Tds after obtaining trc
This query is : Resolved
29 August 2015
We are making continuous payments to our foreign vendors & after obtaining TRC we are not deducting TDS.
Is it Ok or we do have to deduct TDS.
Is it Ok or we do have to deduct TDS.
29 August 2015
TRC is not TDS exemption certificate, you have to deduct TDS u/s.195 subject to Double taxation avoidance agreement with the respective country
31 August 2015
Thanks Mr Ramesh, will you please brief about the DTAA
27 July 2025
You're right to seek clarification, because this is a **very commonly misunderstood area** in cross-border taxation. Let me explain the **correct treatment of TDS** when you have obtained a **Tax Residency Certificate (TRC)** from your foreign vendor, and how the **Double Taxation Avoidance Agreement (DTAA)** works.
---
### 🔍 **1. What is a TRC?**
A **Tax Residency Certificate (TRC)** is issued by the **foreign government** to the **non-resident (your vendor)** to certify that they are a **tax resident of that country**.
✅ It is **mandatory** for the foreign vendor to provide TRC **to claim benefits under the DTAA**.
---
### ❓ So, **Does TRC Exempt You from Deducting TDS?**
❌ **No.**
TRC **does not automatically exempt** you from deducting TDS. It only makes the **vendor eligible for DTAA benefits**.
➡️ You, as the payer (resident in India), are still **required to deduct TDS under Section 195**, **at the rate applicable** as per:
* The **Income Tax Act, 1961**, OR
* The **DTAA**,
**whichever is more beneficial to the payee** (i.e., the foreign vendor).
---
### 📘 **2. What is DTAA?**
**Double Taxation Avoidance Agreement (DTAA)** is a bilateral agreement between India and another country to **avoid taxing the same income twice** — once in India and once in the foreign country.
It **prescribes reduced rates** of TDS for certain types of income, such as:
| Income Type | Typical DTAA TDS Rate |
| --------------------------------- | ---------------------------------------------------------------------- |
| Royalty | 10% or 15% |
| Fees for Technical Services (FTS) | 10% or 15% |
| Interest | 10% |
| Dividend | 10% or 15% |
| Business Profits | Taxable only if the vendor has a PE (Permanent Establishment) in India |
> ⚠️ You must check the **relevant article** in the DTAA for the country in question.
---
### ✅ **What You Need to Do (Step-by-Step):**
1. **Obtain the TRC** from the foreign vendor.
2. Also collect **Form 10F** and a **declaration of beneficial ownership**.
3. **Check the applicable DTAA article** for the nature of payment.
4. Apply the **lower rate of TDS** if allowed under DTAA.
5. Deduct TDS under **Section 195** and deposit it with the government.
6. File **Form 15CA/15CB** for foreign remittance as applicable.
---
### 🧾 Example:
You pay \$10,000 to a U.S. vendor for software licensing fees:
* Under Income Tax Act: TDS may be 20% + surcharge + cess.
* Under DTAA with USA (Article on Royalty): TDS rate is **15%**.
If the vendor gives you a **valid TRC**, you can deduct TDS @ **15%** (plus surcharge/cess if applicable), not 20%.
---
### ✅ Final Answer:
Even after obtaining a **TRC**, you **must deduct TDS under Section 195**, but you can apply the **DTAA rate**, **not the domestic rate**, if:
* The TRC is valid,
* The foreign vendor is the **beneficial owner** of the income,
* The payment qualifies under a DTAA article.
Let me know the country and nature of the payment, and I can help you find the **exact DTAA rate and clause**.
---
### 🔍 **1. What is a TRC?**
A **Tax Residency Certificate (TRC)** is issued by the **foreign government** to the **non-resident (your vendor)** to certify that they are a **tax resident of that country**.
✅ It is **mandatory** for the foreign vendor to provide TRC **to claim benefits under the DTAA**.
---
### ❓ So, **Does TRC Exempt You from Deducting TDS?**
❌ **No.**
TRC **does not automatically exempt** you from deducting TDS. It only makes the **vendor eligible for DTAA benefits**.
➡️ You, as the payer (resident in India), are still **required to deduct TDS under Section 195**, **at the rate applicable** as per:
* The **Income Tax Act, 1961**, OR
* The **DTAA**,
**whichever is more beneficial to the payee** (i.e., the foreign vendor).
---
### 📘 **2. What is DTAA?**
**Double Taxation Avoidance Agreement (DTAA)** is a bilateral agreement between India and another country to **avoid taxing the same income twice** — once in India and once in the foreign country.
It **prescribes reduced rates** of TDS for certain types of income, such as:
| Income Type | Typical DTAA TDS Rate |
| --------------------------------- | ---------------------------------------------------------------------- |
| Royalty | 10% or 15% |
| Fees for Technical Services (FTS) | 10% or 15% |
| Interest | 10% |
| Dividend | 10% or 15% |
| Business Profits | Taxable only if the vendor has a PE (Permanent Establishment) in India |
> ⚠️ You must check the **relevant article** in the DTAA for the country in question.
---
### ✅ **What You Need to Do (Step-by-Step):**
1. **Obtain the TRC** from the foreign vendor.
2. Also collect **Form 10F** and a **declaration of beneficial ownership**.
3. **Check the applicable DTAA article** for the nature of payment.
4. Apply the **lower rate of TDS** if allowed under DTAA.
5. Deduct TDS under **Section 195** and deposit it with the government.
6. File **Form 15CA/15CB** for foreign remittance as applicable.
---
### 🧾 Example:
You pay \$10,000 to a U.S. vendor for software licensing fees:
* Under Income Tax Act: TDS may be 20% + surcharge + cess.
* Under DTAA with USA (Article on Royalty): TDS rate is **15%**.
If the vendor gives you a **valid TRC**, you can deduct TDS @ **15%** (plus surcharge/cess if applicable), not 20%.
---
### ✅ Final Answer:
Even after obtaining a **TRC**, you **must deduct TDS under Section 195**, but you can apply the **DTAA rate**, **not the domestic rate**, if:
* The TRC is valid,
* The foreign vendor is the **beneficial owner** of the income,
* The payment qualifies under a DTAA article.
Let me know the country and nature of the payment, and I can help you find the **exact DTAA rate and clause**.
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