Tds on payment to non resident.
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
02 June 2012
If an Indian company is making payment to a non resident foreign broker for helping in imports/exports, is it liable for withholding tax u/s 195? The broker belongs to UAE and is not having any PE in India. Also Article 7 of DTAA between India & UAE specifies that business income of a resident of UAE would be taxable in UAE only. In this context, please guide whether Indian company has to deduct TDS or not?
02 June 2012
Yes section 195 will apply
Querist : Anonymous
Querist :
Anonymous
(Querist)
04 June 2012
Thanks Sir for your opinion. But Sec 195 applies to income chargeable under Income Tax Act 1961. Here in the above case, foreign agent is not having any PE in India and is operating outside India. In such a case, how can the income said to accrue or arise in India? Further DTAA always rules over Income Tax Act. In such a condition, according to Article 7, the income earned by the resident of UAE who is not having PE in India, is chargeable to tax in UAE and not in India. Article 7 is reproduced as under :
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
Please clarify in this context.
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
Please clarify in this context.
Querist : Anonymous
Querist :
Anonymous
(Querist)
04 June 2012
Thanks Sir for your opinion. But Sec 195 applies to income chargeable under Income Tax Act 1961. Here in the above case, foreign agent is not having any PE in India and is operating outside India. In such a case, how can the income said to accrue or arise in India? Further DTAA always rules over Income Tax Act. In such a condition, according to Article 7, the income earned by the resident of UAE who is not having PE in India, is chargeable to tax in UAE and not in India. Article 7 is reproduced as under :
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
Please clarify in this context.
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
Please clarify in this context.
27 July 2025
Great question — this is a classic issue about **TDS under Section 195 vs. DTAA protections**.
Here’s the detailed explanation:
---
### 1. **Applicability of Section 195**
* Section 195 mandates **TDS on any sum payable to a non-resident, which is chargeable to tax in India**.
* The key phrase is: **“chargeable to tax in India.”**
---
### 2. **DTAA between India and UAE (Article 7 - Business Profits)**
* Article 7 says profits of an enterprise of UAE shall be taxable **only in UAE** unless the enterprise has a **Permanent Establishment (PE) in India**.
* Since the foreign broker **does not have PE in India**, **the income is not taxable in India** under the DTAA.
* DTAA provisions **override domestic law** to avoid double taxation and tax on income not taxable as per treaty.
---
### 3. **What does this mean for TDS?**
* Even though **Section 195 mandates TDS on payments to non-residents if taxable in India**,
* **If the income is not taxable in India due to DTAA protections (no PE), then no TDS needs to be deducted.**
---
### 4. **Important procedural steps**
* The Indian company **should obtain a certificate from the Income Tax department** under **Section 195(2)** or **195(3)** to confirm **nil or lower withholding tax**, citing the DTAA benefit.
* This avoids future disputes or penalties for non-deduction.
* If certificate is not obtained, tax authorities may hold the payer liable for non-deduction.
---
### 5. **Summary:**
| Condition | TDS Requirement |
| ---------------------------------------------------------------- | ------------------------------------------------- |
| Non-resident has **PE in India** | Deduct TDS under Section 195 |
| Non-resident has **no PE in India** and DTAA applies (Article 7) | No TDS deduction required if certificate obtained |
---
### 6. **In your case:**
* Broker from UAE with **no PE in India**
* Income taxable **only in UAE** per Article 7
* **No TDS deduction is required** provided you obtain a **nil deduction certificate** under Section 195(3) from Income Tax department.
---
### 7. **Practical advice**
* Submit an application to the Assessing Officer for certificate under Sec 195(3) for no TDS or lower TDS based on DTAA.
* Keep this certificate safely as proof to avoid issues later.
* You may also need to file Form 15CA and 15CB (CA certificate) depending on remittance type.
---
If you want, I can help draft the application or give more practical tips on this!
Here’s the detailed explanation:
---
### 1. **Applicability of Section 195**
* Section 195 mandates **TDS on any sum payable to a non-resident, which is chargeable to tax in India**.
* The key phrase is: **“chargeable to tax in India.”**
---
### 2. **DTAA between India and UAE (Article 7 - Business Profits)**
* Article 7 says profits of an enterprise of UAE shall be taxable **only in UAE** unless the enterprise has a **Permanent Establishment (PE) in India**.
* Since the foreign broker **does not have PE in India**, **the income is not taxable in India** under the DTAA.
* DTAA provisions **override domestic law** to avoid double taxation and tax on income not taxable as per treaty.
---
### 3. **What does this mean for TDS?**
* Even though **Section 195 mandates TDS on payments to non-residents if taxable in India**,
* **If the income is not taxable in India due to DTAA protections (no PE), then no TDS needs to be deducted.**
---
### 4. **Important procedural steps**
* The Indian company **should obtain a certificate from the Income Tax department** under **Section 195(2)** or **195(3)** to confirm **nil or lower withholding tax**, citing the DTAA benefit.
* This avoids future disputes or penalties for non-deduction.
* If certificate is not obtained, tax authorities may hold the payer liable for non-deduction.
---
### 5. **Summary:**
| Condition | TDS Requirement |
| ---------------------------------------------------------------- | ------------------------------------------------- |
| Non-resident has **PE in India** | Deduct TDS under Section 195 |
| Non-resident has **no PE in India** and DTAA applies (Article 7) | No TDS deduction required if certificate obtained |
---
### 6. **In your case:**
* Broker from UAE with **no PE in India**
* Income taxable **only in UAE** per Article 7
* **No TDS deduction is required** provided you obtain a **nil deduction certificate** under Section 195(3) from Income Tax department.
---
### 7. **Practical advice**
* Submit an application to the Assessing Officer for certificate under Sec 195(3) for no TDS or lower TDS based on DTAA.
* Keep this certificate safely as proof to avoid issues later.
* You may also need to file Form 15CA and 15CB (CA certificate) depending on remittance type.
---
If you want, I can help draft the application or give more practical tips on this!
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