Does partnership firm has to deduct any TDS on payment of interest or remuneration to partner who is non-resident?

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Any remuneration paid to a partner of a partnership firm shall not be liable to TDS u/s 192 or any interest paid to partner will not be liable for TDS u/s 194A due to some definition in the relevant section or some exception in the section.

To read the reason in detail, you can read our article: No TDS to be deducted on salary/ Interest paid to partner by partnership firm. – Taxontips

However, the question of our article is whether any TDS needs to be deducted in case of partner who is a non-resident and there is no restriction on a non-resident becoming a partner of an Indian partnership firm.

Section 194A is only applicable in case of resident payee and hence it won’t be applicable on a non-resident partner.

To discuss the applicability of TDS on payment made to non-resident partner we need to check provisions of section 195.

TDS on payment made to non-residents | Section 195 | Consequences of non-deduction – Taxontips

Now, if we check section 195, there is no specific provision for interest to non-resident partner’s, the online line item for interest available is of

“Income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in Section 194LB or Section 194LC)”

Will the amount contributed by partner in a partnership firm be considered as money borrowed by partnership firm or is it capital introduction?

There are opinion in support of both the sides where one side says that it is a form of money borrowed by partnership firm as it is a separate legal entity and on the other hand some people say it is a capital introduced by owners in partnership firm and hence cannot be considered as money borrowed.

In our opinion the above amount won’t be considered as interest on money borrowed and hence could be liable for tax withholding at the rate of 30% in India as other Income.

Once we have seen the Income tax act we must also check the Double Tax avoidance agreement between India and other country of which such non-resident is a resident to see if any relief is available. If we check the definition of interest in various DTAA a common definition with some minor tweaks which, would come out is as under:

“The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from Government securities and income from bonds or debentures including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.”

According to the above definition also interest shall mean any income from debt-claims, and as we have not considered the amount invested in partnership firm as debt-claim, if we take the same view here as well that the amount invested is not some kind of loan to partnership firm then in that case it won’t fall under definition of interest and then it could either fall under business profit or Other Income and more chances of it would be to fall under Other Income and in such a case in majority of DTAA such income won’t be taxable in India but will be taxable in the resident country of non-resident and hence no tax needs to be deducted on such income in India.

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Disclaimer: The views presented in the above article are personal views of our team (based on information available on public domain) and has no legal binding. For any legal opinion consult a tax professional.

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