TDS on payment to NRI ass Fees for Technical Services or Business Income or Independent Personal services (IPS).

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TDS on payment to NRI ass Fees for Technical Services or Business Income or Independent Personal services (IPS).

Foreign remittances are subject to Tax Deduction at Source (TDS) u/s. 195. There is a lot of confusion as to the applicability of TDS U/s 195. It may be noted that every payment to a non-resident is not liable for TDS u/s. 195. The basic principle which governs the TDS provision u/s 195 is the taxability of such payment / income in the hands of non-resident recipients. In addition to section 195, clauses contained in the Double Taxation Avoidance Agreement (DTAA) also have an impact on TDS provision.

Classification of income under the correct head & right clause of DTAA also determines the taxability and TDS applicability. One may note that rules of DTAA differ from country to country. DTAA with one country may have a separate rule regarding taxability of income as compared to other countries.

The classification of income in DTAAs may not be in alignment with the income as recognized in the Income Tax Act. One such differentiating nature which finds presence in almost all the DTAA is with regard to professional services.  Under the Income Tax Act- 1961, TDS u/s 194J on professional services includes payment to a resident towards all professional services whereas in DTAA such payments is normally classified for TDS only if it is a Fees for Technical Services or Business Income or Independent Personal services (IPS).

The concept of Independent professional services in DTAA vis a vis professionals services in Income Tax Act is important. One need to know the concept of Independent Personal services (IPS) as contained in majority of the DTAA

In DTAA, normally the clause related to IPS  applies in respect of a service provider who is an  individual or even in some cases firm of individuals-other than a company) and it is for the services which are in the nature of  “professional services or other independent activities of a similar character”.  “Professional services” in such cases are provided to include independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. It is normally provided in almost all DTAAs that such income is liable to be taxed only in the country of residence of the recipient  and shall be taxable in India only in the 2 situations as under:

  1. Service provider has a permanent establishment regularly available to him in India for the purposes of performing his activities or
  2. Such a person stays  in India for more than a minimum period (In normal course, 90 days) in a fiscal year.

If the payee is not covered in any of the above 2 situations then the income is not taxable in India and so TDS will not be required in such cases u/s. 195.

It may be noted here that the concept of Independent Personal services is applicable normally when the service provider is an individual though some DTAA have made it applicable to the partnerships also. However, it doesn’t mean they will be excluded. If the Non-resident recipient is a company, then though it may not be reckoned as Independent Personal services but it will be considered as Fees for Technical Services or Business Income, depending upon the facts of the individual case.

It may be noted that for claiming the benefits of DTAA, requirements of Section 90(4) regarding tax residency certificate from the country of residence of the recipient and of Section 90(5) read with rule  21AB related to furnishing declaration by Non-Resident in form 10F, are also required to be complied with. In short, if the payment is being made to a non resident individual  and services of NR are in the nature of Independent Personal Services then subject to compliance with the requirements of DTAA and of Section 90 of the Act,  such income is not taxable in India and as such no TDS u/s. 195 is required in such cases.

In one of the cases of DCIT (International Taxation) Vs. Hydrosult Inc. is worth discussion here. In this case, Non resident was awarded a contract  by the Chhattisgarh   Government  for  providing   consultancy   services  to  Chhattisgarh   Irrigation   Development  Project. Indian corporation has paid consultancy fees to various independent professionals of foreign origin who were  hired for technical services related to the project. Assessing officers found that no TDS was done on such payments & objected to it for non deduction of TDS.  ITAT Ahmedabad in this case ruled in the favor of Indian Corporation quoting that all such payments were in the nature of fees for Independent Personal services and hence taxable only in the country of residence of the recipient. While drawing the conclusions, ITAT examined the agreement between the consultants and the Indian taxpayer at length to conclude that the services performed in terms of the agreement to be of independent nature.

It may be noted that the requirement of submitting Form 15CA & 15CB is also related to its taxability in India. The above discussion may not help in the proper compliance with the TDS provisions but also with regard to submission of Form No. 15CA & 15CB.

Readers can also refer – https://thetaxtalk.com/2019/12/03/applicability-of-form-15-ca-cb/

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