[Opinion] Chargeability of Sum for Withholding Tax u/s 195

D.C. Agrawal – [2025] 176 taxmann.com 542 (Article)

1. Introduction

Section 195 of the Income Tax Act governs the deduction of tax at source on payments made to non-residents. The primary objective is to ensure that tax on income of non-residents is collected at the earliest point of remittance. This section applies when a person is responsible for paying to a non-resident any sum which is chargeable under the Act, excluding salaries and dividends referred in Sections 194, 194E, etc. The payer may be resident or non-resident, but the payee must be a non-resident. The obligation arises only if the sum is “chargeable to tax” under the Act. Hence, payments like reimbursements, or those not having income element, may not attract Section 195. The expression “any other sum” clarifies that not just pure income, but gross sums having income components are covered for TDS. Even if the income portion is embedded in a composite payment (like royalties, technical fees, etc.), tax must be deducted on the whole unless certified otherwise under Section 195(2). These provisions aim to prevent revenue leakage from cross-border transactions. In this article focus will be on interpretation of expression ‘chargeability to tax’.

2. Ingredients of Section 195

The ingredients of section 195 are:

(a) Any person

(b) Responsible for paying

(c) To a non-resident (not being a company, or to a foreign company)

(d) Any interest (not being interest referred to in Section 194 LB, or Section 194LC, or Section 194LD)

(e) Or any other sum chargeable under the provisions of this Act (not being income chargeable under the head salaries).

(f) Shall at the time of payment thereof, in cash, or by the issue of a cheque, or draft, or by any other mode, whichever is earlier.

(g) Deduct Income tax thereon

(h) At the rate in force.

3. Interpretation of the term ‘Any person’ u/s 195

The term “any person” under Section 195 is of wide amplitude and includes both residents and non-residents. This ensures that any person, regardless of their residential status, making a payment to a non-resident that is chargeable to tax in India, must deduct tax at source. The obligation is not dependent on the payer being a resident but solely on whether the payment is chargeable to tax. This principle was affirmed by the Supreme Court in GE India Technology Centre Pvt. Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456 (SC). CBDT Circular No. 728 dated 30.10.1995 also clarifies that a non-resident making payment to another non-resident is equally obligated to deduct tax under Section 195 if the payment is chargeable to tax in India. The circular affirms that the Act makes no distinction between residents and non-residents in this regard. Hence, the scope of “any person” is wide, ensuring that the tax deduction obligation is based not on the status of the payer but on the chargeability of the remittance under Indian tax law. Delhi ITAT in ACIT v. Vinod Soni & Sons [(2007) 108 ITD 375 (Delhi)] emphasised that when a person acts as an agent (as defined under Section 163), such person is also treated as “any person” under Section 195. The Tribunal held that a person making remittance on behalf of a non-resident or facilitating payments becomes an agent under the Act and inherits the responsibility to deduct TDS.

4. Meaning and Scope of “Any Sum”

The expression “any sum” refers not merely to pure income components but to gross payments that may include embedded income. This interpretation was upheld in Transmission Corporation of A.P. Ltd. v. CIT [1999] 105 Taxman 742/239 ITR 587 (SC), where the Court held that even where the income component in the payment is indeterminate, tax must be deducted on the gross amount if such sum includes income chargeable to tax. However, this does not obliterate the need to examine whether the sum indeed has a taxable element. The deductor may approach the Assessing Officer under Section 195(2) to determine the appropriate proportion chargeable to tax.

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