TDS under section 195 arises on credit or payment, not merely on accrual in the non-resident's hands.

Tax deduction at source under section 195 is triggered by credit of the amount to the payee's account or by actual payment, whichever is earlier. Mere accrual of income in the non-resident recipient's hands does not by itself create the deductor's obligation under that provision. The payer's accounting method cannot replace the statutory timing rule for TDS, and the recipient's taxability remains distinct from the deductor's withholding duty. A demand computed solely on an accrual basis was set aside and remitted for fresh adjudication in accordance with law.

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Issues: Whether tax deduction at source under section 195 of the Income-tax Act, 1961, in respect of franchise fees payable to a non-resident, crystallises on accrual of income in the hands of the payee or only on credit of the amount to the payee's account or actual payment, whichever is earlier, and whether the payer's method of accounting can be disregarded for this purpose.

Analysis: Tax deduction at source is a mode of recovery and is not the same as final determination of the recipient's tax liability. The statutory language of section 195 governs the time of deduction and requires deduction at the time of credit to the payee's account or at the time of payment, whichever is earlier. The payer's accounting method cannot be substituted by an accrual-based approach for working out TDS liability under that provision. The question of taxability in the hands of the foreign recipient and the question of the deductor's obligation under section 195 are distinct, and accrual of income in the recipient's hands alone is not the proximate trigger for the deductor's liability under section 195.

Conclusion: TDS liability under section 195 arises only on credit to the payee's account or on payment, whichever is earlier, and not merely on accrual of income in the hands of the non-resident recipient.

Final Conclusion: The demand raised on an accrual basis was set aside and the matter was sent back for fresh adjudication in accordance with law.

Ratio Decidendi: For the purposes of section 195 of the Income-tax Act, 1961, the obligation to deduct tax at source is triggered only by credit to the payee's account or by payment, whichever occurs earlier, and cannot be enlarged by treating mere accrual of income in the recipient's hands as sufficient.

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