Section 195 TDS on Commission paid to Non-resident: An Analysis

Please also refer the case JLC Electromet Pvt. Ltd. Vs ACIT (ITAT Jaipur).  I’m trying to analyse only some of the provisions applicable, only for understanding purpose.

As per Section 195 of Income Tax Act, any person who makes payment to non-resident by way of interest (except the interest as specified in Sections 194LB or 194LC or 194LD), or any other sum chargeable under the provisions of the Act, should deduct income tax at the rates in force, either at the time of payment or credit to such non-resident.

The deduction should be made for the non-resident irrespective of the fact that whether the non-resident has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India as per Explanation 2.

From the above, it is clear that in order to deduct income tax on the payment to non-resident, it is necessary that the income should be chargeable under the provisions of the Act even if the non-resident has a residence or place of business or business connection in India.

Since the tax is applicable only on income, we need to look at the scope of income.  Section 5 provides the provisions for the scope of Income.  According to the section, the total income of a non-resident includes all income from whatever source derived which-

(i) is received or is deemed to be received in India in such year by or on behalf of such person; or

(ii) accrues or arises or is deemed to accrue or arise to him in India during such year

As per the case, the non-resident is residing outside India and received the income outside India only, in that case, the first (i) provision does not apply here as the income is not received in India or is deemed to be received in India as per Section 7.

Now, we have to check if the second (ii) provision applies here.  Section 9 has provisions to determine if the income is deemed to accrue or arise in India.  As per the section, income accruing or arising directly or indirectly, through or from any business connection in India, any property in India, any asset or source of income in India or through the transfer of a capital asset situate in India.

So in order to charge the income, the business connection in India is necessary.  But as per the Explanation in the same section says that if the income arises by way of interest, royalty or fees for technical services, it shall be included in the total income of the non-resident, whether or not, the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India.

Since, the business connection in India is irrelevant for non-resident, we need to verify if the amount paid to the non-resident is not mentioned in the explanation above.  The commission amount paid to the non-resident is not interest, royalty or fees for any technical service.  It is merely the commission, for procuring orders outside India.  The above analysis is applicable for the payments made as exhibition expenses and testing charges also.

Since the income is not chargeable under any of the provisions of the Act, we can conclude that TDS may not be applicable on the amount paid as commission to the non-resident in this case.

Note: I’ve just tried to analyse the case as per the provisions of the Act.  If readers find any errors and omissions, please share your views in the comments section.

Disclaimer: This article is only reading purpose, just to understand the provisions. The author bears no responsibility on decisions taken by the readers whatsoever.  This article is merely for the purpose of understanding the provisions of the Act.  E&OE.