What if you are not deducting TDS for non residents? Nowadays there are a lot of transactions done through international markets. For conducting those transactions payments needs to be made to non residents. This article is basically based on non compliance of TDS while making payments to the non residents. The assessee acts as an agent for the non residents and TDS sections gets affected. Apart from consequences like Interest, penalty and prosecution for Non Deduction or Nonpayment of TDS after deduction, there is another consequence for assesses getting profits and gains from business or profession – Disallowance of Expenditure under section 40(a)(i) and 40(a)(ia) of Income Tax Act, 1956 Section 40(a) Section 40 overrides the provisions of 30 to 38. 1)      Interest, royalty, fees for technical services or any other amount taxable on which tax is required to be deducted is payable:-

• Outside India
• In India to a non resident, not being a company or to foreign company.

Would be disallowed, if tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed. If tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed, such sum shall be allowed as deduction in the previous year in which such tax has been paid. Analysis The proviso to section 201(1) provides that if the payer has defaulted in deduction and payment of tax at source from the payments which otherwise required deduction of tax at source then without prejudice to the consequences of interest, penalty and prosecution, the payer is deemed to be an assessee in default for amount of tax which was not deducted. However if the payer is able to obtain and produce an evidence from the payee that the payee has deposited the requisite amount of corresponding tax either by way of advance or self-assessment then the payer shall be relieved to the extent of the tax amount and shall not be deemed to be an assessee in default for the tax amount. Although the payer was relieved from defaulted amount of tax by virtue of the proviso to section 201(1), however the underlying expenditure remained to be disallowed due to section 40 (a) (ia), on the ground that there was a failure in deduction and deposit and section 40(a) (ia) did not provide any relief similar to that section. Thus the payment getting doubly taxed, once by way of self assessment by the payee and secondly by way of disallowance to the payer. Thus, if an assessee being person responsible for deducting tax, has failed to deduct tax, the expenditure would be allowed in the year in which the resident payee has furnished his return of income. The above provision merely fixes the date of payment. The deduction for expenditure shall be allowed in accordance with the provision of the section.   Any payment which is chargeable under the head “Salaries”, if it is payable— outside India; or to a non-resident, and if the tax has not been paid thereon nor deducted there from under Chapter XVII-B. Thanks for reading for this article. Please feel free to write to us, We want to hear it all!Suggestions? Complaints? Feedback? Requests?  at [info@taxmantra.com] or call us at +91 88208208 11. We would be more than happy to assist you.