TDS was deposited before the due date of submission of ROI but the TDS was not deducted before 31.03.2019

It means to get the deduction of payment made to the Non-Residents or Foreign Company, TDS should be deducted before 31st March of the relevant FY and should be deposited before the due date of filing of Return of Income, otherwise either the expenses will be fully disallowed or the allowance of deduction in respect of expenditure will be allowed in the year in which the TDS was actually deposited by the payer.

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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One Comment

  1. Skiro says:

    Hi Manshi,
    Very nice article, will we be liable to pay TDS to govt. in the scenario below?
    We used a foreign company to do some installation services in India. That company is not a tax resident in India. Should we still pay TDS?

    The foreign company will not agree if we deduct TDS from them.


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March 2021