Pawan Sehrawat (CA, CS)

Under Income tax as per explanation 2 to section 9(1)(vii), legal service is considered as fee for technical service.

Explanation 2 u/s 9(1)(vii) says “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

Legal fees is deemed to accrue or arise in India, whether or not non-resident has place of business in india or has rendered services in India.

Explanation to section 9 says, “For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,—

(i)  the non-resident has a residence or place of business or business connection in India; or

(ii)  the non-resident has rendered services in India.

TDS rate under IT Act is 25% [as per section 115A(B)].

India has entered into tax treaty with several countries which contain clauses for less withholding tax or no withholding tax rate. Assessee has option to use lower withholding rate (lower of IT rate or DTAA rate).

Section 90(2) says “Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”

To get the benefit of tax treaties, non-resident has to share Tax Residency Certificate. Otherwise normal IT rate shall apply.

Section 90(4) says “An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless 60b[a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”

Further, besides having TRC, non-resident should have PAN no. otherwise tax rate as per section 206AA will apply. As this section contains non-obstante clause.

Section 206AA(1) says, “Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—

(i)  at the rate specified in the relevant provision of this Act; or

(ii)  at the rate or rates in force; or

(iii) at the rate of twenty per cent”

Lets understand with the help of an example:

Example 1

Mr. X of USA/UK provided some legal service from there only, to client in India. Now as per USA/UK treaties with India, rate is NIL.

Hence, Withholding tax rate will be.

  • If he has PAN & TRC, NIL tax.
  • If he has PAN only, tax rate shall be as per IT Act i.e. 25%. Since he can’t take benefit of tax treaty.
  • If he has only TRC, tax rate shall be higher of 20% or above 25%.

Note: 25% tds rate shall be increased by applicable SC, EC & SHEC.

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Posted Under

Category : Income Tax (26759)
Type : Articles (16251)
Tags : Legal Services (42) section 195 (143) TDS (980) TRC (6) Withholding tax (56)

28 responses to “TDS on legal service received from outside India”

  1. Jamie Benson says:

    The above analysis is incorrect. Legal services are not technical services but professional services. Please see the summary of the decision of the Income Tax Appellate Tribunal in ADIT V. Clifford Chance, where it was held that income of non-resident law firms would be taxable in India only to the extent attributable to services performed in India:

    http://www.pwc.co.uk/assets/pdf/foreign-law-firms-providing-services-in-india-june2013.pdf

    Please correct the answer to reflect the law as noted in the case cited above.

  2. Jitu says:

    on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax – See more at: https://taxguru.in/income-tax/tds-legal-service-received-india.html#disqus_threadtechnical service.thanks for information .

  3. Mohit says:

    An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless 60b[a certificate of his being a resident] in any country outside India – See more at: https://taxguru.in/income-tax/tds-legal-service-received-india.html#disqus_thread
    outside IndiaI hope it reaches your targetted audience.

  4. sameer says:

    What will be the rate for F.Y. 2015-16 of TDS in the following situation :-
    Type of Payment :- Fees for Tooling charges.
    1) NO TRC is provided
    2) No PAN
    3) There is no Permanent Establishment
    Kindly suggest. –

  5. sameer says:

    What will be be rate of TDS in the following situation :-
    Type of Payment :- Fees for Tooling charges.
    1) NO TRC is provided
    2) No PAN
    3) There is no Permanent Establishment
    Kindly suggest.

  6. ashwin says:

    I am taking IP consultancy from Oman ,that firm dose all my IP work for various countries. I make the payment. Since all services are provided outof India, is any TDS is applicable.Pl advise

  7. Rajagopal says:

    We need to pay Service amount to our Foreign supplier against Technical services provided in US… who does not have any business establishment or having PAN etc., in India kindly suggest that TDS or Service Tax involved in this..?

  8. Jitendra Agrawal says:

    what is the rate of tax in such situation?

    Payment has to made NR for technical services provided in India.
    NR don’t Have PAN and TRC.
    NR is concerned with Thailand.
    What is the Rate of TDS ?

  9. CA B S Sridhar says:

    Dear Sir

    What will be be rate of TDS in the following situation :-

    Type of Payment :- Fees for Technical services.

    1) NO TRC is provided
    2) No PAN
    3) There is no Permanent Establishment

    Kindly suggest.

  10. Gaurav bajaj says:

    Srinivasan post is absolutely correct on 12 the Feb is 100% correct as TDs provision is mechanical in nature . if as per DTAA nil tax and there is no pan but TRC and form 10 f than sec 206 A will not be applicable.

  11. pa says:

    Dear S.Srinivasan:
    On you below question
    ((((Once a person has a TRC, and you have a DTAA with the other country, the rate should be the lower of our rate or as per DTAA. the applicability of section 206AA should not be there,( in spite of the word “Notwithstanding anything contained in the act ” as the opening word of the section) as it it clear that the other person is not a resident of India at all.))))

    I also agree with you. But Tax deptt. will take stand with gives them more revenue. Its a normal practice to be a bit conservative, in case you don’t have full clarity. I have put my views to avoid any litigation.

    Final call is yours.

    Thanks & Regards
    Pawan Sehrawat

  12. Pawan Sehrawat says:

    Dear Anuj Gupta,
    Referring to your question below:
    ((((It is mentioned in the article that “as per USA/UK treaties with India, rate is NIL”. I beg to differ as the rate as per US/UK DTAA’s is not NIL but 15%, although there is concept of “Make Available” under UK/US Treaties which,if applicable ,can make the TDS rate NIL, however interpretation of “NIL” TDS for all legal fees payments may not be correct in all the situations.

    According to me ,Withholding tax rate will be.

    If Foreign Entity has TRC, 15% or NIL tax(as the case may be).
    If Foreign Entity has PAN only, tax rate shall be as per IT Act i.e. 25%.
    If Foreign Entity has only TRC, tax rate shall be 20% .))))

    I have just used one simple example of Individual to explain the tds implication. Tax rates will surely change from case to case.

    Regards
    Pawan Sehrawat

  13. Sandeep says:

    Mr. Anuj Gupta,

    Please check your post since no difference between condition 1 and condition 3 but you have specified different tax treatements??

  14. CA. Anuj Gupta says:

    It is mentioned in the article that “as per USA/UK treaties with India, rate is NIL”. I beg to differ as the rate as per US/UK DTAA’s is not NIL but 15%, although there is concept of “Make Available” under UK/US Treaties which,if applicable ,can make the TDS rate NIL, however interpretation of “NIL” TDS for all legal fees payments may not be correct in all the situations.

    According to me ,Withholding tax rate will be.

    If Foreign Entity has TRC, 15% or NIL tax(as the case may be).
    If Foreign Entity has PAN only, tax rate shall be as per IT Act i.e. 25%.
    If Foreign Entity has only TRC, tax rate shall be 20% .

  15. Ravi Kiran R says:

    In the example, third proposition is not clear; If the recipent of technical services provides TRC and does not have a PAN in India then, rate of witholding tax should be 20% (Sec. 206AA) or Nil (DTAA) whichever is higher; why do you say it is higher of 20% or 25%?

    25% u/s 115A(B) would apply only when TRC is not available right?

  16. Pawan says:

    What will be rate of TDS in case of “Modeling Services” received.

  17. Sandeep Srivastava says:

    Two things are not clear in the Example 1 –

    First why tax rate is NIL under US/UK DTAA on legal services provided from there only. Would this not be considered as Technical services as per Article 12 of US DTAA?

    Second why in case of NIL tax under DTAA why there is a requirement of both PAN and TRC. Will section 206AA apply at all when matter is covered by a DTAA? Especially since PAN number will not be required to be declared at any time as the TDS is NIL?

    Please do clarify in more detail.

    Many thanks.

  18. sudarshan says:

    lawyers service may come under independent personal services also

  19. Srinivasan says:

    In the case of legal services the same may fall under independent personal services under the DTAA, In few cases not only the individual even Firm of lawyers are covered under the DTAA. In such cases if the payee shares withh the TRC then the DTAA benefit has to be extended to them.

    Therefore, i feel that provisions of 206AA cannot be triggered in such cases even in the absence of PAN.

  20. Jaideep Sehrawat says:

    Dear Sunil,
    Rate will remain same (as applicable), just need to do backup calculation to determine the amount of withholding tax.

    Jaideep Sehrawat
    M.Com, LLB

  21. Bhamini G S says:

    In the example, in my view, in the case where the non-resident has only TRC then the TDS would be NIL (DTAA benefit). So there is no need to apply Sec 206AA. Can this interpretation be taken?

  22. KKSHAH says:

    I think PAN is required only if tax is payable since they are getting benefit of DTAA hence not liable for any tax & thier PAN is not required

  23. Rachana says:

    Applicable rate shall be 34.68% presuming payment to non resident does not exceed Rs.1crore

  24. s.srinivasan says:

    Sir
    Once a person has a TRC, and you have a DTAA with the other country, the rate should be the lower of our rate or as per DTAA. the applicability of section 206AA should not be there,( in spite of the word “Notwithstanding anything contained in the act ” as the opening word of the section) as it it clear that the other person is not a resident of India at all.
    regards
    srinivasan

  25. k gopalan says:

    if the person requiring the legal services is a resident individual and does not have a TAN number, there is a problem in uploading the tds. Consequently, there is a problem for the A,D, to make the remittance to the overseas service provider. This requires to be addressed.

    • Sandeep says:

      Mr. Gopalan,

      You are talking of two seperate things – for purpose of remittance form 15BC is required to be filled online – this requires either PAN or TAN,therefore even in case TAN is not available PAN can be used.
      TAN wil be required if TDS is deducted, remittance made and then TDS return has to be submitted.

      • k gopalan says:

        Mr Sandeep
        Thank you for your message. In case this is a one of transaction and the overseas service provider insists on a fee amount which is net of taxes, then the Indian client who is s resident individual has to gross up and pay TDS. While filling up and uploading form 15 BC. the Indian resident who is the remitter seems to need TAN. If he does not have a TAN what should he do.
        For a solitary transaction like this it seems too much trouble to apply for a TAN. Form 15BC may not accept PAN in lieu of TAN.

  26. sunil Bhageria says:

    What will be TDS rate if the TDS is to be paid by service receiver by Grossing up the amount in all different conditions mentioned above like non availability of TRC or PAN etc.

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