Section 195 of ITA, 1961 : Section 195: Other Sums

Explanation using Example

Imagine a scenario where an Indian software development company, Tech Innovations Pvt. Ltd., enters into a contract with a Singapore-based company, Web Solutions Inc., for providing specialized software services. As per the agreement, Tech Innovations Pvt. Ltd. is to pay Web Solutions Inc. a fee of INR 10 million upon completion of the project.

Under Section 195 of the Income-tax Act, 1961, before making the payment to Web Solutions Inc., Tech Innovations Pvt. Ltd. is required to deduct income tax from the payment amount since Web Solutions Inc. is a foreign company. The deduction must be made at the prevailing tax rates in force at the time of credit or payment, whichever is earlier.

Tech Innovations Pvt. Ltd. would need to consider whether the entire fee is chargeable to tax under the Act. If they believe that only a portion of the fee is chargeable, they can apply to the Assessing Officer to determine the appropriate proportion of the fee that is taxable. Based on this, they would deduct tax only on that portion.

If Web Solutions Inc. believes that the income is not taxable in India or is eligible for a lower rate of taxation under the Double Taxation Avoidance Agreement (DTAA) between India and Singapore, they can apply for a certificate from the Assessing Officer. If granted, Tech Innovations Pvt. Ltd. would then make the payment without deducting tax, or at the lower rate as specified in the certificate.

In any case, Tech Innovations Pvt. Ltd. must also furnish information about the payment to the tax authorities in the prescribed form and manner.