Sec 195

This query is : Resolved

shikha (Querist)
Follow

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%

CA Ashok Kumar Sahu

CA Ashok Kumar Sahu (Expert)
Follow

20 March 2010 as per my opinion

50+1.25+1.025+0.5125=52.7875
it+sc+ec+hec=total

shikha

shikha (Querist)
Follow

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?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
Follow

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.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now