The Dilemma of Tax at Source (TDS) & Exchange Rates!

A foreign vendor provided technical assistance to M/s. ABC co. with a payment terms as follows. $30,000 USD and tax is to be borne by the foreign vendor at applicable rate. M/s. ABC Co. made a liability in its books on 31.03.2008 and deducted TDS u/s 195 of IT Act at applicable rate and deposited the same to IT department.(Dollar rate as on 31.03.08 was Rs.40 per USD, say) Now, actual payment is to be made by M/s. ABC Co. to that foreign vendor(i.e. $30,000 USD) . Dollar rate at the time of payment is Rs.46 per USD, say. Question is: 1. Whether additional TDS is to be deducted on the amount increased due to exchange. Sujit Talukdar, Kolkata

The fact is that section 195 prescribes that payer will deduct the income tax at the rates specified either at the time of credit of payment or at the time of payment whichever is earlier. M/s ABC Co did the right thing by deducting the tax on 31/3/2008 when it credited the forign vendor in its books. Only point to see is whether the exchange rate was taken as per Rule 26 of I T Rule which is as under

Rate of exchange for the purpose of deduction of tax at source on income payable in foreign currency.

26. For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income.

Explanation : For the purposes of this rule, telegraphic transfer buying rate, in relation to a foreign currency, means the rate or rates of exchange] adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), for buying such currency , having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency, where such currency is made available to that bank through a telegraphic transfer.

If the rates applied by ABC CO is same as telegraphic rate adopted by SBI on 31/3/2008 , the action of the company was according to the provision of the I T Act and any more payment in rupees terms on account of fluctuation of exchange rate shall not require tax at source.