The purchaser has to deduct tax if NRI’s income is chargeable under the Act. The Supreme Court in G.E. India Technology Centre P. Ltd. v. CIT [327 ITR 456 (SC) has held that:
“The most important expression in section 195(1) of the Income-tax Act, 1961, dealing with deduction of tax at source consists of the word “chargeable under the provisions of the Act.” A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. Section 195 contemplates not merely amounts, the whole of which are pure income payments, which have an element of income embedded or incorporated in them. The obligation to deduct tax at source is, however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. It is for this reason that the CBDT has clarified in Circular No. 728 dated October 31, 1995 that the tax deductor can take into consideration the effect of the DTAA in respect of payments of royalties and technical fees while deducting tax at source.”
Be that as it may, if income of non-resident is chargeable in India, the purchaser has to deduct the tax @ 20% being rate in force, as per section 112 of the Act.