Fiscal deduction at source to payments to non -residents

Summary: The tax deducted at the source (TDS) on payments to non -residents (no) in India ensures tax compliance and prevents evasion. Section 195 of the Income Tax Law presents the requirements of TDS for these payments. Non-residents who generate income in India may face double taxation, which is mitigated by agreements to avoid double taxation (DTAA) or exemption in accordance with sections 90 and 91. Payments to Nos establish a business connection when activities, such as the conclusion of the contract or the delivery of stocks, are carried out in India. In addition, a significant economic presence, defined by income exceeding 2 crores or interactions with at least 3 Lakh users, is also a business connection. There are specific exemptions in accordance with explanation 1 to section 9 (1) (I), while explanation 5 clarifies the treatment of assets that derive value from Indian properties, as seen in the case of Vodafone. Certain royalty payments, widely defined to include the use of the software, patent licenses and technical services, are taxable, unless they are exempted by specific provisions, such as notification no. 21/2012. These provisions ensure the clarity and respect of transactions involving no, facilitating international affairs while protecting fiscal interests.

In India, the tax is usually deduced at the source to prevent tax evasion, placing the responsibility on the individual or the entity that makes the payment, regardless of the recipient’s status, if the payment falls within the provisions of the income tax.

Non-residents who often generate income from various sources, in India would face taxation both in India and their country of residence, which leads to Double taxation.

To avoid this, international principles stipulate that the same income should not to be taxed twiceWhat is the place where double taxation avoidance agreements (DTAA) become very significant in supply relief and encouraging cross -border transactions.

In order to address such situations, the income tax law, 1961 provides relief (90th century and 91th century) FROM Double taxation by any Bilateral Relief or Unilateral Relief.

In India, exemption is granted by credit method according to Section 91 For taxes paid in the countries with which India not have a dtaa.

Given this context, we now understand how the tax should be deducted at the source (TDS) for any payments made to NRI or a foreign company.

Sec.195 presents the provisions of TDS for making payments to non -residents.

TDS for payments to NRS

Business connection

Include any business activity carried out through a person acting in the name of the non -resident.

• need
  • have one authorities, To conclude contracts or
  • Usually, it concludes contracts or
  • play The main role which leads to the conclusion of contracts
• Usually maintain a stock from which it delivers regularly on behalf no.
• The usual security order in India, mainly or in full for no.

In addition, there may be situations in which the person acting on behalf of the safe non -resident order for other non -residents.

Business connection for other Non -residents is established If it is controlled by non -resident or vice versa or subjected to the same control as that of the non -resident.

“The agents who have independent status They are not included in the business connection ”

Explanation 2A to sec. 9 (1) (i)

Significant economic presence of a non -resident in India also constitutes a business connection in India (regardless of the place of agreement or residence or the business place or the provision of services in India or not).

– Regarding any goods, services or properties performed by any person in India, including the provision of data download or software in India> payment aggregate resulting from such transactions or transactions from the previous year should exceed Rs. 2 crore.

– The systematic and continuous request for business activities or involvement in interaction with users in India> The number of users should be at least 3 Lakhs.

Explanation 1 to sec. 9 (1) (i)

Following notbe treated as a business connection in India

Explanation 5 to the sec. 9 (1) (i) – Vodafone Caselaw

Moreover, an asset or an asset of capital is Any action or interest in a company or entity registered or incorporated outside India is considered to be and ever to be considered to be Located in IndiaIf the action or interest derives direct or indirectit is substantial value of the assets located in India

Does not apply to foreign institutional investors (BE) and foreign portfolio investors (FPI)

Dividend statement by foreign company outside India does not have the effect of transfer an asset basic assets located in India. Therefore such an income is is not considered to accumulate or rise in India.

Exception – The income will not to be considered to accumulate or rise to a non -resident of transfer, out of India, from any share or interest in a company or entity registered or incorporated outside India

• Foreign company or entity directly or indirectly hold assets Located in India

AND

• Transfer, directly or indirectly, at any time of Twelve months Previous the date of the transfer, does not hold – the right of management or control; or 5% of total voting power or shares

Royalty –

Account for –

• The transfer of all or any rights (including granting the license) for
• Transmitting any information on the operation or use of
• Transmission of any information about technical, industrial, commercial or scientific knowledge, experience or ability
• Use or the right to sue any industrial, commercial or scientific equipment, but without including the mentioned amounts U/S 44BB
• The transfer of all or any rights (including granting a license) in terms of any copyright, literacy, artistic or scientific, including movies or video boxes for use in television or radio radio

of any patent, invention, model, design, secret formula or process or trademark or similar properties

Note – The sale, distribution or exhibition of film films is also covered in the scope

• Rendering any services in relation to the activities mentioned in the above clauses.
• Use or right when using your computer software

CG has, Vide Notification no. 21/2012 of 13^Th June 2012 to be effective from 1^Sf July 2012, exempted if the payment is made by the transferor for the purchase of software from a Resident transferorprovisions Sec. 194J It will not be applicable If –

• Software purchased without any change by transferrator
• The tax already deducted either in the sec. 194J or sec. 195 to pay for any previous transfer of such software and
• The transfer obtains a statement from the transferor who The tax was so deduced Next to the transferant pan.

Without tax it is necessary to be deducted at the source below Sec. 195, If the amount paid by Indian resident End users at nonresidentsas taking into account for the resale or use of computer software through Eula (License Agreements for End user or distribution agreements) it is not royalty.

Product	Bought by	Bought from
Computer software	The end user, resident in India	Foreign, non -resident supplier or manufacturer
	Resident Indian companies – acting as distributors or resale
	Foreign, non -resident seller, who recounts the same for resident Indian distributors or end users
The computer software applied to hardware and is sold as an integrated unit/equipment	Resident Indian distributors or end users

Royal income it will not be Considered to accumulate or rise in India, if –

• Is for the supply of computer software together with Hardware computer within the CG scheme
• The transfer of properties is already taxable “capital gain”

Rule 37BB

Furniture of information for payment to a non-resident (form no. 15CA)- It is signed electronically and offered to the authorized dealer before remitting the payment.

General Tax Presentation at Source (TDS) to foreign payments

The author is a financial and fiscal professional based in Bangalore and can be contacted by E -mail to [email protected]