Payment to Non Resident Company

When making payments to a non-resident company that does not have a permanent establishment (PE) in India, you must navigate several tax compliance requirements under the Income Tax Act.

Key Compliance Requirements

1. Determine Taxability: TDS under Section 195 applies only if the income is "chargeable to tax" in India.

   • If the payment is for services rendered entirely outside India, it may not be taxable in India and thus may not attract TDS.

   • Recommendation: Because tax laws involving cross-border transactions are complex, it is highly recommended that you consult a Chartered Accountant (CA) to determine if the specific nature of your payment (e.g., royalty, fees for technical services, or business profits) is taxable in India.

2. Tax Deduction at Source (TDS) - Section 195:

   • Obligation: If the income is taxable in India, you are required to deduct TDS at the "rates in force" (Finance Act rates or beneficial DTAA rates, whichever is lower).

   • Timing: TDS must be deducted at the earlier of credit to the payee’s account or actual payment.

   • No Threshold: Unlike domestic payments, there is no minimum threshold for TDS under Section 195; it applies from the first rupee.

   • PAN: Obtain the foreign company's Tax Identification Number (TIN) or equivalent from their home country. While Section 206AA (higher TDS if no PAN) has relaxations for non-residents, you should collect their Tax Residency Certificate (TRC) and other contact details to comply with current documentation rules.

3. Remittance Compliance (Forms 15CA and 15CB):

   • Before you can remit funds to a non-resident, your bank (the Authorized Dealer) will require you to file Form 15CA and/or Form 15CB.

   • Form 15CB: A certificate from a CA verifying that the appropriate taxes have been considered/deducted.

   • Form 15CA: An online declaration filed by the remitter on the Income Tax e-filing portal.

4. Reporting:

   • Form 27Q: You must file quarterly TDS returns in Form 27Q for payments made to non-residents.

   • TAN: You must hold a valid Tax Deduction Account Number (TAN) to deduct and deposit the tax.

Consequences of Non-Compliance

• Disallowance of Expense: Under Section 40(a)(i), failure to deduct TDS (when required) can result in a disallowance of 30% (or more depending on specific provisions) of the expenditure for your own corporate tax computation.

• Interest & Penalties: Failure to deduct or deposit TDS leads to interest under Section 201(1A) (1% per month for non-deduction, 1.5% for non-deposit) and potential heavy penalties.

Summary Checklist for Your Payment

• Consult a CA: Confirm if the payment is taxable in India.

• Obtain Documentation: Collect the recipient's Tax Residency Certificate (TRC) and Form 10F if you intend to claim lower tax rates under a Double Taxation Avoidance Agreement (DTAA).

• Verify Rate: Determine the applicable TDS rate (check DTAA treaty rates between India and the vendor's country).

• File Forms: Complete the necessary Form 15CA/15CB process for the bank remittance.

• Deposit & Return: Deduct the tax, deposit it via Challan 281 by the 7th of the following month, and file Form 27Q quarterly.