Sec 195
This query is : Resolved
20 March 2010
Hi Friends
i am making a payment to a foreign company for installation charges ie Can.$ 175000/-
now i need to deduct tds u/s 195.
what rate should i charge for tds?
is it 40%+3%=41.20%
i am making a payment to a foreign company for installation charges ie Can.$ 175000/-
now i need to deduct tds u/s 195.
what rate should i charge for tds?
is it 40%+3%=41.20%
20 March 2010
as per my opinion
50+1.25+1.025+0.5125=52.7875
it+sc+ec+hec=total
50+1.25+1.025+0.5125=52.7875
it+sc+ec+hec=total
20 March 2010
but its not a royalty......
what about DTAA ...?
Do we consider DTAA while deducting tds u/s 195?
& thats techniacl services charges not royalty?
What is the meaning of "WithHolding Tax"?
Since As per DTAA Rate bw CAnada & INDIA is 10%-20%?
Now I should charge tds at what rate?
what about DTAA ...?
Do we consider DTAA while deducting tds u/s 195?
& thats techniacl services charges not royalty?
What is the meaning of "WithHolding Tax"?
Since As per DTAA Rate bw CAnada & INDIA is 10%-20%?
Now I should charge tds at what rate?
23 July 2025
You've raised a very practical and important question on **TDS under Section 195** for a **payment to a foreign company (Canada)** towards **installation charges**, and the **correct rate to be applied** considering **DTAA** and **withholding tax implications**.
Let’s break it down step by step.
---
## ✅ 1. **Nature of Payment: Installation Charges**
* **Installation charges** are typically treated as:
* **Fees for Technical Services (FTS)** if they involve **technical or consultancy services** (like supervision, know-how, etc.)
* **Business income** if they are incidental to a contract and no technical element is involved
* The **classification** is important because it impacts **TDS applicability and rate**.
---
## ✅ 2. **Under Income Tax Act (Domestic Law):**
If **FTS applies**, then:
| Status of Payee | Basic Rate | Surcharge | Health & Ed Cess | Effective Rate |
| --------------- | ---------- | --------- | ---------------- | -------------- |
| Foreign Company | 10% or 30% | 2% or 5% | 4% | Up to 42.744% |
* **Without DTAA**, the base rate could be **10% (u/s 115A)** or **30% (if general provision applies)**.
* But total effective rate including **surcharge and cess** could go up to **40%–42%**.
* You’ve seen various numbers like **41.2%, 52.78%** — those are valid in **different contexts** (e.g., if it’s royalty or business income taxed at 40–50%).
---
## 🇮🇳🤝🇨🇦 3. **DTAA Between India & Canada**
Yes, **India and Canada have a DTAA**, and you **must consider it** while deducting TDS u/s 195. **DTAA overrides domestic tax rates** (if beneficial to the taxpayer).
### Under DTAA (Article 12):
* **Fees for Technical Services (FTS)** rate: **15%** (if it makes available technical knowledge, skill, etc.)
* **Royalty**: 10% or 15% depending on nature
* **Business income**: Not taxable in India **unless the foreign company has a Permanent Establishment (PE)** in India
👉 **"Make available" clause** applies: If the service just performs installation but doesn’t "make available" skills or know-how to you, then it **may not be taxable in India under DTAA**.
---
## 💡 So, what rate should you deduct?
### ✅ Option 1: **If DTAA applies and FTS is taxable**
* **Rate: 15%** (no surcharge or cess – DTAA rate is flat)
* Conditions:
* Obtain **Tax Residency Certificate (TRC)** from Canada company
* Collect **Form 10F** and declaration of no PE in India
### ✅ Option 2: **If it's just business income and no PE in India**
* **No TDS** is required
* But you must get **Form 15CB from CA** confirming this
### ✅ Option 3: **If DTAA not applied (fallback to domestic law)**
* Deduct TDS at **40% + surcharge + cess** = **\~41.6% to 42.744%**
* This is what you were calculating earlier (e.g., 40 + 2% + 4%)
---
## 🔍 What is Withholding Tax?
* **Withholding Tax = TDS** on payments made to non-residents
* Called "withholding" because you **withhold a portion of payment** and deposit to Indian government
* Ensures India collects tax on income deemed to arise in India
---
## 📌 Conclusion: What You Should Do
| Step | Action |
| ---- | ----------------------------------------------------------------------------- |
| 1️⃣ | Classify nature of payment – FTS vs business income |
| 2️⃣ | If DTAA applies, ask for **TRC**, **Form 10F**, and declaration of no PE |
| 3️⃣ | Apply **DTAA rate (likely 15%)** if FTS and “make available” clause satisfied |
| 4️⃣ | If not covered by DTAA, apply **Indian domestic rate (\~42%)** |
| 5️⃣ | Get **Form 15CB** from your CA for documentation |
---
Let me know if you can share:
* Invoice copy or nature of installation
* If any technical personnel came to India
* If the Canadian company has any presence (PE) in India
Then I can help you confirm whether 15% DTAA rate applies or TDS can be avoided.
Let’s break it down step by step.
---
## ✅ 1. **Nature of Payment: Installation Charges**
* **Installation charges** are typically treated as:
* **Fees for Technical Services (FTS)** if they involve **technical or consultancy services** (like supervision, know-how, etc.)
* **Business income** if they are incidental to a contract and no technical element is involved
* The **classification** is important because it impacts **TDS applicability and rate**.
---
## ✅ 2. **Under Income Tax Act (Domestic Law):**
If **FTS applies**, then:
| Status of Payee | Basic Rate | Surcharge | Health & Ed Cess | Effective Rate |
| --------------- | ---------- | --------- | ---------------- | -------------- |
| Foreign Company | 10% or 30% | 2% or 5% | 4% | Up to 42.744% |
* **Without DTAA**, the base rate could be **10% (u/s 115A)** or **30% (if general provision applies)**.
* But total effective rate including **surcharge and cess** could go up to **40%–42%**.
* You’ve seen various numbers like **41.2%, 52.78%** — those are valid in **different contexts** (e.g., if it’s royalty or business income taxed at 40–50%).
---
## 🇮🇳🤝🇨🇦 3. **DTAA Between India & Canada**
Yes, **India and Canada have a DTAA**, and you **must consider it** while deducting TDS u/s 195. **DTAA overrides domestic tax rates** (if beneficial to the taxpayer).
### Under DTAA (Article 12):
* **Fees for Technical Services (FTS)** rate: **15%** (if it makes available technical knowledge, skill, etc.)
* **Royalty**: 10% or 15% depending on nature
* **Business income**: Not taxable in India **unless the foreign company has a Permanent Establishment (PE)** in India
👉 **"Make available" clause** applies: If the service just performs installation but doesn’t "make available" skills or know-how to you, then it **may not be taxable in India under DTAA**.
---
## 💡 So, what rate should you deduct?
### ✅ Option 1: **If DTAA applies and FTS is taxable**
* **Rate: 15%** (no surcharge or cess – DTAA rate is flat)
* Conditions:
* Obtain **Tax Residency Certificate (TRC)** from Canada company
* Collect **Form 10F** and declaration of no PE in India
### ✅ Option 2: **If it's just business income and no PE in India**
* **No TDS** is required
* But you must get **Form 15CB from CA** confirming this
### ✅ Option 3: **If DTAA not applied (fallback to domestic law)**
* Deduct TDS at **40% + surcharge + cess** = **\~41.6% to 42.744%**
* This is what you were calculating earlier (e.g., 40 + 2% + 4%)
---
## 🔍 What is Withholding Tax?
* **Withholding Tax = TDS** on payments made to non-residents
* Called "withholding" because you **withhold a portion of payment** and deposit to Indian government
* Ensures India collects tax on income deemed to arise in India
---
## 📌 Conclusion: What You Should Do
| Step | Action |
| ---- | ----------------------------------------------------------------------------- |
| 1️⃣ | Classify nature of payment – FTS vs business income |
| 2️⃣ | If DTAA applies, ask for **TRC**, **Form 10F**, and declaration of no PE |
| 3️⃣ | Apply **DTAA rate (likely 15%)** if FTS and “make available” clause satisfied |
| 4️⃣ | If not covered by DTAA, apply **Indian domestic rate (\~42%)** |
| 5️⃣ | Get **Form 15CB** from your CA for documentation |
---
Let me know if you can share:
* Invoice copy or nature of installation
* If any technical personnel came to India
* If the Canadian company has any presence (PE) in India
Then I can help you confirm whether 15% DTAA rate applies or TDS can be avoided.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Difference between Date of Payment and Date of Deduction?
- TDS CREDIT MISMATCHING
- Buy back of shares u/s69
- Unregistered suppliers utility
- Tax Audit Applicability – Newly Formed Partnership Firm with Profit Below 6%/8%
- ITR 4 and Bank transactions
- Bank details not Visible on Traces Portal
- Taxability of Partnership firm for FY 2025-26
- Need Professional Opinion - AY 2012-13 Old Demand & AY 2026-27 Refund Adjustment
- Cash balance limit and property purchases limit
- EXPORT COMMERCIAL INVOICE HSN CODE
- RCM @ 5% on Hamali charges, Transport Charges, Unloading charges we take ITC or not
- CALCULATION OF DEFFERED TAX - OP BL IS DTL & CURRET IT DTA
- LLP audit under companies act
- Experienced CA recommendation from Kolkata for FNO return filing
- Interest Reporting in Form 168
- Sales of goods of amount Rs77 lakhs to a party
- Tax Demand of ₹4,650 for AY 2026-27
- Concept of Vendor and customner reconciliation
- Mistake in e-invoice identified after 24 hours
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
