Section 195(2)

Section 195(2) — the law in short

What the courts have decided on section 195(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Formula One World Championship Ltd v CIT Supreme CourtHelps department
  We had access to an Indian venue for only a few days in the year. Can that be a permanent establishment?
  Yes. A place is at the disposal of an enterprise when the enterprise has the right to use it and control over it, and a fixed place permanent establishment needs stability, productivity and dependence rather than ownership or a long lease. The Buddh International Circuit was a fixed place through which Formula One World Championship Ltd carried on its commercial activity, so it had a permanent establishment in India.
• UOI v Tata Chemicals Ltd Supreme CourtHelps taxpayer
  I deducted tax under s.195 because the officer told me to, and the CIT(A) has now held it was not deductible. Do I get interest on the refund, or only the tax back?
  Yes, interest as well. The resident deductor is entitled not only to the refund of the tax deposited under s.195(2) but to have it refunded with interest from the date of payment of the tax. The Revenue was the appellant and its appeals were dismissed. The CBDT has since accepted the position by circular.
• GE India Technology Centre P Ltd v CIT Supreme CourtHelps taxpayer
  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.
• Transmission Corporation of A.P. Ltd v CIT Supreme CourtHelps department
  I am paying a foreign supplier for equipment and its erection. Most of the payment is cost, not profit. Must I deduct tax at source under section 195 at all?
  Yes. The Supreme Court held that any other sum chargeable under the provisions of this Act in section 195(1) is not confined to pure income profits. A sum is within the section if it is chargeable to tax, and that includes a sum in which income is hidden or embedded, such as a trading receipt of which only a fraction is taxable. The deduction is tentative, subject to regular assessment, and the payer's and recipient's protection lies in applying under section 195(2) or (3) or section 197 for a determination of the chargeable proportion or a lower or nil deduction.
• Transmission Corporation of AP Ltd v CIT Supreme CourtHelps departmentValidity unconfirmed
  I am paying a foreign supplier for equipment and for erecting it, and only part of that is really his income - must I deduct tax under section 195 on the whole payment?
  Yes, unless you first get the chargeable proportion fixed. The Supreme Court held that any other sum chargeable under the provisions of this Act in section 195(1) is not limited to payments that are wholly pure income profits; it covers a gross trading receipt in which income is embedded. The payer's obligation is confined to the appropriate proportion of income chargeable, but that proportion is determined on an application under section 195(2), or by the recipient under section 195(3) or section 197. If no application is made, tax must be deducted on the sum paid. The assessee's appeals were dismissed with costs.
• Barendra Prasad Ray v ITO Supreme CourtHelps department
  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?
  Yes, on these facts. The Supreme Court held that 'business connection' in section 9(1) is not confined to trade or manufacture and takes in a professional connection. Business means an activity carried on continuously and systematically by applying labour or skill to earn income, and professions are generally regarded as businesses. The connection between the Calcutta solicitors and the English barrister was real and intimate, not casual: he argued their case with their consent, alongside their Indian counsel, and could not have earned the fees without associating himself with them. The order treating them as his agent under section 163(1) stood.
• Van Oord ACZ India P Ltd v CIT High CourtHelps taxpayerPartly overruled — read this first
  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.
• Hyder Consulting Ltd v CIT Advance RulingCuts both waysValidity unconfirmed
  The State government paying our consultancy fee is deducting tax at 42.85 per cent when the India-UK treaty caps technical fees at 15 per cent, and it - not we - has already gone to the Assessing Officer under s.195(2). Can we still get an advance ruling on the rate?
  Yes on maintainability, and yes on the rate. The Authority held the application maintainable because the s.195(2) reference had been made by the Government of Orissa as payer, not by the applicant, so nothing was pending in the applicant's own case within clause (a) of the proviso to s.245R(2). On the substance it held the receipts were fees for technical services and that deduction was to be made at 15 per cent of the gross amount under article 13 of the India-UK agreement, not at the 42.85 per cent the Income-tax Officer (TDS) had arrived at. It refused to rule on whether the sums routed through the applicant to its Indian sub-consultant were its income at all - that was a question of fact for the Assessing Officer. The ruling binds only Hyder Consulting.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.