Basavaraj (Asst, Manager-Legal) 13 April 2010

Non-Residents companies are liable to tax in India

Dear Lawyersclub members……

Please solve the issue.

‘A’ (say) India based pharma company has imported part of raw materials from ‘B’ Non-Indian Resident Company. A Company made the payment towards the purchases price. Income Tax dept issued a demand notice u/s 195 of the I.T. Act,1961 on the ground that 'A' Company did not deduct the TDS towards the payment and proposed to treat ‘A’ Company as defaulter u/s 201 of IT Act. Please provide me relevant citations.

Substantial Question of Law

Whether can court decide payment made to Non-residents ‘B’companies who supplied goods is not liable to deduction of tax at part and parcel of consideration paid for goods?
Whether amount paid by ‘A’ Company to ‘B’Non-residents companies on debt and the same is liable to tax in India in accordance with the provisions of the I.T.Act as well as Double Taxation Agreement existed between India and Non-residence?
Whether A Company should have taken permission u/s 195 of the I.T.Act for non-deduction of tax (TDS)? or
B Company should have taken exemption under the same provision for not paying TDS?

I request you to exchange your experts on the above issue.

Reply Follow

3 Replies

A V Vishal (Advocate) 13 April 2010

For deduction of tax at source under section 195 only consideration would be whether payment of sum to non-resident is chargeable to tax under provisions of Act; sum may or may not be income or income hidden or otherwise embedded therein; scheme of tax deduction at source applies not only to amount paid which wholly bears ‘income’ character but also to gross sums whole of which may not be income or profits of recipient - Headstart Business Solutions (P.) Ltd., In re [2006] 155 Taxman 639 (AAR - New Delhi).

Vineet (Director) 14 April 2010

TDS u/s 195 is deductible on payment of interest or any other sum chargeable to tax under the Act to any non-resident or a foreign company. The receipts of foreign companies or non-residents are either from their business and professional activities in India directly or through agent or certain receipts deemed to accrue in India by virtue of section 9 of Income Tax Act. Plain reading of the facts suggets that it was pure case of import of raw material, then no liability of TDS u/s 195 should have arisen. However, the transactions involves 'something else' which results in income accruing in India, the TDS liability arises. In such composite transactions, the payor may obtain an order u/s 195(2) from AO so as to which portion of the sum is liable for TDS. There is provision u/s 195(3) wherein foreign company may obtain a certificate from AO for non deduction of tax in certain conditions as may be prescribed by CBDT.