Should Technical Fee Paid to Non Resident Suffer Tax At Source?

Your company has Non Resident status and has no permanent establishment in India and basically giving technical services to Indian company. So , first it is to be seen if the payment made to you for the services provided by you to Indian company is taxable in India and if it is ,then TDS is applicable.

the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which

• (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
• (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Income deemed to accrue or arise is given in section 9 of the I T Act. The said section 9 , under subsection 1 (vii) contains provision regarding the “technical fees” in following words

(vii) income by way of fees for technical services payable by

(a) ……………..or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

Therefore , any technical fees paid by a Resident to a Non Resident is income deemed to accrue or arise in India.From assessment year 2007-08, technical fees is taxable in India for a Non Resident even if there is no Permanent Establishment of that non resident in India. The Explanation given in section 9 of the I T Act effective from 1/4/2008 is as follows:

Explanation.For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.

Hence , as per section 5(2) , Non resident in case of such deemed income is chargeable to tax under the I T Act. If it is taxable under I T Act, TDS provision is applicable. Section 195 therefore compels Resident to deduct the tax before making any payment to non resident.Hence, your client in India has to deduct tax at source.

What are the relief from such taxation?
First of all ,you should know that the TDS rate 15% being applied by your client is as per Double Taxation Avoidance Agreement signed between India and USA. Under the same agreement, Article 25 states that the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income the income-tax paid to India by or on behalf of such citizen or resident . Therefore , whatever tax is paid by you or deducted by your client can be taken of credit when your income is being taxed in United States.

Secondly, if you feel that the tax is being deducted at a higher rate than what should be your client can make an application before Assessing Officer to allow it to deduct the tax at lower rate. However ,in my opinion, tax rate @ 15 % is already lower rate.

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