Analysis of Section 40(a)(i)- Non-compliance of Provisions of TDS where payment is made to Non Resident:
As per the provision of section 40(a)(i), If any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable to Non-resident or Foreign Company, disallowance of deduction if TDS is not deducted or deducted but not deposited to govt.
The disallowance is made due to following reasons under section 40(a)(i)
- TDS has not been deducted in previous year (Or)
- TDS deducted but not deposited to govt. up to due date of return filing under section 139(1).
Under this section 40(a)(i), 100% of such sum shall not be allowed as deduction.
Example-1
Onlinesolves Ltd paid of Rs 5,00,000 as liability for remuneration to Santosh, a film artist and a non-resident. Tax was not deducted at the time of payment. So, what is the dis-allowance of the Remuneration amount?
Answer:
As per section 40(a) any sum payable to a non-resident shall not be allowed as deduction, if tax has not been deducted at source or after deduction, has not been paid on or before the due date specified under section 139(1). So, here the payment is made to Santosh who is non-resident without tax deduction and amount of Rs:5,00,000 is not allowed as deduction.
Example-2
Onlinesolves Ltd paid of Rs 5,00,000 as on 15-08-2021. liability for remuneration to Santosh, a film artist and a non-resident. Tax was deducted at the time of payment but it was deposited to Govt. on 15-11-2022. So, what is the dis-allowance of the Remuneration amount?
Answer:
As per section 40(a) any sum payable to a non-resident shall not be allowed as deduction, if tax has not been deducted at source or after deduction, has not been paid on or before the due date specified under section 139(1).
So, here payment is made to non resident and tax deducted as per section 195. But it was not deposited within time limit i.e within due of return filing under section 139(1). So, the total amount of Rs: 5,00,000 is dis-allowed for the deduction to onlinesolves.ltd.
Exception to Section. 40(a)(i):
If any amount paid /credited to payee without deduction of TDS but such payee
- Furnishes his Return of Income
- Takes into account such amount in total income.
- Has paid the tax due on such income
- Payer furnishes a certificate in FORM 26A from CA to this effect then it shall be deemed that the payer has deducted TDS & paid to Govt on date of furnishing of return by payee & deduction of such expenditure shall be allowed accordingly (100% ) disallowed in current year and will be allow in the year in which payee file his Rerturn of Income.
However payer has to pay interest u/s 201(1A) @ 1% pm or part of the month on the amount of TDS not deducted from the date on which the TDS was so deductible till the date on which payee furnish his ROI.
Provisions under DTAA
The DTAA entered into by India are mostly based on UN model and relevant article dealing with Interest, Royalty or Fees for Technical Services are analyzed as under:-
Article 11- Interest
- Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
- However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State—
Article 12- Royalty
- Royalties arising in a Contracting State and paid to a resident of the other Contracting State maybe taxed in that other State.
- However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State,—-
Fees for Technical Services
The UN model does have specific clause for Fees for Technical Service, but in various DTAA entered into by India, the clause relating to FTS, wherever specifically provided is as under:-
- Fees for Technical Services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
- However, such fees for Technical Services may also be taxed in the Contracting
State in which they arise and according to the laws of that State,—-
Thus, afore-said clauses in the context of Indian Resident and Non-resident can be interpreted as under:-
- Interest, Royalty or Fees for Technical Services PAID by Indian resident to non-
resident is taxable in the county of non-resident. - SUCH Interest , Royalty & fees for Technical services are also taxable in India at prescribed rates.
Now question of consideration is that whether word “Paid” is to be interpreted in strict sense or in liberal sense to cover payable also.
In certain recent judicial decisions rendered in the context of Royalty & FTS, the words PAID is interpreted in strict sense and held that Royalty & FTS is taxable in the hands of non-resident in India on paid basis or not on accrual basis.
Thus point of taxability of Royalty, Interest or fees of Technical Services are summarized as under:-
a) Income Tax Act- Payable basis.
b) DTAA- Paid basis
Thus in terms of DTAA, Interest, Royalty or Fees for Technical Services will be not considered as Income Chargeable to Tax in India, till same is paid to Non-resident.
Now in respect of Royalty, Interest or fees for technical services payable, at the end of year, assessee can always take the position that since said amount is not taxable in the hands of Non-resident under DTAA, there is no liability to deduct TDS u/s 195 on said amount.
Thus based on afore-said discussion , with reference to expenses on account of Royalty, Interest or fees for technical services, there will not be any disallowance u/s 40a(i) on account of non-deduction of TDS as under:-
- Non deduction of TDS on amount paid in Financial Year- No disallowance as per Ruling of SC in Vector shipping
- Non Deduction of TDS on amount payable at the end of Year- Such amount is not chargeable to tax in the hands of Non-resident in said financial year under DTAA and hence no liability to deduct TDS u/s 195
