Should There Be TDS On Payment Made By Indian Company’s Branch Office in USA to USA Based Consultant?

One of our client having its base at NOIDA and registered under STPI and accordingly claiming deduction u/s 10A of income tax act, 1961. The client is having a branch at USA. USA branch had paid some professional and consultancy charges there. Do the head office at India (NOIDA) needs to deduct TDS\withholding tax on such payments made by USA branch. please clarify the exact situation. Vinod Gupta , Delhi

The answer to such question require elaborate facts about payer,nature of payment and payee. I am afarid little facts are only given in the question . Therefore, the opinion should be considered based on the facts

The tax under the I T Act is to be deducted at source if the payment on which tax is to be deducted is taxable under I T Act. Therefore, moot point to see that whether the payments made by the USA branch of Indian company is taxable under I T Act .

Therefore, if payment is payable by Indian Resident ,for the services received by the USA branch is for earning or for business carried out (which is assumed as the company is STPI registered & claiming 10 A exemption ) , same is not considered arising in India for the purpose of I T Act. As such the payment made is not taxable in India. For that reason , there cannot question of TDS on such payments.

Remember , if the services rendered by the USA based residents , event though arranged by USA branch and paid by USA branch itself, if utilized by Indian company for earning income or business carried out in India, the payment shall be considered “deemed to arise in India” and for that TDS is a must u/s 195 of the I T Act. The controversy regarding PE is no more there as the I T Act has been amended to include an Explanation 2 below sub-section(vii) of section 2 by which for technical or professional fees, Permanent Establishment of a foreign party is not a necessity for treatment of payments as income under I T Act .

So, check your facts properly , before reaching a conclusion. In this regard , read the Circular 786 of 7/2/2000 which is reproduced below :

“In the Audit Report for 1997-98 (D P No 79(I.T.) The Comptroller & Auditor General (C&AG) raised an objection that the Assessing Officer in computing the Profits and Gains of Business or Profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C&AG the expenditure should have been disallowed in accordance with the provisions of
section 40(a)(i) of the Income-tax Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.
The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No 23 dated 23.7.1969 is drawn, where the tax ability of ‘Foreign Agents of Indian Exporters” was considered alongwith certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No 23 shall prevails. No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller & Auditor General have agreed to drop the objection referred to above.”