In respect of foreign payments, TDS u/s. 195 is quite a grey area of the Indian Income Tax Act (act). Every payment to a non resident is not liable for TDS u/s. 195. A decision as to the coverage of any payment u/s. 195 requires determination about taxability of income in the hands of NR recipient- not only from the angle of the act but also from the perspective of Double Taxation Avoidance Agreement (DTAA).
Taxability of an income in India in terms of DTAA depends upon the classification of income under the right clause of DTAA. In this regards, one finds that the scheme of classification of income in DTAAs is quite different from that is given in the Income Tax Act. One such important classification is with respect to payment for professional services. While in case of payment to a resident, all professional services related payments get classified u/s. 194J of the act for TDS purposes, in DTAA such payments may get classified as Fees for Technical Services or Business Income or Independent Personal services (IPS).
If a payment gets classified as Fees for Technical Services, almost all DTAAs of India allows the taxability of income in India, requiring thereby a TDS by the payer entity. However, if it is a payment for Independent Personal services, then it is taxable in India only in very limited cases and as such in majority of cases, payer does not have a liability of TDS. This difference in tax treatment makes it imperative to understand in detail the concept of Independent Personal services (IPS) as obtained in DTAAs.
Normally in a DTAA, the clause of IPS applies in respect of a service provider who is an individual (or in some cases firm of individuals-other than a company) and for the services which are in the nature of “professional services or other independent activities of a similar character”. “Professional services” here includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
Regarding taxability of fees for IPS in the hands of NR in India, it is provided in almost all DTAAs that such income shall be taxable only in the country of residence of receiver and shall be taxable in India only in following 2 situations :
If the case is not covered in any of the above 2 situations, the income is not taxable in India and accordingly no TDS is required u/s. 195.
For example one may consider the case of a US university professor, Mr. Levin who is a resident of USA and has been engaged by an Indian educational institute for conducting some classes in India for 10 days. The question is whether honorarium paid to him is liable for TDS u/s. 195. One may note that the services provided by Mr. Levin are covered by “Independent Personal services” clause of DTAA. He does not have any fixed base available to him in India for providing his services and he is also not in India for more than 90 days. Accordingly as per Indo US DTAA, his remuneration / honorarium is taxable only in US and not in India. As such no TDS in India is applicable in this case.
Similar would be the case for a lawyer or an architect engaged in his individual capacity for providing services in India.
In a recent case of DCIT (International Taxation) Vs. Hydrosult Inc., tax payer had been awarded contract by Chhattisgarh Government for providing consultancy services under the Chhattisgarh Irrigation Development Project. It has paid consultancy fees to several independent professionals of foreign origin, hired for technical services related with the project. The assessing officer objected to these payments on the ground of non deduction of TDS. Ahmadabad Tribunal finally ruled in the favor of taxpayer mentioning that these payments were in the nature of fees for Independent Personal services and hence taxable only in the country of residence of the receiver. For coming to the conclusion, the tribunal examined the agreement between the consultants and the tax payer in great details and held the services performed in terms of the agreement to be of independent nature.
It is important to note that in almost all the DTAAs, the above concept of Independent Personal services is applicable only when the service provider is an individual (some DTAAs apply this concept to partnerships also). However, if the Non resident entity is a company, then it is not a case of Independent Personal services but a Fees for Technical Services or Business Income, depending upon the facts of the case. In such case there are different parameters to decide taxability or otherwise of Income in India.
Further, for claiming the benefits of DTAA, requirements of Sec. 90(4) – a tax residency certificate from the country of residence of the receiver and of Sec. 90(5) read with rule 21AB- furnishing declaration by NR in form 10F, are also required to be complied with.
Thus, if the payment is being made to a non resident individual and services of NR are in the nature of Independent Personal Services, then (subject to compliance with the requirements of DTAA and of Sec. 90 of the Act) such income is not taxable in India and as such no TDS u/s. 195 is warranted from such payment.
A Note of Caution
Rules of DTAAs differ from country to country and DTAA with a specific country may have a separate rule regarding taxability of income discussed above. Any decision regarding taxability or otherwise of income in the hands of NR must be taken after careful study of DTAA with the country of residence of NR payee. This article does not constitute a legal opinion and is written only for generating a basic awareness about the concept of Independent Personal Services.
(The author can be reached at [email protected] or on +91 98260 46463 for any queries)