Is Payment To Non Resident Consultant For Work Abroad liable To TDS?

The basic principal which governs the TDS provision is that the income should be first taxable under I T Act. Therefore the main issue to be decided in your case is “whether the amount received by the Australian company from you for work carried out in Libya i.e outside India is taxable in India?” . If such an amount is taxable, the TDS has to be made u/s 195 . If not, no TDS is required.

Since the Australian company is non resident, income which are deemed to be received or accrued or arisen in India shall be taxable in India. The income which are considered deemed to arise or accrue in India is given in section 9 of the the I T act . And sub section vii of 9(1) is specific to income by way of fees for technical services . The said provision , I find that specifically excludes payments made by a RESIDENT for services utilized for HIS business or profession carried out side India…The excerpt is given as under

“(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or”

Further , the said subsection has Explanation also which clears the meaning of “Fees for technical services “ in following words

“Explanation 2 .-For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services “.

In this regard circular 786 dt 7/2/2000 should be given attention to because this circular is fully applies to a case similar to a Non Resident Broker who gives services outside India and who is paid outside the country. The said circular is reproduced below

“In the Audit Report for 1997-98 (D P No 79(I.T.) The Comptroller & Auditor General (C&AG) raised an objection that the Assessing Officer in computing the Profits and Gains of Business or Profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C&AG the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the Income-tax Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.

The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No 23 dated 23.7.1969 is drawn, where the tax ability of ‘Foreign Agents of Indian Exporters” was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No 23 shall prevails. No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller & Auditor General have agreed to drop the objection referred to above.

Therefore I have no doubt, based on the facts given by you , that the payments made by you for the consultancy to Australian company for work in Libya is not taxable under I T act as it is clearly excluded from the definition of “income deemed to accrue or arise in India” as given in section 9(1)(vii) of the I T act.

And lastly, you can approach Authority on Advance Ruling for clarification on the issue if in doubt.