Applicability of TDS on service provided by Non-Residents

Fees for services rendered by non-resident is deemed to accrue or arise in India, whether or not non-resident has place of business in India if he has rendered services in India. 

Explanation to section 9 says, “For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.

TDS rate under IT Act is 25%

India has entered into tax treaty with several countries which contain clauses for less withholding tax or no withholding tax rate. Assessee has option to use lower withholding rate (lower of IT rate or DTAA rate).

Section 90(2) says “Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”

To get the benefit of tax treaties, non-resident has to share Tax Residency Certificate. Otherwise normal IT rate shall apply.

Section 90(4) says “An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless 60b[a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”

Further, besides having TRC, non-resident should have PAN no. otherwise tax rate as per section 206AA will apply. As this section contains non-obstante clause.

Section 206AA(1) says, “Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—

(i)  at the rate specified in the relevant provision of this Act; or

(ii)  at the rate or rates in force; or

(iii) at the rate of twenty per cent”

Lets understand with the help of an example:

Example 1

Mr. X of USA/UK provided some legal service from there only, to client in India. Now as per USA/UK treaties with India, rate is NIL.

Hence, Withholding tax rate will be.

• If he has PAN & TRC, NIL tax.
• If he has PAN only, tax rate shall be as per IT Act i.e. 25%. Since he can’t take benefit of tax treaty.
• If he has only TRC, tax rate shall be higher of 20% or above 25%.

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