The remittance to my foreign parent bore no tax. Can s.40(a)(i) still hit me for non-deduction?
No. Section 195(1) fastens the duty to deduct on a sum chargeable under the Act, so chargeability is a jurisdictional condition and not a question of quantum. Where the authorities have found in the non-resident's own assessment that no tax is payable, there is nothing to deduct and no disallowance can follow.
Decided by the High Court (Delhi High Court (A.K. Sikri and Siddharth Mridul, JJ.; judgment delivered by A.K. Sikri, J.); IT Appeal No. 439 of 2008; assessment year 2003-04) on 2010-03-15, reported as [2010] 189 Taxman 232 (Del) / [2010] 323 ITR 130 (Del) / [2010] 230 CTR 365 (Del) / 36 DTR 425 (Del); IT Appeal No. 439 of 2008; assessment year 2003-04. On appeal: Van Oord ACZ India (P.) Ltd. v. CIT [2023] 149 taxmann.com 38 / 292 Taxman 405 / 453 ITR 214 (SC), Civil Appeal Nos. 5088 and 5089 of 2011, 23 March 2023.. It bears on section 195, section 195(2), section 40(a)(i), section 9 of the Income Tax Act 1961, in Assessment & Scrutiny and TDS Defaults matters.
It is the answer to the disallowance made on the reasoning that tax should have been deducted first and taxability argued later. It confines Transmission Corporation to composite payments where part is admittedly income, and it treats a s.195(2) determination as tentative, so an adverse or absent order there does not conclude the disallowance. Reimbursements with no income element are the clearest case.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was the Indian subsidiary of Van Oord ACZ Marine Contractors BV (VOAMC), a Netherlands company, and carried on dredging, contracting, reclamation and marine work. For assessment year 2003-04 it debited to its profit and loss account the mobilisation and demobilisation cost it reimbursed to VOAMC - the cost of moving a dredger, survey equipment and plant to the Indian site and back, including fuel, contracted by VOAMC from third-party non-residents and reimbursed on their invoices. The assessee applied to the Deputy Commissioner (International Taxation) for a nil withholding certificate on the footing that this was pure reimbursement carrying no income taxable in India. The Deputy Commissioner held the reimbursement taxable, treated 11 per cent of it as VOAMC's profit arising in India and directed deduction on that basis; the assessee deducted accordingly. The Assessing Officer nonetheless disallowed the reimbursement under s.40(a)(i) on the ground that the assessee had defaulted in deducting under s.195. The Commissioner (Appeals) and the Tribunal upheld the disallowance. In VOAMC's own case the return was accepted, the tax deducted was refunded to it - so it was not treated as liable - though the assessment was later reopened.
The appeal was allowed and the Tribunal's order set aside (para 28). The Court summarised the position at para 23: s.195 requires the payer to deduct at the rates in force, but the obligation arises only where the payment is chargeable under the Act; if the payer thinks no deduction or a lower deduction is due he must apply to the Assessing Officer, and where no application is made, or one is made and a direction issued, he is duty-bound to deduct as directed or at the prescribed rates and may otherwise be treated as in default. A determination under s.195(2) is tentative. Two consequences follow, and the entry recorded only the second. First, in his own assessment proceedings a payer who was required to deduct will not be permitted to argue that the sum paid was not chargeable. Second, if in the recipient's assessment it is ultimately held that the sum was not chargeable, there is no obligation to deduct, the payer is not in default and is absolved of the consequences. On the facts, VOAMC had been treated as not liable and refunded the tax deducted, so the assessee was not liable to deduct under s.195(1) and the s.40(a)(i) disallowance could not stand (paras 24-25). Question 2, on pure reimbursement, was treated as answered by that discussion (para 26); question 3, on Article 24 of the India-Netherlands treaty, was left unanswered as academic (para 27). Para 25 also carried a condition - that if VOAMC's reopened assessment ended against it the assessee would be treated as in default - and that condition has since been quashed by the Supreme Court.
Section 195(1) fastens the withholding duty on a person paying 'any sum chargeable under the provisions of this Act', so chargeability is the condition of the obligation, not merely a matter of quantum (paras 19, 21). The Court read s.195(2) as engaged only where a sum is otherwise chargeable but the payer considers that not the whole of it is income in the recipient's hands, and treated the determination made under it as tentative: once such a determination is made the payer must deduct, and if he does not he runs the risk of s.40(a)(i); but if the recipient's own assessment ultimately establishes no liability, the payer cannot be treated as in default, because s.195(1) casts the obligation only on a chargeable sum (para 21). It supported this from its own decision in CIT v. Estel Communications (P.) Ltd., the Karnataka High Court in Jindal Thermal Power Co. Ltd. on the payer's right to question the payee's liability, and at length from the Special Bench of the Tribunal in Mahindra & Mahindra Ltd., which reasoned that action under s.201(1) depends on the outcome of the payee's assessment (paras 19-20). Transmission Corporation of A.P. Ltd. v. CIT was read as dealing with a composite payment part of which was admittedly income - the gross-versus-net question - and not with a payment bearing no tax at all. The Karnataka High Court's decision in CIT (International Taxation) v. Samsung Electronic Co. Ltd. was distinguished as arising in a different context, where the payers sought to show in their own proceedings that the amounts were not assessable in the recipients' hands, which the Court agreed they were precluded from doing; and beyond that the Delhi Bench said, with respect, that it was not in agreement with some of the observations in the Karnataka judgment (para 22).
In case it is ultimately found in the assessment proceedings relating to the recipient that he was not liable to pay any tax on the sums received, the assessee cannot be treated in "default" inasmuch as section 195(1) of the Act casts an obligation to deduct the tax at source on the sum 'chargeable under the provisions of this Act'.
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Handle my notice → Ask a CA on WhatsAppNo. Section 195(1) fastens the duty to deduct on a sum chargeable under the Act, so chargeability is a jurisdictional condition and not a question of quantum. Where the authorities have found in the non-resident's own assessment that no tax is payable, there is nothing to deduct and no disallowance can follow. This was decided by the High Court (Delhi High Court (A.K. Sikri and Siddharth Mridul, JJ.; judgment delivered by A.K. Sikri, J.); IT Appeal No. 439 of 2008; assessment year 2003-04) and bears on section 195, section 195(2), section 40(a)(i), section 9 of the Income Tax Act 1961. It is reported as [2010] 189 Taxman 232 (Del) / [2010] 323 ITR 130 (Del) / [2010] 230 CTR 365 (Del) / 36 DTR 425 (Del); IT Appeal No. 439 of 2008; assessment year 2003-04. On appeal: Van Oord ACZ India (P.) Ltd. v. CIT [2023] 149 taxmann.com 38 / 292 Taxman 405 / 453 ITR 214 (SC), Civil Appeal Nos. 5088 and 5089 of 2011, 23 March 2023.. It is the answer to the disallowance made on the reasoning that tax should have been deducted first and taxability argued later. It confines Transmission Corporation to composite payments where part is admittedly income, and it treats a s.195(2) determination as tentative, so an adverse or absent order there does not conclude the disallowance. Reimbursements with no income element are the clearest case. If it applies to you, the first step is this: Get the non-resident's own assessment or the finding on taxability of the receipt on record, since that is what decided this case.
The assessee was the Indian subsidiary of Van Oord ACZ Marine Contractors BV (VOAMC), a Netherlands company, and carried on dredging, contracting, reclamation and marine work. For assessment year 2003-04 it debited to its profit and loss account the mobilisation and demobilisation cost it reimbursed to VOAMC - the cost of moving a dredger, survey equipment and plant to the Indian site and back, including fuel, contracted by VOAMC from third-party non-residents and reimbursed on their invoices. The assessee applied to the Deputy Commissioner (International Taxation) for a nil withholding certificate on the footing that this was pure reimbursement carrying no income taxable in India. The Deputy Commissioner held the reimbursement taxable, treated 11 per cent of it as VOAMC's profit arising in India and directed deduction on that basis; the assessee deducted accordingly. The Assessing Officer nonetheless disallowed the reimbursement under s.40(a)(i) on the ground that the assessee had defaulted in deducting under s.195. The Commissioner (Appeals) and the Tribunal upheld the disallowance. In VOAMC's own case the return was accepted, the tax deducted was refunded to it - so it was not treated as liable - though the assessment was later reopened. The matter was decided on 2010-03-15 by the High Court (Delhi High Court (A.K. Sikri and Siddharth Mridul, JJ.; judgment delivered by A.K. Sikri, J.); IT Appeal No. 439 of 2008; assessment year 2003-04). On those facts the High Court held as follows. The appeal was allowed and the Tribunal's order set aside (para 28). The Court summarised the position at para 23: s.195 requires the payer to deduct at the rates in force, but the obligation arises only where the payment is chargeable under the Act; if the payer thinks no deduction or a lower deduction is due he must apply to the Assessing Officer, and where no application is made, or one is made and a direction issued, he is duty-bound to deduct as directed or at the prescribed rates and may otherwise be treated as in default. A determination under s.195(2) is tentative. Two consequences follow, and the entry recorded only the second. First, in his own assessment proceedings a payer who was required to deduct will not be permitted to argue that the sum paid was not chargeable. Second, if in the recipient's assessment it is ultimately held that the sum was not chargeable, there is no obligation to deduct, the payer is not in default and is absolved of the consequences. On the facts, VOAMC had been treated as not liable and refunded the tax deducted, so the assessee was not liable to deduct under s.195(1) and the s.40(a)(i) disallowance could not stand (paras 24-25). Question 2, on pure reimbursement, was treated as answered by that discussion (para 26); question 3, on Article 24 of the India-Netherlands treaty, was left unanswered as academic (para 27). Para 25 also carried a condition - that if VOAMC's reopened assessment ended against it the assessee would be treated as in default - and that condition has since been quashed by the Supreme Court.
Section 195(1) fastens the withholding duty on a person paying 'any sum chargeable under the provisions of this Act', so chargeability is the condition of the obligation, not merely a matter of quantum (paras 19, 21). The Court read s.195(2) as engaged only where a sum is otherwise chargeable but the payer considers that not the whole of it is income in the recipient's hands, and treated the determination made under it as tentative: once such a determination is made the payer must deduct, and if he does not he runs the risk of s.40(a)(i); but if the recipient's own assessment ultimately establishes no liability, the payer cannot be treated as in default, because s.195(1) casts the obligation only on a chargeable sum (para 21). It supported this from its own decision in CIT v. Estel Communications (P.) Ltd., the Karnataka High Court in Jindal Thermal Power Co. Ltd. on the payer's right to question the payee's liability, and at length from the Special Bench of the Tribunal in Mahindra & Mahindra Ltd., which reasoned that action under s.201(1) depends on the outcome of the payee's assessment (paras 19-20). Transmission Corporation of A.P. Ltd. v. CIT was read as dealing with a composite payment part of which was admittedly income - the gross-versus-net question - and not with a payment bearing no tax at all. The Karnataka High Court's decision in CIT (International Taxation) v. Samsung Electronic Co. Ltd. was distinguished as arising in a different context, where the payers sought to show in their own proceedings that the amounts were not assessable in the recipients' hands, which the Court agreed they were precluded from doing; and beyond that the Delhi Bench said, with respect, that it was not in agreement with some of the observations in the Karnataka judgment (para 22). In the words reproduced by the source cited on this page: "In case it is ultimately found in the assessment proceedings relating to the recipient that he was not liable to pay any tax on the sums received, the assessee cannot be treated in "default" inasmuch as section 195(1) of the Act casts an obligation to deduct the tax at source on the sum 'chargeable under the provisions of this Act'." The decision followed or applied CIT v. Estel Communications (P.) Ltd. [2009] 318 ITR 185 (Delhi) - relied on (para 19); Jindal Thermal Power Co. Ltd. v. Dy. CIT (TDS) [2009] 182 Taxman 252 (Karnataka) - relied on (para 19); Mahindra & Mahindra Ltd. v. Dy. CIT [2009] 122 TTJ (Mum.) 577 (SB) - agreed with at length (para 20); Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 / 105 Taxman 742 (SC) - read as confined to composite payments part of which are admittedly income (para 8 onwards); CIT (International Taxation) v. Samsung Electronic Co. Ltd. [2010] 320 ITR 209 / [2009] 185 Taxman 313 (Karnataka) - distinguished, and some of its observations disagreed with (para 22); Relied on by the Delhi High Court in CIT v. Expeditors International (India) (P.) Ltd. [2012] 24 taxmann.com 76 (Delhi), 16 December 2011; Set aside in part by the Supreme Court in Van Oord ACZ India (P.) Ltd. v. CIT [2023] 149 taxmann.com 38 / 292 Taxman 405 / 453 ITR 214 (SC), 23 March 2023.
It was decided by the High Court on 2010-03-15 and is reported as [2010] 189 Taxman 232 (Del) / [2010] 323 ITR 130 (Del) / [2010] 230 CTR 365 (Del) / 36 DTR 425 (Del); IT Appeal No. 439 of 2008; assessment year 2003-04. On appeal: Van Oord ACZ India (P.) Ltd. v. CIT [2023] 149 taxmann.com 38 / 292 Taxman 405 / 453 ITR 214 (SC), Civil Appeal Nos. 5088 and 5089 of 2011, 23 March 2023.. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 195, section 195(2), section 40(a)(i), section 9, 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 appeal was allowed and the Tribunal's order set aside (para 28). The Court summarised the position at para 23: s.195 requires the payer to deduct at the rates in force, but the obligation arises only where the payment is chargeable under the Act; if the payer thinks no deduction or a lower deduction is due he must apply to the Assessing Officer, and where no application is made, or one is made and a direction issued, he is duty-bound to deduct as directed or at the prescribed rates and may otherwise be treated as in default. A determination under s.195(2) is tentative. Two consequences follow, and the entry recorded only the second. First, in his own assessment proceedings a payer who was required to deduct will not be permitted to argue that the sum paid was not chargeable. Second, if in the recipient's assessment it is ultimately held that the sum was not chargeable, there is no obligation to deduct, the payer is not in default and is absolved of the consequences. On the facts, VOAMC had been treated as not liable and refunded the tax deducted, so the assessee was not liable to deduct under s.195(1) and the s.40(a)(i) disallowance could not stand (paras 24-25). Question 2, on pure reimbursement, was treated as answered by that discussion (para 26); question 3, on Article 24 of the India-Netherlands treaty, was left unanswered as academic (para 27). Para 25 also carried a condition - that if VOAMC's reopened assessment ended against it the assessee would be treated as in default - and that condition has since been quashed by the Supreme Court. It arises in Assessment & Scrutiny and TDS Defaults matters, on section 195, section 195(2), section 40(a)(i), section 9 of the Income Tax Act 1961, and was decided by Delhi High Court (A.K. Sikri and Siddharth Mridul, JJ.; judgment delivered by A.K. Sikri, J.); IT Appeal No. 439 of 2008; assessment year 2003-04. 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. Show the cost basis of a reimbursement claim with the underlying invoices, so that the absence of an income element is on the file. Where the department relies on Transmission Corporation, meet it on the gross versus net distinction rather than on the facts alone. Do not simply remit on your own view of non-taxability without a determination on record if the amount is material.
Partly overruled — read this first. Both sides appealed. In Van Oord ACZ India (P.) Ltd. v. CIT [2023] 149 taxmann.com 38 / 292 Taxman 405 / 453 ITR 214 (SC), Civil Appeal Nos. 5088 and 5089 of 2011, decided 23 March 2023 (M.R. Shah and C.T. Ravikumar, JJ.), the Supreme Court dealt with this judgment in two parts. On the Revenue's appeal it declined to interfere, because it had specifically been found that the Indian company was not liable to deduct - but it added in terms that 'the question of law, if any, on interpretation of section 195 is kept open'. That is not an affirmance of the s.195 reasoning, and this decision cannot be cited as though the Supreme Court had approved it. On the assessees' appeal it allowed the appeal and quashed and set aside the observation in para 25 that if VOAMC's reopened assessment went against it the assessee would then be treated as an assessee in default, holding that once the assessee is held not liable to deduct at all it cannot be treated as in default merely because the foreign company is later held taxable, and that the High Court's observation was 'on surmises and conjectures'. So the outcome survives, para 25 does not, and the interpretation of s.195 is expressly open. Practitioner commentary that treats the position as settled by GE India Technology Centre should be read against that reservation. 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.
Read this with the Supreme Court's order of 23 March 2023, [2023] 149 taxmann.com 38 / 453 ITR 214 (SC), which quashed para 25 of this judgment - the observation that the assessee would become an assessee in default if VOAMC's reopened assessment went against it - as resting on surmises and conjectures, while declining to interfere with the outcome and expressly keeping open the question of law on the interpretation of s.195. The proposition is therefore not settled at Supreme Court level on this authority. Two further limits. The Court accepted that a payer who was required to deduct cannot argue non-chargeability in his own assessment proceedings; he is protected only where the recipient's own assessment shows the sum was not chargeable. And the Article 24 non-discrimination question, framed as question 3, was left unanswered as academic. The Karnataka line in CIT v. Samsung Electronic Co. Ltd. was distinguished rather than swept aside, so expect resistance where it is relied on. The judgment does not set out the treaty article relied on for non-taxability of the mobilisation charges; the treaty non-discrimination question under Article 24 was raised as question 3 and left unanswered as academic. The outcome of VOAMC's own reopened assessment, and of the proceedings the Supreme Court noted were pending in the Madras High Court, is not established here. 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 appeal was allowed and the Tribunal's order set aside (para 28). The Court summarised the position at para 23: s.195 requires the payer to deduct at the rates in force, but the obligation arises only where the payment is chargeable under the Act; if the payer thinks no deduction or a lower deduction is due he must apply to the Assessing Officer, and where no application is made, or one is made and a direction issued, he is duty-bound to deduct as directed or at the prescribed rates and may otherwise be treated as in default. A determination under s.195(2) is tentative. Two consequences follow, and the entry recorded only the second. First, in his own assessment proceedings a payer who was required to deduct will not be permitted to argue that the sum paid was not chargeable. Second, if in the recipient's assessment it is ultimately held that the sum was not chargeable, there is no obligation to deduct, the payer is not in default and is absolved of the consequences. On the facts, VOAMC had been treated as not liable and refunded the tax deducted, so the assessee was not liable to deduct under s.195(1) and the s.40(a)(i) disallowance could not stand (paras 24-25). Question 2, on pure reimbursement, was treated as answered by that discussion (para 26); question 3, on Article 24 of the India-Netherlands treaty, was left unanswered as academic (para 27). Para 25 also carried a condition - that if VOAMC's reopened assessment ended against it the assessee would be treated as in default - and that condition has since been quashed by the Supreme Court.
TaxSphere, “Van Oord ACZ India P Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/van-oord-acz-india-v-cit-195/ (validity last checked 2026-08-19)
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Must you deduct tax on every payment to a non-resident, just to be safe?
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?
We had access to an Indian venue for only a few days in the year. Can that be a permanent establishment?
A foreign professional worked on our matter in India but we neither briefed him nor paid him. Can we be treated as his agent and made liable for his tax?
