During the previous year 2024-25, Mr. Vivek, a non-resident became partner in a partnership firm M/s Pal & Co., India and contributed 50 lakhs…

(i) Section 194A requiring deduction of tax at source on any income by way of interest, other than interest on securities credited or paid to a resident, excludes from its scope, income credited or paid by a firm to its partner. However, section 195 which requires tax deduction at source on payment to non-residents, does not provide for any exclusion in respect of payment of interest by firm to its non-resident partner. Further, since FTS is deemed to accrue or arise in India on account utilisation of services for a project in India and chargeable to tax in the hands of Mr. Vikas, TDS is also required to be deducted on FTS payment. Accordingly, tax has to be deducted under section 195 @30% plus HEC@4% being the rate in force on both interest on capital and FTS (assuming it is not in pursuance of Central Government agreement). As per section 10(2A), share of profit received by partner from the total income of firm is exempt from tax. Therefore, the share of profit paid to non-resident Indian is not liable for tax deduction at source. However, section 195 (6) provides that the person responsible for paying any sum, whether or not chargeable to tax, to a non-corporate non-resident or to a foreign company shall be required to furnish the information relating to payment of such sum in the form and manner prescribed under Rule 37BB. (ii) As per section 239A, where under a DTAA, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, such person can file an application before the Assessing Officer for refund of such tax within 30 days from the date of payment of such tax. In this case, Pal & Co. has to file an application before the Assessing Officer for refund of such tax within 30 days from the date of payment of such tax. The CBDT has, vide Circular No.11/2007 dated 27.9.2011 modified Circular No.7/2007 dated 23.10.2007, which laid down the procedure for refund of tax deducted at source under section 195 of the Income-tax Act, 1961 to the person deducting tax at source from the payment to a non-resident. The said Circular allowed refund to the person making payment under section 195, inter alia , when there occurs payment of tax at a higher rate under the Income-tax Act, 1961 while a lower rate is prescribed in the relevant double taxation avoidance treaty entered into by India. Hence, M/s Pal & Co., India can claim tax refund of excess tax deducted at source under section 195 where tax has been deducted at source at the rate of 30% provided under the Income-tax Act, 1961 while a lower rate i.e., 10% is prescribed under the DTAA with Country 'X', only if Pal & Co. has borne the tax. Otherwise, refund can be claimed by the non-resident, Mr. Vikas.