Basics of Section 195 of Income Tax Act, 1961

Basics of Section 195 of Income Tax Act, 1961

  • Sec 195 (1) -Scope -Deduction on the earlier of credit or payment of sumchargeable at the rates in force
  • 195(2) – Application by payer to AO for determination of the portion of sum chargeable
  • 195(3 & 4) – Application by payee to AO for no deduction of tax  read with Rule 29B
  • Section 195(5) : Power of CBDT to issue Notifications
  • 195(6) – Information in form 15CA and 15CB
  • 195(7) – CBDT to specify class of persons or cases where application to AO is compulsory
  • 195A – Income payable “net of tax”

Sl. No. Questions Answers Review
1 To Whom does Section 195 applies? a) A resident Making Payment to Non-Resident and, b) A Non-Resident making payment to a Non-resident As per Section 195, it says “Any person responsible for paying to non-resident…”any person not only includes Resident but also non-resident making payment to a non-resident
Though domestic TDS Sections such as 194C or 194J also says “Any person responsible for paying…. “, but it does not oblige non-resident to make TDS while making payment, because, that amounts to extra-territorial operations for which Income Tax Act does not have any authority upon non-resident WRT TDS recovery. But in case of Section 195, by the virtue of insertion of explanation (1) to section 195, it applies to a non-resident to make TDS at the time of payment to a Non-resident
2 When a non-resident sales his shares which is long term capital asset, to many number of potential share holders via IPO, whether the individual share holders has to deduct TDS as per section 195? No, it is practically impossible to make individual share holders liable to make TDS under the provisions of section 195. Therefore, apply section 204(iia) wherein, the ‘authorized person’ remitting such sum to Non-resident has to make TDS, in the given case the authorized person would banker to the issue, has to make TDS
3 Which are the payments made to non-residents is subject to TDS As per section 195(1), any interest or any other sum chargeable under the provisions of income tax Act shall be covered Section 4 of the income tax act would apply, meaning Income Chargeable to Tax would attract TDS.

Further Sums chargeable to tax in India to be read with:

‒ Sec 4 – Charge of income tax

– Sec 5 – Scope of total income

-Sec 6- Residence  in India

Sec 9 – Income deemed to accrue or arise in India

4 What is the threshold Limit for deduction of TDS section 195(1) says among others “…. any sum chargeable under the provisions….”, therefore no threshold limit for deduction of TDS
5 Whether TDS has to be made on gross amount or net amount Section 195A- Grossing up for computing TDS to be done in cases where the payer bears the tax liability.

For Example: Amount payable to Non residentis INR 100, rate    of TDS is 10%; Gross amount for TDS purpose is INR 111.11 (100*100/90)

As per section 195(2), the payer can make an application to the assessing officer to determine the appropriate proportion of such sum which is so chargeable.
6 Whether TDS has to be made on accrual basis or on payment basis under section 195? WRT clause (v), clause (vi) or clause (vii) of sub-section (1) of section 9, the section which mentions “Interest Payable“, “Royalty Payable” or “Fee for Technical Services (FTS) Payable“, therefore TDS would be payable on accrual basis, however if DTAA is invoked, DTAA mentions “Interest Paid“, “Royalty Paid” and “FTS Paid“. When DTAA is applicable, TDS would be made at the time of payment instead of accrual basis To take the advantage of DTAA, one has to obtain the PAN and Tax Residency Certificate (TRC) of the non-resident.
7 Ex: Mauritius based company sells shares held in Indian based company to Malaysia based company, is TDS applicable? If so who has to do TDS?  

TDS is applicable U/s 195(1), Ideally, Malaysian company has to make the TDS.

However, the department can invoke section 163 to make Indian company as the agent of the Malaysian/Mauritius based company and recover TDS amount.

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