Who is Responsible for TDS on sale of shares by NRI’s

CA Anuj Gupta

We are an Indian Company and our 5% equity is held by an NRI. Under a scheme of buyback of equity shares announced by our Company, the said NRI has offered all his equity for buyback. The said shares were acquired by him in convertible foreign exchange 5 years back. Whether there is any liability on the Indian company to deduct TDS on the said buyback from NRI?

Ans. This is a common question now a days that whether TDS is to be deducted in case of sale of equity shares held by an NRI and the simple answer to the aforesaid question is that yes TDS needs to be deducted by the person making payment to the NRI. Here is the reason for such conclusion.

Section 195 of the Income Tax Act, 1961 clearly states that that if a non-resident is paid any sum, which is chargeable to tax, TDS should be deducted.

Sec. 195 : Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in Section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

The meaning of the phrase “Any person responsible for paying” used in section 195 above, has been defined in sec. 204 of Income Tax Act,1961, in the following words:-

204. For the purposes of the foregoing provisions of this Chapter and section 285, the expression “person responsible for paying” means—

(i) ……………..

(ii) ………………..

(iia) in the case of any sum payable to a non-resident Indian, being any sum representing consideration for the transfer by him of any foreign exchange asset, which is not a short-term capital asset, the authorised person responsible for remitting such sum to the non-resident Indian or for crediting such sum to his Non-resident (External) Account maintained in accordance with the Foreign Exchange Management Act, 1999, and any rules made thereunder;

(iib)…………

(iii)………………..

(iv)……………….

Explanation —For the purposes of this section:—

(a) “non-resident Indian” and “foreign exchange asset” shall have the meanings assigned to them in Chapter XII-A;

(b) “authorised person”shall have the meaning assigned to it in clause (c) of section 2 of the Foreign Exchange Management Act, 1999.

Before we proceed further, let us also understand what do we mean by “foreign exchange asset” under Chapter XII-A

Section 115C defines foreign exchange asset investment income and specified assets as follows:

(b)”foreign exchange asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.

(f) ‘specified asset’ means any of the following assets, namely :

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

So let us put section 204 (iia) in simple words:

1. In case of any sum payable to a non-resident Indian,

2. Such sum represents consideration for the transfer by him of any foreign exchange asset,

3. The said foreign exchange asset is not a short-term capital asset,

4. The authorised person responsible for remitting such sum to the non-resident Indian or for crediting such sum to his Non-resident (External) Account shall be person responsible for deducting TDS.

So in the present case it is pretty clear that the sum being paid is for a foreign exchange asset, which is not a short term capital asset. Hence Authorised Person paying the sum to NRI on buyback of shares shall be responsible for deducting TDS u/s 195.

(Author can be reached at  Email – anuj@arsacas.com, Cell No. +91-9810106211)

(Republished With Amendments)