tds applicability
S RAJAKUMAR
(Querist) 03 October 2010
This query is : Resolved
U.S. CITIZEN RENDERING PROFESSIONAL SERVICES IN INDIA FOR AN INDIAN COMPANY. HIS MONTHLY PROFESSIONAL CONSULTANCY FEE IS 4000 U.S. DOLLARS PER MONTH. HIS STAY IN INDIA UPTO MARCH 2011 IS MORE THAN 181 DAYS. HIS FEE IS PAID IN USD. HE IS ALSO HAVING PAN NUMBER IN INDIA. KINDLY ADVISE ME 1) WHETHER TDS TO BE DEDUCTED ON THE FEE? 2) IF SO HOW MUCH TO BE DEDUCTED? 3)HOW HIS STATUS WILL BE TREATED IN INDIA? 4) WHETHER PROVISION OF DTAA ATTRACTED?
R.Ramachandran
(Expert) 03 October 2010
(1) In terms of Section 195 of the Income Tax Act, "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
(Please go through complete provisions of this Section.)
Thus, when payment is being made to the U.S.Citizen, definitely TDS is to be deducted.
(If his stay in India is more than 181 days then he would be treated as 'resident' is liable to pay income tax.) This is independent of the requirement to deduct TDS as mentioned in Section 195.
If there is DTAA then he will be entitled to the same while filing his returns in his country, based on the certificate of tax collected in India given by the Government.
Apart from this, there may also be incidence of Service Tax on the consultancy service being rendered by him and being received by the company.
Rahul Chaudhary
(Expert) 04 October 2010
Indian company is liable to deduct tax under section 195 from payments to US professional if the same is liable to tax in India.
since the services are rendered in India, the same are liable to tax in India under the Income Tax Act.
India has a DTAA with US. For the purpose of DTAA, the US professional would continue to be tax resident of US. (refer to Article 4 - here i am assuming the US professional has a permanent home in US).
Amount payable to the US Professional would be liable to tax in India under DTAA either as fee for included services or as payment for Indipendent Personal Services. The taxability would depend upon the nature of arrangment between the Indian company and the US professinal and the nature of services rendered.
Assuming the services are professional in nature the same would be liable to tax as Indipendent Personal Services and tax would have to be deducted.
And like Mr. Ramachanran said there may be service tax levy as well. In my opinion, the US professional would be liable to service tax, if any, as the services were rendered by him personally in India.
VENKATRAMAN SHRINIVAS
(Expert) 04 October 2010
Tax is required to be deducted in India since the income of the US national has arisen in India by virtue of section 9. Even other wise by operation of section 6, he is to be regarded as a resident. Tax has to be deducted at the rate applicable to professional charges under section 194J. He is entitled to relief by application of DTAA on the tax paid in India on his income.
Rahul Chaudhary
(Expert) 04 October 2010
I believe Mr. Shrinivas is right.
Since the US Professional is tax resident for the purpose of the Income tax Act, provisions of 194J and not 195 would apply as the payment would be made by the Indian company to a person resident in India and not to a non-resient.
Accordingly tax at the prescribed rate would need to be deducted, either at the time of payment or Credit whichever is earlier.
Please note, tax is to be deducted from "sum paid" as opposed to "income".
It is a unique situation. For the purpose of determining the taxability of income
the US Professional would be trated as a non-resident as per Article 4 of the Indo-Us DTAA. However, for the purpose of determining the obligation of Indian company to deduct TDS and the proceedure to be followed for this purpose,the payment made to US Professional would be trated as payment to a resident as his stay in India during the relevant financial year exceeds 181 days as per Section 6 read with Section 194J of the Income Tax Act.
I would request Mr. Srinivas and Mr. Ramachandran to extend thier views on this so that this query can be closed. Thanks in advance.
R.Ramachandran
(Expert) 05 October 2010
Prior to the US citizen completing the threshold number of days stay in India, nobody knows really whether he would become 'resident' by operation of Section 6 of the Income Tax Act. As such, the person making the payment to such a US Citizen would be required to deduct TDS in terms of Section 195.
However, the moment the person crosses the threshold number of days stay in India making him a 'resident', then the TDS has to be deducted in terms of Section 194J.
Since at present both under Sec. 195 and 194J the rate of TDS is 10%, it would not make much of a difference.
Having said the above general provisions, since there is DTAA between India and US it is also important to know the following details:
(1) Whether the US citizen is alone in India or his family also resides in India. In case the family is residing in US, then he would be having permanent establishment in US and by operation of tie-breaker rule, he will be subjected to US Tax laws. But being a 'resident' by virtue of Sec. 6 he would also be liable to tax in India. Ofcourse, due to the provisios of DTAA, he would be able to take credit of whatever tax he paid in India, on the basis of the certificate grantedby the Income Tax Department.
(2) It is presumed that the 'Consultancy' in question is independent personal service (covered under Article 15 of the Indo-US DTAA) rendered by the US Citizen.
