Refund of Tax Deducted

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Refund of Tax Deducted Under Section 195: How Indian Payers and Non-Residents Can Recover Excess TDS

If you have deposited TDS under Section 195 of the Income-tax Act 1961 and the amount turns out to be higher than what was legally due — because a cross-border contract collapsed, a DTAA rate was overlooked, or the same payment was processed twice — that excess does not have to sit permanently in the government's account. Two legally distinct recovery paths exist: the Indian deductor claims directly under CBDT Circular No. 7/2007, or the non-resident payee files an Indian income tax return and claims the refund as part of assessment. Both routes require precise documentation, correct sequencing, and strict adherence to timelines.

When Does Excess TDS Under Section 195 Actually Arise?

Section 195 casts a wide net: any sum chargeable to tax in India that is paid — or credited — to a non-resident or a foreign company attracts withholding at source. The default rate falls back on the Income-tax Act, typically 20% for royalties, fees for technical services (FTS), and interest under Section 115A, unless a Double Taxation Avoidance Agreement (DTAA) provides something lower. Because deduction happens at the moment of remittance, errors crystallise early and refunds arrive late. The most common triggers in practice are:

• Contract cancellation after TDS deposit. The challan is paid, but the wire to the non-resident never goes out. Tax has been deposited on income the payee never received.
• DTAA rate overlooked. The deductor applies the domestic 20% on royalties without evaluating treaty eligibility. If the India–UK DTAA caps royalties at 15% under Article 13, the 5-percentage-point gap is a recoverable excess.
• Grossing-up errors under Section 195A. Where the Indian payer contractually bears the tax ("net-of-tax" contracts), the TDS must be computed on the grossed-up payment. A wrong formula results in either over- or under-deduction.
• Double deduction on the same transaction. Two departments of the same company both process an invoice and each triggers a TDS deduction. The non-resident receives one credit, the government receives two challans.
• Payment reclassified as non-taxable. A software licence fee initially treated as royalty is subsequently held to be a payment for a copyrighted article (not the copyright itself), falling outside the royalty definition — making the original deduction excess.

CBDT Circular No. 7/2007, read with Circular No. 11/2016, expressly recognises the deductor's right to a refund in situations where the amount has not been credited or paid to the non-resident, or where excess tax was deducted.

Two Refund Routes: Deductor vs. Non-Resident Payee

The law provides two independent tracks. Picking the wrong one wastes months of follow-up.

The two routes are mutually exclusive for the same deduction amount. Before you file under Route 1, obtain a written declaration from the non-resident confirming it has not claimed foreign tax credit in its home jurisdiction for the same TDS. Without that declaration, the Assessing Officer (AO) will reject the application outright.

Route 1: Deductor's Refund Under Circular 7/2007 — Step by Step

This is the faster route when the non-resident is cooperative and has not filed an Indian return. Here is the sequence you follow today:

Step 1 — Identify and quantify the excess

Pull the original challan and Form 27Q (the quarterly TDS statement for payments to non-residents) from the TRACES portal (www.tdscpc.gov.in). Map each challan — identified by its BSR code and serial number — to the relevant deductee row. Compute the excess: actual TDS deposited minus the correct amount (DTAA rate × grossed-up payment, or zero if the contract was cancelled).

Step 2 — Correct Form 27Q on TRACES before approaching the AO

This step is non-negotiable and frequently missed. On TRACES, file a correction statement for the relevant Form 27Q quarter and reduce the deductee-level TDS to the correct amount. Once the revised statement is processed, the non-resident's credit in Form 26AS / Annual Information Statement (AIS) automatically drops. This system-level update is the AO's primary evidence that the non-resident cannot double-claim. If you approach the AO before the TRACES correction is processed, expect a straightforward rejection.

Step 3 — Obtain the non-resident's written declaration

Get a letter on the non-resident's letterhead, signed by an authorised signatory, stating: (a) it has not received the amount for which TDS was deducted (contract cancellation cases), or (b) it has not claimed credit for the excess TDS in any return filed in its country of residence. This declaration needs to be specific to the challan and financial year.

Step 4 — Draft and submit the application to the AO (TDS)

Address the application to the jurisdictional AO (TDS) under whose jurisdiction your Tax Deduction Account Number (TAN) falls. The application must include:

1. Your name, PAN, TAN, and registered address
2. Non-resident's name, country of residence, and Tax Identification Number (TIN)
3. Excess TDS amount with challan details (BSR code, serial number, date of deposit)
4. Reason for excess with supporting evidence
5. TRACES correction acknowledgement number (from Step 2)
6. Non-resident's declaration (Step 3)
7. Copies of Form 15CA and Form 15CB filed at the time of the original remittance
8. Bank or SWIFT confirmation that the remittance did not go through (for cancellation cases)
9. Undertaking by you that neither you nor the non-resident has claimed any tax benefit, credit, or refund from this excess deduction

Step 5 — Cooperate with AO verification

The AO will verify the challan on OLTAS (Online Tax Accounting System), cross-check the Form 27Q revision on TRACES, and may call for supplementary information. Respond within the window given — typically 15 to 30 days. Once satisfied, the AO issues a refund order.

Hard time limit: Applications must reach the AO within two years from the end of the financial year in which the tax was deducted. For TDS deducted in FY 2024-25, the deadline is 31 March 2027. For FY 2025-26, it is 31 March 2028. AOs interpret this limit strictly; late applications require condonation, which is rarely granted without exceptional circumstances.

Route 2: Non-Resident Files an Indian Income Tax Return

Where the payment was actually received (so Route 1 is unavailable), the non-resident recovers excess TDS through an Indian ITR.

Obtaining an Indian PAN. The non-resident must first apply for a Permanent Account Number using Form 49AA on the NSDL or UTI portal. A valid passport and home-country address proof are required. Allow four to six weeks for PAN allotment.

Filing the ITR. For Assessment Year 2027-28 (income received in FY 2026-27), the non-resident files ITR-2 (where income is salary, capital gains, or other sources) or ITR-3 (where business income is involved). In the return: declare the gross income under the relevant head, claim relief under the applicable DTAA article, match TDS to Form 26AS / AIS, and show the net refund payable.

Linking to AIS. Before filing, download the AIS from www.incometax.gov.in and verify that the TDS deducted by the Indian deductor appears correctly. Any mismatch between what the deductor reported in Form 27Q and what appears in AIS must be resolved first — otherwise the ITR processing system will raise a defect notice.

Section 244A interest on delayed refunds. When the Income-tax Department is slow to process the refund, Section 244A requires it to pay simple interest at 0.5% per month or part of month on the refund amount. The clock starts from 1 April of the Assessment Year if the return is filed on time under Section 139(1), or from the date of filing if the return is belated. On a refund of Rs. 5,00,000 delayed by 18 months, the non-resident is owed Rs. 45,000 in interest — always claim it explicitly in the return and follow up if the refund intimation under Section 143(1) omits it.

Note: Section 244A interest is itself taxable income in the hands of the non-resident for the year of receipt. Factor this into the net recovery calculation.

DTAA Benefit Claims: The Documentation You Must Have

Claiming a concessional DTAA rate is not automatic. Courts have consistently held that the treaty benefit is available only when the conditions in both domestic law and the treaty are simultaneously satisfied. For FY 2026-27, the mandatory documentary package is:

1. Tax Residency Certificate (TRC) Issued by the tax authority of the non-resident's home country. Under Rule 21AB of the Income-tax Rules 1962, the TRC must contain: the non-resident's name, status (individual or company), nationality or country of incorporation, Tax Identification Number, period of validity, and address during that period. An expired TRC — or one that does not cover the date of payment — is routinely rejected by the AO.

2. Form 10F (electronic) A structured declaration by the non-resident providing information that may not be in the TRC. Since CBDT's direction effective from the financial year 2023-24, Form 10F must be filed electronically on the income tax portal by the non-resident using its Indian PAN login. A paper Form 10F is no longer valid for new remittances or refund proceedings. Deductors whose counterparties have not yet registered on the portal must resolve this before the refund application is complete.

3. No-PE Declaration A letter from the non-resident's authorised signatory confirming it does not have a Permanent Establishment (PE) in India within the meaning of the applicable DTAA. Without this, the AO can invoke the business profits article, deny the concessional royalty or FTS rate, and tax the full profit attributable to the deemed PE.

4. Article-wise DTAA Analysis Document which treaty article applies, the rate it prescribes, and how the payment fits the definition. For software payments, this analysis is critical: payments for use of copyright (royalty) attract the treaty royalty rate, while payments for a copyrighted article (product purchase) are typically outside the royalty definition and attract no withholding. Get this classification right before the remittance, not after.

Worked Example: Royalty Payment to a UK Company — Over-Deduction and Recovery

Facts. An Indian manufacturing company pays royalty to a UK licensor for use of a proprietary process in Q3 of FY 2025-26. It remits Rs. 50,00,000. At the time, the UK company's electronic Form 10F is still being processed on the portal, so the Indian company deducts at the domestic rate to avoid delaying the payment.

Recovery under Route 1. The Indian company files a correction on TRACES reducing the UK licensor's TDS credit from Rs. 10,00,000 to Rs. 7,50,000. It obtains the TRACES acknowledgement and a declaration from the UK company confirming the excess will not be claimed as a foreign tax credit in the UK self-assessment return. Together with the original Form 15CA Part C and Form 15CB, the TRC (now covering the correct period), the electronically-filed Form 10F, and the no-PE declaration, a formal application is submitted to the AO (TDS).

Prevention was cheaper. Had the Indian company applied under Section 195(3) — the non-resident applies to the AO for a certificate authorising the deductor to deduct at the DTAA rate — before the remittance, or raised a query under Section 195(2) for a ruling on the chargeable portion, the entire refund exercise would have been unnecessary. Obtaining Section 195(3) certificates for recurring non-resident payments to the same party is a cost-effective discipline that eliminates refund litigation for the life of the arrangement.

Form 15CA and Form 15CB: Their Role in the Refund Record

Form 15CA and Form 15CB are remittance-compliance documents, not refund documents. But they are indispensable forensic evidence in the refund proceeding.

Form 15CA is filed by the Indian remitter on the income tax portal before each foreign remittance. Part C applies where the remittance exceeds Rs. 5,00,000 in the financial year and is chargeable to tax. It captures the nature of payment, the DTAA article relied upon (if any), and the rate and amount of TDS. The portal generates an acknowledgement number that you cite in the refund application.

Form 15CB is the Chartered Accountant's certificate under Rule 37BB confirming that the Income-tax Act and the applicable DTAA have been complied with and that TDS has been correctly deducted. In a refund proceeding, the AO scrutinises this certificate closely. If the CA certified a 20% rate and you are now arguing the correct rate was 15%, the AO will ask why the CA did not apply the DTAA rate at the time. Be prepared with a clear explanation — usually the gap is the absence of a completed electronic Form 10F on the filing date of Form 15CB.

Common Mistakes That Kill Section 195 Refund Claims

1. Filing the refund application before correcting Form 27Q. The AO verifies the non-resident's credit balance on TRACES. If the original, uncorrected Form 27Q still stands, the system shows the non-resident has credit — and the AO cannot rule out a double claim. File the TRACES correction first, wait for it to be processed, and only then approach the AO.

2. Missing the two-year Circular 7/2007 deadline. This is a hard limit. Companies that deducted excess TDS in FY 2023-24 have until 31 March 2026 — which, as of this writing in May 2026, means some FY 2023-24 windows have already closed. Audit your open Section 195 refund positions now.

3. Non-resident having already claimed foreign tax credit. If the UK company has already included the Rs. 10,00,000 as a tax credit in its UK return, Route 1 is closed. Reversing a foreign tax credit claim involves corresponding procedures with HMRC, which takes time and co-operation. Avoid this by establishing the refund strategy before the non-resident files its home-country return.

4. Using a paper Form 10F. Since FY 2023-24, this is not valid. An AO who finds a paper Form 10F in the refund application has clear grounds to deny DTAA benefit — which dismantles the entire rate-difference argument.

5. TRC covering the wrong period. The TRC must be valid for the date on which the royalty was paid or credited. A TRC valid only through 31 March 2025 cannot support a DTAA claim for a payment made in July 2025. Always check the TRC validity window before issuing Form 15CB.

6. Omitting the no-PE declaration. Even where there is manifestly no PE, missing this document gives the AO an objection point. It is a one-page letter that costs nothing to obtain. Its absence has derailed well-documented refund claims.

7. Presenting a lump refund without breaking out surcharge and cess. The refund amount must be segregated: basic tax excess + surcharge excess + health and education cess (4%) excess. Present a computation table with this granularity. The AO's internal processing system requires it, and an ambiguous figure invites a query that delays payment by months.

Section 244A Interest: Quantifying What the Non-Resident Can Recover

When a non-resident files under Route 2 and the refund is delayed, Section 244A entitles it to 0.5% simple interest per month or part of month on the refund amount. The clock runs from:

• 1 April of the Assessment Year, if the return is filed on or before the due date under Section 139(1), or
• The date of filing, if the return is filed after the due date.

Quick calculation: If the India-UK DTAA scenario above proceeds under Route 2 — with the UK company filing an Indian ITR for AY 2026-27 and claiming a net refund of Rs. 2,50,000 — and the ITR is filed on time but the refund is granted 20 months after 1 April 2026, interest = 0.5% × 20 months × Rs. 2,50,000 = Rs. 25,000. Claim it explicitly in the return under the interest schedule; it does not accrue automatically without a formally filed and processed ITR.

The interest is itself taxable income in the non-resident's hands in the year of receipt — include this disclosure in the relevant-year ITR or treaty analysis.

Key Takeaways

• Two routes, one at a time. The deductor's Circular 7/2007 route and the non-resident's ITR route are mutually exclusive for the same deduction amount. Establish which route applies before filing anything.
• TRACES correction must come first. Reduce the TDS credit in the system by filing a Form 27Q correction statement and obtaining the TRACES acknowledgement. The AO verifies on the system — not on paper.
• Two-year hard deadline under Circular 7/2007. FY 2024-25 deductions must be claimed by 31 March 2027; FY 2025-26 by 31 March 2028. Audit open positions every quarter.
• Electronic Form 10F is non-negotiable. A paper Form 10F filed after FY 2023-24 does not support a DTAA rate claim in refund proceedings.
• Section 244A interest is available to the non-resident at 0.5% per month under Route 2 — quantify and claim it explicitly, and account for its taxability in the year of receipt.
• Prevention is vastly cheaper than refund. Apply for a Section 195(3) certificate (non-resident applies) or a Section 195(2) determination (deductor applies) before the first remittance to a known non-resident counterparty, especially where DTAA benefits are clear and recurring.
• Seven documents must travel together: Contract or invoice, Form 15CA + Form 15CB, challan details, Form 27Q acknowledgement, TRC (correct period), electronic Form 10F, and no-PE declaration. An incomplete set is the single most common reason for AO objections — assemble all seven before the application date, not after.