TDS Under section 195
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 March 2010
(1) The query is related to dedeuction of TDS on foreign payments for fees for technical services.
(2) Assume that for rendering the technical services the non resident has been in India for more than 6 months so he will be having a deemed permanent establishment in India.
(3) Due to point no 2 the rate for tax dedcution as per DTAA for fees for technical services will become 40% in place of 10%.
(4) Now we come to sec 195. The rate as per section 195 will be 10% + cess etc. as IT act no where provides that if the assessee is having a permanent establishment in India than the rate of TDS will be different.
(5) Various provisions under sec 9, section 44 series, sec 115 series does not apply. They apply only at the time of assessment and not at the time of TDS.
(6) The further contentions in support of point no 5 are as follows :
(a) We deduct TDS u/s 194C @ 2% even though the contractor will pay tax @ 30 % at the time of assessment. So TDS provisions are totally different from provisions applicable at the time of assessment.
(b) Sec 44 series does not apply. Like there are separate provisions for tax payment for transporters. But we do not deduct tax based on those provisions. So once again this reiterates that TDS provisions are different from provisions applicable on assessment.
(7) So by above we find that the rate as per DTAA is 40% but the rate as per IT act is 10% + cess etc.
(8) Now sec 90 comes into picture. It says that whichever provisions are more beneficial can be applied. In our case the provisions as per IT Act are more beneficial and hence TDS should be applied @ 10% + cess.
(9) Please clarify whether the above contentions are correct and provide your opinions on this issue.
(1) The query is related to dedeuction of TDS on foreign payments for fees for technical services.
(2) Assume that for rendering the technical services the non resident has been in India for more than 6 months so he will be having a deemed permanent establishment in India.
(3) Due to point no 2 the rate for tax dedcution as per DTAA for fees for technical services will become 40% in place of 10%.
(4) Now we come to sec 195. The rate as per section 195 will be 10% + cess etc. as IT act no where provides that if the assessee is having a permanent establishment in India than the rate of TDS will be different.
(5) Various provisions under sec 9, section 44 series, sec 115 series does not apply. They apply only at the time of assessment and not at the time of TDS.
(6) The further contentions in support of point no 5 are as follows :
(a) We deduct TDS u/s 194C @ 2% even though the contractor will pay tax @ 30 % at the time of assessment. So TDS provisions are totally different from provisions applicable at the time of assessment.
(b) Sec 44 series does not apply. Like there are separate provisions for tax payment for transporters. But we do not deduct tax based on those provisions. So once again this reiterates that TDS provisions are different from provisions applicable on assessment.
(7) So by above we find that the rate as per DTAA is 40% but the rate as per IT act is 10% + cess etc.
(8) Now sec 90 comes into picture. It says that whichever provisions are more beneficial can be applied. In our case the provisions as per IT Act are more beneficial and hence TDS should be applied @ 10% + cess.
(9) Please clarify whether the above contentions are correct and provide your opinions on this issue.
21 March 2010
You can deduct the tax as per DTAA which is 10% or Section 195 (10% if the technical knowhow fits under industrial policy) or 40% / 30% if the technical know how falls outside the industrial policy whichever is less but you should also take note of the notification wherein if the receiver do not have pan then you have to deduct at 20%.
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 March 2010
Dear Sir,
The point is suppose the non resident becomes a deemed PE under DTAA due to resident period more than 6 months than the income will not remain fees for technical services but it shall become business income and hence taxable @ 40%. The withholding tax RATE also becomes 40%.
Can still TDS be deducted @ 10% + cess under the IT Act given the benefit u/s 90.
The TDS under IT Act is governed by Sec 195.
Regards
Dear Sir,
The point is suppose the non resident becomes a deemed PE under DTAA due to resident period more than 6 months than the income will not remain fees for technical services but it shall become business income and hence taxable @ 40%. The withholding tax RATE also becomes 40%.
Can still TDS be deducted @ 10% + cess under the IT Act given the benefit u/s 90.
The TDS under IT Act is governed by Sec 195.
Regards
02 August 2025
Great question! Here’s a detailed explanation of TDS under Section 195 when dealing with foreign payments for fees for technical services (FTS) where the non-resident has a **deemed Permanent Establishment (PE)** in India under a DTAA:
---
### Issue Recap:
* Non-resident provides technical services.
* They stay in India > 6 months → Deemed PE under DTAA.
* As per DTAA, income attributed to PE is treated as **business income**, taxed at higher rate (e.g., 40%).
* Section 195 IT Act specifies TDS on payments to non-residents.
* The question: Should TDS be deducted at **DTAA PE business income rate (40%)** or IT Act FTS rate (10%)?
---
### Key Points:
1. **Section 195 TDS Rate vs. DTAA Rate:**
* Section 195 sets the baseline TDS rate at **10% for fees for technical services** (FTS).
* DTAA may specify different rates or categorize income differently (e.g., business income at 40%).
2. **Impact of Deemed PE:**
* When a non-resident has a PE, income attributable to the PE is treated as business income, not FTS.
* DTAA thus treats the payment as business income (taxable at 40% in your example).
3. **Interaction of Sec 195 & DTAA (Sec 90):**
* Section 90 allows the benefit of the **more beneficial (lower) rate** to be applied.
* If DTAA rate is higher (40%) and IT Act rate is 10%, the deductor can apply the lower IT Act rate.
* But this is where it gets tricky — DTAA treats this income as business income, not FTS.
4. **Assessment vs TDS:**
* TDS provisions under Sec 195 are **independent** of how income will be assessed.
* TDS rates are **not necessarily the same** as final tax rates applied at assessment.
* The rate of TDS is based on the nature of payment as per the Act and DTAA at the time of deduction.
5. **Nature of Income:**
* If income is treated as **business income due to PE**, then TDS rate applicable on business income should apply.
* If income is treated as FTS, then the 10% applies.
* If DTAA classifies the payment as business income due to PE, TDS should be deducted accordingly (40%).
6. **Practical Guidance:**
* Typically, if a PE exists, the income is business income → TDS at higher rate.
* If the deductor is unsure, the prudent step is to get a **certificate from AO under Sec 197** for lower TDS.
* The payee can also apply to AO for no or lower deduction if beneficial.
---
### Summary:
| Situation | TDS Rate to Deduct | Reason |
| ------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------------- |
| No PE, payment is for FTS | 10% + cess | As per Sec 195 and DTAA |
| PE exists, income treated as business | Higher rate (40% or as per IT rate for business income) | DTAA treats income as business income, so higher rate applies |
| Payee applies for certificate | Lower rate or nil | Allowed under Sec 197 |
---
### Your conclusion point:
> “TDS under IT Act is governed by Sec 195. Sec 90 allows benefit of lower rate.”
Correct, but **the nature of income matters** — if the DTAA classifies income as business income due to PE, the lower 10% rate for FTS **does not apply**.
---
### Final advice:
* For a non-resident with PE, **TDS should be at business income rates (usually 40%)**.
* If there is uncertainty, get **clarification or certificate from Assessing Officer**.
* Always check if payee has PAN; if not, deduct TDS at 20%.
* Maintain documentation to support your position.
---
If you want, I can help draft an application for certificate under Sec 197 or explain how to calculate TDS in this scenario. Would you like that?
---
### Issue Recap:
* Non-resident provides technical services.
* They stay in India > 6 months → Deemed PE under DTAA.
* As per DTAA, income attributed to PE is treated as **business income**, taxed at higher rate (e.g., 40%).
* Section 195 IT Act specifies TDS on payments to non-residents.
* The question: Should TDS be deducted at **DTAA PE business income rate (40%)** or IT Act FTS rate (10%)?
---
### Key Points:
1. **Section 195 TDS Rate vs. DTAA Rate:**
* Section 195 sets the baseline TDS rate at **10% for fees for technical services** (FTS).
* DTAA may specify different rates or categorize income differently (e.g., business income at 40%).
2. **Impact of Deemed PE:**
* When a non-resident has a PE, income attributable to the PE is treated as business income, not FTS.
* DTAA thus treats the payment as business income (taxable at 40% in your example).
3. **Interaction of Sec 195 & DTAA (Sec 90):**
* Section 90 allows the benefit of the **more beneficial (lower) rate** to be applied.
* If DTAA rate is higher (40%) and IT Act rate is 10%, the deductor can apply the lower IT Act rate.
* But this is where it gets tricky — DTAA treats this income as business income, not FTS.
4. **Assessment vs TDS:**
* TDS provisions under Sec 195 are **independent** of how income will be assessed.
* TDS rates are **not necessarily the same** as final tax rates applied at assessment.
* The rate of TDS is based on the nature of payment as per the Act and DTAA at the time of deduction.
5. **Nature of Income:**
* If income is treated as **business income due to PE**, then TDS rate applicable on business income should apply.
* If income is treated as FTS, then the 10% applies.
* If DTAA classifies the payment as business income due to PE, TDS should be deducted accordingly (40%).
6. **Practical Guidance:**
* Typically, if a PE exists, the income is business income → TDS at higher rate.
* If the deductor is unsure, the prudent step is to get a **certificate from AO under Sec 197** for lower TDS.
* The payee can also apply to AO for no or lower deduction if beneficial.
---
### Summary:
| Situation | TDS Rate to Deduct | Reason |
| ------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------------- |
| No PE, payment is for FTS | 10% + cess | As per Sec 195 and DTAA |
| PE exists, income treated as business | Higher rate (40% or as per IT rate for business income) | DTAA treats income as business income, so higher rate applies |
| Payee applies for certificate | Lower rate or nil | Allowed under Sec 197 |
---
### Your conclusion point:
> “TDS under IT Act is governed by Sec 195. Sec 90 allows benefit of lower rate.”
Correct, but **the nature of income matters** — if the DTAA classifies income as business income due to PE, the lower 10% rate for FTS **does not apply**.
---
### Final advice:
* For a non-resident with PE, **TDS should be at business income rates (usually 40%)**.
* If there is uncertainty, get **clarification or certificate from Assessing Officer**.
* Always check if payee has PAN; if not, deduct TDS at 20%.
* Maintain documentation to support your position.
---
If you want, I can help draft an application for certificate under Sec 197 or explain how to calculate TDS in this scenario. Would you like that?
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