Under Income Tax Act, TDS has to be deducted u/s 195 if an Indian assessee makes payment to a non-resident assessee at the rates specified in the finance act. Here the only condition is that he should be a Non-resident for the purpose of deduction of TDS.
Under double taxation avoidance agreement, Permanent Establishment concept has to be tested. i.e. A Non resident assessee should have a Permanent Establishment in India to come under the purview of Double taxation avoidance agreement.
For Example: Uhde Gmbh Company incorporated in Germany. They also have a permanent establishment in India by incorporating a company in India called as Uhde India Private Limited. Now an Indian Assessee makes a payment to Uhde GmBH. Since Uhde GmBH is having permanent establishment in India, it will be taxed at the rates specified in Double Taxation Avoidance Agreement.
(Article 7 of the DTAA with Malaysia: The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only on so much thereof as is attributable to that permanent establishment.)
On close reading of your situation, the income derived by a Non Resident in respect of professional services or other independent activities of a similar character shall be taxable only in that country i.e. to say Malaysia in your case as per Article 14 of the Double Taxation Avoidance Agreement. So as per DTAA , the tax rate is Nil, but however as per Indian Taxation the tax rate is 10% (excluding Surcharge & Cess) if the payment is made to Non resident Individual.
Conclusion: The applicable tax rate is Nil rate as per Double Taxation Avoidance agreement or 10% as per section 195 whichever is Lower. So we can take the shelter of article 14 of the double taxation avoidance agreement entered between Malaysia.
Article 14
(INDEPENDENT PERSONAL SERVICES - 1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State.
However, in the following circumstances such income may also be taxed in the other Contracting State :
(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or
(b) if his stay in the other State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State; or
(c) if the remuneration for his services in the other Contracting State is either derived from a resident of that State or borne by a permanent establishment or fixed base which a person not resident in that State has in that State and which, in either case exceeds in value an amount equivalent to two thousand U.S. dollars in the fiscal year concerned.
2. The term professional services includes especially independent scientific
literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. )
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