Whether Charter Fees paid to non-resident will attract the provisions of tax deduction at source under section 195 of Income-Tax Act ,1961

Does payment of charter fee to a non-resident (for chartering fishing vessels), by way of percentage of fish catch done outside the territorial waters of India but brought to an Indian port for verification and valuation before dispatch of the same to the non-resident, attract the provisions of tax deduction at source under section 195?

Case: Kanchenjunga Sea Foods Ltd. v. CIT & ITO (2010) 325 ITR 540 (SC)

Section : 5(2) ,195& 201  of Income-Tax Act, 1961

Facts

An Indian company engaged in the sale and export of sea foods entered into an agreement with a non-resident for chartering two fishing vessels (trawlers) for an all-inclusive charter fee of US $ 6,00,000 per vessel per annum. The charter fee was payable out of earnings from the sale of fish and for this purpose, 85% of the gross earnings from the sale of fish was to be paid to the non-resident company.

In this case , Supreme Court was of the view that since the first receipt of 85% of the fish catch was in India, the non-resident effectively received the charter fee in the shape of 85% of the fish catch in India.

In light of the above, the income earned by the non-resident was chargeable to tax under section 5(2) of the Income-tax Act, 1961. The Indian company was, therefore, liable to deduct tax under section 195 on the payment made to the non-resident company. Since it had failed to deduct tax at source, it was an assessee-in-default under section 201.

It may be noted that TDS provisions under section 195 are attracted even if the charter fees is payable in kind, for example, as a percentage of fish catch, as in this case.