Tax deducted at source
This query is : Resolved
27 June 2008
Whether TDS to be deducted on foreign commission paid outside india relating to sales.
27 June 2008
yes ,but lower of rates provided in dtaa or income tax act.
28 June 2008
But income for the foreign company does not accrue or arise in India, it is not for service rendered in India, so why should tax be deducted?
Can u please give me the section/circular/notification/case law from which you arived at this conclusion.
Can u please give me the section/circular/notification/case law from which you arived at this conclusion.
26 July 2025
Great question! Here's a detailed explanation:
### TDS on Foreign Commission Paid Outside India
**General Rule:**
* Under **Section 195 of the Income Tax Act, 1961**, any payment made to a non-resident, which is chargeable to tax in India, requires deduction of tax at source (TDS).
* The law requires deduction of TDS on payments made to non-residents if such income **“accrues or arises in India”** or is deemed to accrue or arise in India.
---
### When is TDS applicable on foreign commission?
* If the commission is for services **rendered or sales made in India**, the income is considered to accrue or arise in India.
* Hence, TDS under **Section 195** applies.
---
### But if the foreign company’s income **does not accrue or arise in India** (e.g., if services are rendered completely outside India), TDS is generally **not applicable**.
---
### Relevant provisions and references:
* **Section 195**: TDS on payments to non-residents.
* **CBDT Circular No. 728, dated 21-4-1995** clarifies that TDS under Section 195 is applicable only if income accrues or arises or is deemed to accrue or arise in India.
* **Supreme Court rulings** like *Azadi Bachao Andolan vs Union of India* (2003) emphasize the principle of “source rule” for taxing non-residents.
---
### Double Taxation Avoidance Agreement (DTAA):
* If India has a DTAA with the foreign country, the tax rate under the DTAA or Income Tax Act applies, whichever is lower.
* This DTAA may provide exemptions or reduced withholding tax rates.
---
### Summary:
| Scenario | TDS Applicability |
| ------------------------------------------------------------ | -------------------------------- |
| Commission payment for sales/services in India | TDS applicable under Section 195 |
| Commission payment where income does **not** accrue in India | TDS not applicable |
---
### What should you do?
* Assess if the commission income of the foreign company **accrues or arises in India**.
* If yes, deduct TDS under Section 195 at the appropriate rate (DTAA rate if applicable).
* If no, then **no TDS** is required.
---
### TDS on Foreign Commission Paid Outside India
**General Rule:**
* Under **Section 195 of the Income Tax Act, 1961**, any payment made to a non-resident, which is chargeable to tax in India, requires deduction of tax at source (TDS).
* The law requires deduction of TDS on payments made to non-residents if such income **“accrues or arises in India”** or is deemed to accrue or arise in India.
---
### When is TDS applicable on foreign commission?
* If the commission is for services **rendered or sales made in India**, the income is considered to accrue or arise in India.
* Hence, TDS under **Section 195** applies.
---
### But if the foreign company’s income **does not accrue or arise in India** (e.g., if services are rendered completely outside India), TDS is generally **not applicable**.
---
### Relevant provisions and references:
* **Section 195**: TDS on payments to non-residents.
* **CBDT Circular No. 728, dated 21-4-1995** clarifies that TDS under Section 195 is applicable only if income accrues or arises or is deemed to accrue or arise in India.
* **Supreme Court rulings** like *Azadi Bachao Andolan vs Union of India* (2003) emphasize the principle of “source rule” for taxing non-residents.
---
### Double Taxation Avoidance Agreement (DTAA):
* If India has a DTAA with the foreign country, the tax rate under the DTAA or Income Tax Act applies, whichever is lower.
* This DTAA may provide exemptions or reduced withholding tax rates.
---
### Summary:
| Scenario | TDS Applicability |
| ------------------------------------------------------------ | -------------------------------- |
| Commission payment for sales/services in India | TDS applicable under Section 195 |
| Commission payment where income does **not** accrue in India | TDS not applicable |
---
### What should you do?
* Assess if the commission income of the foreign company **accrues or arises in India**.
* If yes, deduct TDS under Section 195 at the appropriate rate (DTAA rate if applicable).
* If no, then **no TDS** is required.
---
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