Paying Technical Fees or Royalty Outside India: Why Non-Resident Requires PAN for claiming DTAA Benefits?

In case we are making a payment of Fees for Technical Service (FTS) or Royalty to a Non-Resident outside India, the same comes under the ambit of TDS provisions of the Income Tax Act. As per Section 115A, a 20% tax is applicable in case a non-resident or a foreign company receives any income by way of royalties or fees for technical services. A surcharge ranging from 2-5% is applicable to this amount, depending on the amount of payment. Also, cess amounting to 4% is Further Added. So the Effective TDS Rate will be as follows:

Form 15CA Part-A is required in case the total payment in a Financial Year is up to Rs. 500,000. Form 15CA Part-C, along with Form 15CB, is required in case the total payment in a Financial Year exceeds Rs. 500,000.

Concept of Grossing up

In many cases, the Non-Resident is not willing to Deduct TDS, but we need the services so we can make the payment and follow the Grossing up concept for booking the expense and TDS Amount.

For Example, the cost of FTS is USD 100000. Here, our Expense will be USD 127942.68 [USD 100000/(100%-21.84%)] and TDS will be 27942.68 [USD 127942.68 X 21.84%]

Documents/Information required from Non-Resident not having PAN [Section 206AA read with Rule rule 37BC read with Section 115A]

• Name, e-mail ID, contact number;
• Address in the country or specified territory outside India of which the deductee is a resident;
• A certificate of Deductee being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate; [TRC]
• Tax Identification Number of the deductee in the country or specified territory of his residence, and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.
• No-PE Declaration from Non-Resident

If this information is not available, then the Maximum Marginal Tax Rate should apply as per Section 206AA.

Also Refer: TDS on Purchase of Property from NRI

TDS Rates on Technical Fees or Royalty as per DTAA

TDS Rates on Technical Fees or Royalty are lower in Double Tax Avoidance Agreements with various countries in comparison with those of the Income Tax Act. For Example, withholding Tax on Royalty or FTS as per India-Singapore DTAA is 10%, India-US DTAA and India-UK DTAA is 15%.

Naturally, businesses will be interested in opting for Lower Tax Rates as per DTAA, as the same will reduce the cost.

Documents required for getting DTAA Benefit [Section 90 read with Rule 21AB]

• A certificate of Deductee being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate; [Tax Residency Certificate or TRC]
• Form 10F
• No-PE Declaration.

Why is PAN Required?

As per Section 115A(5), it shall not be necessary for a non-resident or a foreign company having only Income of Technical Fees or Royalty in India to furnish an Income Tax Return if TDS, as per the Tax Rates given in Section 115A (Given in above Chart 1), has been deducted. Also, filing of Income Tax Return is the responsibility of the Non-Resident, but it can be understood that no Return can be filed if the Deductee does not have a PAN.

Therefore, if we make a harmonious interpretation of Section 90 read with Rule 21AB and Section 115A(5), the following Documents are required for getting DTAA Benefit:

• Tax Residency Certificate
• Form 10F
• No-PE Declaration
• PAN

This article is the views and interpretation of CA Pratibha Goyal. She can be reached at pratibha_goyal@hotmail.com