Deduction of Tax at Source (TDS) for Non-Residents (Section 195)

1. TDS on income of Non-Resident:

2. Who is responsible to Deduct TDS under Section 195 [Explanation 2 to Section 195(1)]

3. When TDS under Section 195 is to be Deducted ?

4. Furnishing of Information relating to payment to Non-Resident / Foreigh Company [Section 195(6)]

5. Payer of the amount may make application for Deduction of Tax on the "income" comprised in the payment [Section 195(2)]:

6. Board empowered to Notify Class of Persons or Cases who shall make an Application to Assessing Officer to determine Appropriate Portion of Sum Chargeable to Tax [Section 195(7)]:

7. Where no Tax is to be Deducted at Source [Section 195(3) and Rule 29B]:

8. Where the TDS under Section 195 is either Not to be Deducted or to be Deducted at Lower Rate [Section 197 Rules 28 and 28AA]:

9. Procedure for Refund of TDS under Section 195 to the Person Deducting Tax at Source -

1. TDS on income of Non-Resident:

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 sum chargeable under this Act (other than salary) 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 incometax thereon at the rates in force.

However, no tax shall be deducted from any dividends referred to in section 115-O declared, distributed or paid by a domestic company on or after 1.4.2003.

2. Who is responsible to Deduct TDS under Section 195 [Explanation 2 to Section 195(1)]

For the removal of doubts, it is hereby clarified that the obligation to comply with section 195(1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

1. a residence or place of business or business connection in India; or

2. any other presence in any manner whatsoever in India.

In other words, person whether resident or non-resident is required to deduct tax at source before making payments to another non-resident, if the payment represents incomes of the payee non-resident chargeable to tax in India.

3. When TDS under Section 195 is to be Deducted ?

Tax shall be deducted either at the time of actual payment of such income or at the time of its credit to the account of the payee (by whatever name called), whichever is earlier.

However, in the case of interest payable by the Government or a public sector bank or a public financial institution, deduction of tax shall be made only at the time of payment thereof in cash or by cheque or draft.

Meaning of 'Rate' or 'Rates in Force' for section 195 [Section 2(37A)]:

"Rate or rates in force" or "rates in force", in relation to an assessment year or financial year, for the purposes of deduction of tax under section 195, mean:

• the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or

• the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90,

whichever is applicable by virtue of the provisions of section 90.

4. Furnishing of Information relating to payment to Non-Resident / Foreigh Company [Section 195(6)]

The person responsible for paying any sum, whether chargeable to tax or not, to a non-resident, not being a company, or to a foreign company, shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed. The following rule 37BB has been prescribed for this purpose:

Furnishing of information for payment to a Non-Resident, not being a company, or to a foreign company [Rule 37BB]

A person making remittance to a non-resident/foreign company is required to furnish an undertaking in digital mode in Form No. 15CA. In some cases, an online certificate of a chartered accountant in Form No. 15CB has to be taken before uploading Form No. 15CA. The relevant provisions (applicable from April 1, 2016) are given below – 

Category A - Amount (which is to be remitted abroad) is not chargeable to tax in the hands of recipient in India—

1. Undertaking in Form No. 15CA and certificate in Form No. 15CB is not required, if remittance pertains to 33 items specified in rule 37BB.

2. Undertaking in Form No. 15CA and certificate in Form No. 15CB is not required, if—

   1. the remittance is made by an individual; and

   2. prior RBI approval is not required† by virtue of section 5 of FEMA read with Schedule III to the Foreign Exchange (Current Account Transaction) Rules, 2000.

3. In any other case, certificate in Form No. 15CB is not required. However, undertaking in Form No. 15CA (Part D) should be uploaded. 

Category B - Amount (which is to be remitted abroad) is chargeable to tax in the hands of recipient in India -

4. If remittance (or aggregate amount of remittance during the financial year) does not exceed Rs. 5,00,000, Form No. 15CB is not required. However, undertaking in Form No. 15CA (Part A) should be uploaded.

5. If lower TDS certificate is received under section 197 or order of the Assessing Officer is received under section 195(2)/(3), information is to be uploaded in Form No. 15CA (Part B). Certificate from a chartered accountant in Form No. 15CB is not required.

6. In any other case of remittance outside India, the person making remittance will have to take a chartered accountant certificate in Form No. 15CB and, subsequently, he/it will have to furnish an undertaking in Form No. 15CA (Part C).

OTHER POINTS - The following points should be noted -

1. The information in Form No. 15CA shall be furnished,—

   1. electronically under digital signature and thereafter printout of the said form shall be submitted to the authorised dealer, prior to remitting the payment; or

   2. electronically in accordance with specified procedures, formats and standards and thereafter signed printout of the said form shall be submitted to the authorised dealer, prior to remitting the payment.

2. An income-tax authority may require the authorised dealer to furnish the signed printout of Form No.15CA for the purposes of any proceedings under the Act.

3. The certificate of chartered accountant in Form No. 15CB shall be furnished and verified electronically.

4. The authorised dealer shall electronically furnish a quarterly statement for each quarter of the financial year in Form No.15CC to the Principal Director General of Income-tax (Systems) or the person authorised by the Principal Director General of Income-tax (Systems) electronically under digital signature within 15 days from the end of each quarter.

5. A certificate issued by a Chartered Accountant in Form No. 15CB, on the question of taxability of payment to non-resident in India, has no decisive impact on the determination of tax liability of the recipient non-resident in India—

5. Payer of the amount may make application for Deduction of Tax on the "income" comprised in the payment [Section 195(2)]:

Where the person responsible for paying any such sum, as mentioned above, to a non-resident considers that the whole of such sum would not be income chargeable in the case of payee in India, he may make an application to the Assessing Officer to determine by general or special order, the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted by him accordingly.

6. Board empowered to Notify Class of Persons or Cases who shall make an Application to Assessing Officer to determine Appropriate Portion of Sum Chargeable to Tax [Section 195(7)]:

Notwithstanding anything contained in section 195(1) and (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a nonresident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under section 195(1) on that proportion of the sum which is so chargeable.

7. Where no Tax is to be Deducted at Source [Section 195(3) and Rule 29B]:

The person entitled to receive any interest or other sum (other than income from salary) may make an application in prescribed Form to the concerned Assessing Officer and obtain a certificate authorising the person responsible for making such payment to make payment of such income without deducting tax thereon.

Where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long asthe certificate isin force, make payment ofsuch interest or othersum without deducting tax thereon.

8. Where the TDS under Section 195 is either Not to be Deducted or to be Deducted at Lower Rate [Section 197 Rules 28 and 28AA]:

Any person to whom interest is payable may make an application in Form No. 13 to the Assessing Officer and obtain such certificate from him, as may be appropriate, authorising the payer not to deduct tax or to deduct tax at a lower rate.

As per section 206AA(4), no certificate under section 197 for deduction of tax at Nil rate or lower rate shall be granted unless the application made under that section contains the Permanent Account Number of the applicant. (For Relaxation from deduction of tax at higher rate under section 206AA. See rule 37BC).

9. Procedure for Refund of TDS under Section 195 to the Person Deducting Tax at Source -

The Board have revised the procedure for refund of tax deducted at source under section 195 to the deductor— 

Cases Covered - In the following cases, tax deducted at source under section 195 can be refunded to the deductor—

1. The contract is cancelled and no remittance is made to the non-resident.

2. The remittance is duly made to the non-resident, but the contract is cancelled. In such cases, the remitted amount has been returned to the person responsible for deducting tax at source.

3. The contract is cancelled after partial execution and no remittance is made to the non-resident for the nonexecuted part.

4. The contract is cancelled after partial execution and remittance related to non-executed part is made to the non-resident. In such cases, the remitted amount has been returned to the person responsible for deducting the tax at source or no remittance is made but tax was deducted and deposited when the amount was credited to the account of the non-resident.

5. There occurs exemption of the remitted amount from tax either by amendment in law or by notification under the provisions of Act.

6. An order is passed under section 154 or 248 or 264 reducing the tax deduction liability of a deductor under section 195.

7. There occurs deduction of tax twice from the same income by mistake.

8. There occurs payment of tax on account of grossing up which was not required under the provisions of the Act.

9. There occurs payment of tax at a higher rate under the domestic law while a lower rate is prescribed in the relevant double taxation avoidance treaty entered into by India or vice versa.

Refund -

In the cases given above, where no income has accrued to the non-resident due to cancellation of contract or where income has accrued but no tax is due on that income or tax is due at a lesser rate, the amount deposited to the credit of Government to that extent under section 195, can be refunded, with prior approval of the Chief Commissioner or the Director General concerned, to the person who deducted it from the payment to the non-resident. 

Other points - The following should also be noted—

1. In case of refund being made to the person who made the payment under section 195, the Assessing Officer may, after giving intimation to the deductor, adjust it against any existing tax liability of the deductor under the Income-tax Act, Wealth-tax Act, or any other direct tax law. The balance amount, if any, should be refunded to the person who made such payment under section 195.

2. A refund should be granted only after obtaining an undertaking that no certificate in form No. 16A has been issued to the non-resident. In cases where such a certificate has been issued, the person making the claim of refund either obtain it or should indemnify the Income-tax Department from any possible loss on account of any separate claim of refund for the same amount by the non-resident.

3. A refund should be granted only if the deductee has not filed return of income and the time for filing of return of income has expired.

4. The limitation for making a claim of refund shall be two years from the end of the financial year in which tax is deducted at source.

5. If a resident deductor is entitled for the refund of tax deposited under section 195, then it has to be refunded with interest under section 244A, from the date of payment of such tax –