Tds rate applicable to payment to foreign company

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SUNIL KUMAR SINGH (Querist)
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23 April 2012 A creative agency based in Germany has provided/rendered services for development of two story boards and concept for television commercials to be used by an Indian Company only. The German Company does not have any PE or business connection in India. What will be tax incidence?
I think TDS should be deducted under ‘fee for royalty or technical services’. The rate prescribed in the DTAA with Germany is 10% as per Article 12 of the relevant DTAA.
But the German creative agency doesn’t have its PAN. As per section 206 AA of the Indian Income Tax Act the payee is required to supply the PAN no. otherwise TDS would be deducted at the higher of 10% or 20%.
What will be the effective rate of TDS? Is there any provision with the help of which we can mitigate the TDS liability?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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28 April 2012 The German company has not rendered any services in Indian and accordingly the provisions of section 195 and section 9 shall not apply and no TDS is required to be made but the fee payment should route through RBI with certificate from CA.

SUNIL KUMAR SINGH

SUNIL KUMAR SINGH (Querist)
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01 May 2012 Excuse me, Sir. Section 9 of the Income Tax Act has been amended by Finanace Act, 2010. An explanation has been inserted after clause (vii) which runs as under:
Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.]
This explanation seeks to tax the transactions, if the services are utilized in India as discussed in the memorandum explaining the Finance Bill, 2010.
In our case since the services are to be utilized in India so I think it is taxable in India and TDS should be deducted. Sir, Please guide me on what rate TDS should be deducted?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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28 July 2025 You're absolutely right to raise a detailed and nuanced query—this situation does require careful application of Indian tax law **read with the India-Germany DTAA**.

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## ✅ **Your Situation:**

* A German creative agency (non-resident, no PE in India)
* Provides services to an Indian company (storyboards and concepts)
* Services used **in India** for creating television commercials
* German company **does not have PAN**
* You’re concerned about:

1. **Whether TDS applies?**
2. **If yes, under which section and at what rate?**
3. **Whether Section 206AA will apply (due to absence of PAN)?**

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## 💡 **Analysis**

### 1. **Taxability of Income in India – Section 9(1)(vii)**

Per amended **Explanation to Section 9(1)(vii)** (Finance Act 2010), fees for technical services (FTS) are **deemed to accrue in India** even if:

* The service is rendered **outside India**, and
* The non-resident has **no PE or business connection in India**, **if**:

* The services are utilized in India.

✅ In your case, the concept and storyboard are being **used in India**, so income is deemed to accrue in India.

➡️ **Yes, TDS is applicable under Section 195**.

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### 2. **TDS Section Applicable**

The services provided (creative, conceptual development) may **not** fall strictly under “technical” or “consultancy” services in the conventional sense unless they involve human intervention, specialized design, or customized consultancy.

However, if considered “**Fee for Technical Services (FTS)**” under **Section 9(1)(vii)**, then:

* **DTAA (India–Germany)** — Article 12 applies.
* **Rate** as per DTAA: **10% (gross basis)** on FTS or royalties.

But you must **obtain a Tax Residency Certificate (TRC)** from the German company to apply DTAA rates.

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### 3. **PAN Not Available — Section 206AA**

Where the foreign company **does not have a PAN**, Section 206AA applies, and TDS must be at the **higher of the following**:

* Rate under the Act (say 10% for FTS),
* Rate under DTAA (10%),
* **20% as per 206AA** (due to no PAN).

BUT — there is relief:

### 🔎 **CBDT Circular No. 03/2015, dated 12.02.2015**

> **Section 206AA shall not apply to non-residents if**:
>
> * The non-resident **does not have PAN**, and
> * The non-resident **furnishes prescribed documents**:
>
> * Name, contact, address, TRC (Tax Residency Certificate), and TIN issued by their country.

So, if you obtain a **TRC + other prescribed details**, **TDS will be 10%** (as per DTAA), and **206AA will not apply**.

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## ✅ Final Answer:

| Point | Treatment |
| -------------------------- | -------------------------------------------------------------------------- |
| Is TDS applicable? | ✅ Yes, under **Section 195 r.w. Section 9(1)(vii)** |
| Type of income | Likely FTS (depending on the exact nature of the services) |
| Applicable section | **Section 195** + **DTAA Article 12** |
| TDS Rate | **10%** under India-Germany DTAA (gross basis) |
| No PAN — Will 206AA apply? | ❌ **Not if** TRC + prescribed details are obtained (CBDT Circular 03/2015) |
| Otherwise (no TRC) | ❗ TDS @ **20%** (as per Section 206AA) |

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### ✅ Action Steps:

1. **Obtain Tax Residency Certificate (TRC)** from the German agency.
2. Collect prescribed documents under Rule 37BC.
3. Deduct TDS @ 10%.
4. Report under Form 15CA/15CB as applicable.
5. Route payment through RBI-approved channel.

Let me know if you need help drafting a Form 15CB or checklist for TRC compliance.

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