As per section 195(g), the rate of TDS on royalties is 10%+3%Cess(if the Foreign Co possess PAN) and if the agreement between the Foreign Co and Government/Indian Concern is approved by Central Govt or the agreement is in accordance with the Industrial Policy.
Wanted to understand if approval of agreement by Central Government is MANDATORY to avail the benefit of 10%.
Further, is it mandatory for the Foreign Compnay to file the return in India. Because if they file the return in India, they will have to pay taxes at 40%.
27 January 2011
In that case, what is the benefit of deducting taxes at 10%. In first instance tax at 10% will be deducted, then, return is to be filed and pay taxes at 40% in case of foreign company.
Instead, I think it is better to deduct taxes at 20% and avoid all the complications.
28 January 2011
I beg to disagree with both the answers of other experts.
The rate of TDS is provided by section 115A and not section 195.
Also the rate of TDS is 10%+2.5%(if income of FC exceeds1 crore)+3%. You will appreciate that clause was introduced in 1976 in the era of Govt. approvals. Now most of the agreements are under automatic Route or the approval of DIPP is needed in case of any requirement under FDI Policy.
Also the rate of TDS shall be 20% if the date is agreement is between 1st June 1997 and 31st may 2005. For any agreement entered after 1st June 2005 the rate shall be 10% subject to foreign company having a PAN otherwise the rate shall be 20%.
Also recently the cap on royalty allowed to paid under FEMA has been removed subject to Transfer Pricing Audit.
Yes it is mandatory for the foreign company to file return of income in India as no where in Income Tax Act, exemption has been provided for the same.
Also the rate of 40% shall be only applicable if the foreign company has a PE in India, otherwise the rates of 10%/20% may be applicable.
Expert CA Anuj Gupta Sir has opined perfectly. However, For filing Return of Income, attention is invited to Section 115A(5) which exempts Foreign Company from filing Return of Income if FC's Income in India is only of those Incomes covered by section 115A and Tax is deducted at appropriate rate.
For your ready reference, Extract of Section 115A is as under: (5) It shall not be necessary for an assessee referred to in sub-section (1) to furnish under sub-section (1) of section 139 a return of his or its income if—
(a) his or its total income in respect of which he or it is assessable under this Act during the previous year consisted only of income referred to in clause (a) of sub-section (1); and
(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.]
Under sec. 115A(1) following incomes are covered: (i)dividends[other than dividends referred to in section 115-O] ; or (ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency ; or (iii) income received in respect of units, purchased in foreign currency,of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India,
Hence it is pretty clear that Fee for Technical Services(FTS) and Royalty are not covered under sec 115A(1) and hence any foreign company receiving FTS or Royalty shall need to file return of income in India.The same has been confirmed by various decisions of AAR.
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