TDS Under section 195

This query is : Open

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.

CA. B.SRINIVASULU

CA. B.SRINIVASULU (Expert)
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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

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