Must you deduct tax on every payment to a non-resident, just to be safe?
No. The obligation under s.195 arises only where the sum paid is chargeable to tax under the Act. Mere remittance to a non-resident does not attract it, and you need not apply under s.195(2) where nothing is chargeable.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia CJ and K.S. Radhakrishnan J) on 2010-09-09, reported as (2010) 327 ITR 456 (SC); [2010] 193 Taxman 234 (SC); [2010] 7 taxmann.com 18 (SC); (2010) 234 CTR 153 (SC); (2010) 10 SCC 29; Civil Appeal Nos. 7541-7778 of 2010. It bears on section 4, section 5, section 9, section 195, section 195(2), section 40(a)(i) of the Income Tax Act 1961, in TDS Defaults matters.
It is the starting point of every cross-border withholding question, and it stops the practice of deducting on everything defensively. It also protects you from a s.201 demand on a payment that was never taxable here.
Binding on every court and authority in India.
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The appellants, of whom Sonata Information Technology Ltd. was the leading case, were distributors of imported pre-packaged shrink-wrapped standardised software bought from Microsoft and other suppliers outside India, and treated their payments as the purchase price of the software. The Income-tax Officer (TDS) held that because the sale included a licence to use the software the payments were royalty deemed to accrue in India, so tax should have been deducted under s.195; the Commissioner (Appeals) agreed. The Tribunal held the payments were not royalty and gave rise to no income taxable in India, so no deduction was required. On the Revenue's appeal the Karnataka High Court accepted a contention raised there for the first time: that unless the payer applied under s.195(2) and obtained permission for non-deduction, he could not contend that the payment gave rise to no taxable income. The High Court rested that on Transmission Corporation of A.P.
The obligation to deduct under s.195(1) arises only where the sum paid to the non-resident is chargeable to tax under the Act, that is under ss.4, 5 and 9. A remittance to a non-resident does not by itself attract the obligation, and a payer who is certain that no part of the payment is chargeable need not apply under s.195(2); that sub-section rests on the principle of proportionality and is attracted where the payment is composite and the payer is unsure what proportion is taxable. The Karnataka High Court's contrary view, that the obligation arises the moment there is a remittance, was overruled. The Court did not decide whether these particular payments for software were royalty. Because the High Court had never gone into the merits, the appeals were allowed, the High Court judgments set aside, and the cases remitted for de novo consideration of the question whether the Tribunal was right that the payments were not royalty and gave rise to no income taxable in India.
The words 'chargeable under the provisions of the Act' in s.195(1) are the pivot, and they appear in no other provision of Chapter XVII - ss.194C, 194EE and 194F speak of 'any sum' or 'any amount' - so they must be given meaning and effect. The Act is one integrated code, and the machinery provisions for collection cannot be read apart from the charging provisions in ss.4, 5 and 9; that was the approach in Eli Lilly on s.192 and it applies to s.195. The Department's reading would produce absurdity: since only the payee can seek a refund under s.237 read with s.199, a payer forced to deduct on a sum not chargeable would be out of pocket with no remedy, and tax would be collected even where the income has no territorial nexus with India. The revenue-leakage argument was rejected because the Act contains its own safeguards - disallowance under s.40(a)(i) if the payer claims the remittance as expenditure without deducting, and the reporting obligation in s.195(6), inserted with effect from 1 April 2008 and so inapplicable to these years. Transmission Corporation was explained rather than departed from: there the contract was composite, comprising supply of plant and its erection and commissioning in India, so the payer knew an element was taxable and the only question was whether TDS applied to composite payments; the observation that tax must be deducted if no s.195(2) application is filed refers to that situation, and the Karnataka High Court had misunderstood it as barring a payer from contending that nothing at all was chargeable.
the obligation to deduct TAS arises only when there is a sum chargeable under the Act
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Handle my notice → Ask a CA on WhatsAppNo. The obligation under s.195 arises only where the sum paid is chargeable to tax under the Act. Mere remittance to a non-resident does not attract it, and you need not apply under s.195(2) where nothing is chargeable. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia CJ and K.S. Radhakrishnan J) and bears on section 4, section 5, section 9, section 195, section 195(2), section 40(a)(i) of the Income Tax Act 1961. It is reported as (2010) 327 ITR 456 (SC); [2010] 193 Taxman 234 (SC); [2010] 7 taxmann.com 18 (SC); (2010) 234 CTR 153 (SC); (2010) 10 SCC 29; Civil Appeal Nos. 7541-7778 of 2010. It is the starting point of every cross-border withholding question, and it stops the practice of deducting on everything defensively. It also protects you from a s.201 demand on a payment that was never taxable here. If it applies to you, the first step is this: Decide chargeability first — under the Act and the treaty — before deciding the rate.
The appellants, of whom Sonata Information Technology Ltd. was the leading case, were distributors of imported pre-packaged shrink-wrapped standardised software bought from Microsoft and other suppliers outside India, and treated their payments as the purchase price of the software. The Income-tax Officer (TDS) held that because the sale included a licence to use the software the payments were royalty deemed to accrue in India, so tax should have been deducted under s.195; the Commissioner (Appeals) agreed. The Tribunal held the payments were not royalty and gave rise to no income taxable in India, so no deduction was required. On the Revenue's appeal the Karnataka High Court accepted a contention raised there for the first time: that unless the payer applied under s.195(2) and obtained permission for non-deduction, he could not contend that the payment gave rise to no taxable income. The High Court rested that on Transmission Corporation of A.P. The matter was decided on 2010-09-09 by the Supreme Court (Supreme Court of India - S.H. Kapadia CJ and K.S. Radhakrishnan J). On those facts the Supreme Court held as follows. The obligation to deduct under s.195(1) arises only where the sum paid to the non-resident is chargeable to tax under the Act, that is under ss.4, 5 and 9. A remittance to a non-resident does not by itself attract the obligation, and a payer who is certain that no part of the payment is chargeable need not apply under s.195(2); that sub-section rests on the principle of proportionality and is attracted where the payment is composite and the payer is unsure what proportion is taxable. The Karnataka High Court's contrary view, that the obligation arises the moment there is a remittance, was overruled. The Court did not decide whether these particular payments for software were royalty. Because the High Court had never gone into the merits, the appeals were allowed, the High Court judgments set aside, and the cases remitted for de novo consideration of the question whether the Tribunal was right that the payments were not royalty and gave rise to no income taxable in India.
The words 'chargeable under the provisions of the Act' in s.195(1) are the pivot, and they appear in no other provision of Chapter XVII - ss.194C, 194EE and 194F speak of 'any sum' or 'any amount' - so they must be given meaning and effect. The Act is one integrated code, and the machinery provisions for collection cannot be read apart from the charging provisions in ss.4, 5 and 9; that was the approach in Eli Lilly on s.192 and it applies to s.195. The Department's reading would produce absurdity: since only the payee can seek a refund under s.237 read with s.199, a payer forced to deduct on a sum not chargeable would be out of pocket with no remedy, and tax would be collected even where the income has no territorial nexus with India. The revenue-leakage argument was rejected because the Act contains its own safeguards - disallowance under s.40(a)(i) if the payer claims the remittance as expenditure without deducting, and the reporting obligation in s.195(6), inserted with effect from 1 April 2008 and so inapplicable to these years. Transmission Corporation was explained rather than departed from: there the contract was composite, comprising supply of plant and its erection and commissioning in India, so the payer knew an element was taxable and the only question was whether TDS applied to composite payments; the observation that tax must be deducted if no s.195(2) application is filed refers to that situation, and the Karnataka High Court had misunderstood it as barring a payer from contending that nothing at all was chargeable. In the words reproduced by the source cited on this page: "the obligation to deduct TAS arises only when there is a sum chargeable under the Act"
It was decided by the Supreme Court on 2010-09-09 and is reported as (2010) 327 ITR 456 (SC); [2010] 193 Taxman 234 (SC); [2010] 7 taxmann.com 18 (SC); (2010) 234 CTR 153 (SC); (2010) 10 SCC 29; Civil Appeal Nos. 7541-7778 of 2010. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 4, section 5, section 9, section 195, section 195(2), section 40(a)(i), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The obligation to deduct under s.195(1) arises only where the sum paid to the non-resident is chargeable to tax under the Act, that is under ss.4, 5 and 9. A remittance to a non-resident does not by itself attract the obligation, and a payer who is certain that no part of the payment is chargeable need not apply under s.195(2); that sub-section rests on the principle of proportionality and is attracted where the payment is composite and the payer is unsure what proportion is taxable. The Karnataka High Court's contrary view, that the obligation arises the moment there is a remittance, was overruled. The Court did not decide whether these particular payments for software were royalty. Because the High Court had never gone into the merits, the appeals were allowed, the High Court judgments set aside, and the cases remitted for de novo consideration of the question whether the Tribunal was right that the payments were not royalty and gave rise to no income taxable in India. It arises in TDS Defaults matters, on section 4, section 5, section 9, section 195, section 195(2), section 40(a)(i) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia CJ and K.S. Radhakrishnan J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where nothing is chargeable, record the analysis; you are not required to apply under s.195(2). Keep the s.40(a)(i) consequence in view separately from the s.201 consequence.
Still good law. Applied by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (2021) 432 ITR 471 (SC), which relies on it for the proposition that s.195 fastens an obligation only on sums chargeable under the Act. The Karnataka High Court judgment reversed here, CIT (International Taxation) v. Samsung Electronics Co. Ltd. (2009) 185 Taxman 313, was again set aside in Engineering Analysis in its later form at (2012) 345 ITR 494. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court laid down the chargeability principle but decided nothing about these payments. Having overruled the High Court's view that remittance alone triggers the obligation, it sent the cases back to the High Court to decide de novo whether the software payments were royalty. That question was eventually answered against the Revenue in Engineering Analysis Centre of Excellence. Cite this case for the s.195 threshold, not for the software characterisation. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The obligation to deduct under s.195(1) arises only where the sum paid to the non-resident is chargeable to tax under the Act, that is under ss.4, 5 and 9. A remittance to a non-resident does not by itself attract the obligation, and a payer who is certain that no part of the payment is chargeable need not apply under s.195(2); that sub-section rests on the principle of proportionality and is attracted where the payment is composite and the payer is unsure what proportion is taxable. The Karnataka High Court's contrary view, that the obligation arises the moment there is a remittance, was overruled. The Court did not decide whether these particular payments for software were royalty. Because the High Court had never gone into the merits, the appeals were allowed, the High Court judgments set aside, and the cases remitted for de novo consideration of the question whether the Tribunal was right that the payments were not royalty and gave rise to no income taxable in India.
TaxSphere, “GE India Technology Centre P Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/ge-india-technology-centre-v-cit/ (validity last checked 2026-08-19)
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The remittance to my foreign parent bore no tax. Can s.40(a)(i) still hit me for non-deduction?
In March 2026 I remitted a fee to a company outside India without deducting anything, because I did not think any part of it was taxable here. The Assessing Officer now says section 195 obliged me to deduct on the whole remittance, or at least to apply to him before paying. Does section 195 say that — and since the new Act has come in, which Act governs my payment at all?
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