TDS on Cross-Border Services: Key Triggers and Exemptions

A Definitive Guide for Indian Businesses Dealing with Non-Resident Consultants

Introduction

As Indian businesses scale globally, cross-border engagements with international consultants, experts, and legal advisors are routine. However, such transactions attract Section 195 TDS obligations under Indian Income-tax law—only if the payment is chargeable to tax in India.

This article decodes:

• When TDS under Section 195 is triggered,

• When no TDS is required (non-taxable payments),

• How to lawfully reduce tax burden using DTAA benefits, and

• Tips to structure contracts and avoid disallowance.

 Legal Foundation: Section 195 and Chargeability

Section 195(1) - Statutory Provision

“Any person responsible for paying to a non-resident… any sum chargeable under the provisions of this Act… shall deduct income-tax thereon at the time of payment or credit, whichever is earlier.”

Thus, TDS applies only when:

• The sum is chargeable to tax under the Income Tax Act, and

• No exemption is available under the applicable DTAA.

When Payment is NOT Taxable in India (No TDS Required)

Case	Why No Taxability?	Supporting Law / Interpretation
💼 Consulting without “make available”	Pure advisory; no technical know-how imparted	DTAA (e.g., Article 12 of India-US DTAA)
🌐 Services rendered outside India, used outside India	No business connection or income source in India	Section 9(1)(vii) + SC in Ishikawajma-Harima
🛠️ No Permanent Establishment (PE) in India	Business income not taxable if no PE exists	Article 7 of DTAAs
🗂️ Reimbursement of actual cost without markup	No income element	CBDT Circular No. 715 (Q30)
📄 TRC + 10F + No “make available”	DTAA applies; income not taxable in India	Section 90(2), Rule 21AB

Case Reference: Ishikawajma-Harima Heavy Industries Ltd. v. DIT

[(2007) 288 ITR 408 (SC)]:
When service is performed and utilized outside India, Section 9(1)(vii) does not deem it to accrue or arise in India.

Strategic Tax Planning Tips

✅ 1. Avail DTAA Benefits Smartly

• Use Form 10F, Tax Residency Certificate (TRC), and self-declaration to claim treaty protection

• For example: India-US DTAA allows 10% TDS on FTS, only if “make available” is satisfied

✅ 2. Use Grossing-Up Clause Wisely

• When Indian payer bears tax, grossing up under Section 195A ensures correct TDS deduction

✅ 3. Get Advance Clearance

• Apply for a Section 195(2) certificate from AO to determine portion chargeable to tax

✅ 4. Treat Reimbursements Carefully

• Ensure documentary proof of actual cost with no markup to avoid taxability

✅ 5. Draft Service Agreements Cautiously

• Avoid technical phrases implying transfer of know-how unless intended

• Keep advisory scope clearly stated as non-technical

Critical Sections and Interpretation

Section / Clause	Provision Summary	Interpretation
Section 195	TDS on sum chargeable to tax	Only if income is taxable under the Act
Section 9(1)(vii)	FTS used in India = taxable	Services used in India = deemed accrual
Section 40(a)(i)	Disallowance for non-TDS	Expense disallowed if TDS not deducted
Section 90(2)	DTAA override	Assessee can choose more beneficial DTAA provisions
Rule 37BB	Form 15CA/15CB	Mandatory for foreign remittances
Rule 21AB	TRC and Form 10F	Required for DTAA benefits

Real-World Case Scenarios

Scenario	Outcome	Reason
🇬🇧 UK-based consultant for strategy	❌ No TDS	Pure advisory, no “make available”
🇺🇸 US IT expert implementing & training ERP	✅ TDS at 10%	“Make available” satisfied
🇸🇬 Singapore lawyer for M&A advisory	❌ No TDS	No technical service, used outside India
🇩🇪 Reimbursement to German company for airfare	❌ No TDS	No income component, backed by proof
🇨🇦 Training from Canada, no TRC provided	✅ TDS at 20%	No DTAA benefit allowed

Structuring Tips to Avoid Disallowance or Penalty

Stage	Action	Purpose
Before Agreement	Define service scope, tax clause	Clarify tax liability
Before Remittance	Check DTAA, collect TRC + Form 10F	Apply beneficial rate
At Payment Time	Deduct TDS if applicable	Avoid 40(a)(i) disallowance
Post Payment	File 15CA / 15CB; report in 27Q	Avoid penalty under Rule 37BB
Annual Audit	Keep agreement, communication, TRC	Documentation for tax audit

 TDS Rate Matrix – Domestic Law vs. DTAA

Country	Domestic Rate	DTAA Rate	“Make Available” Condition?
USA	20%	10-15%	✅ Yes
UK	20%	10%	✅ Yes
Canada	20%	15%	✅ Yes
Singapore	20%	10%	❌ No
Germany	20%	10%	✅ Yes

Note: Always compare both rates and choose the lower under Section 90(2)

Final Checklist: Comply Without Defaults

✅ Item	Description
TRC + Form 10F	Required for DTAA benefits
Review Service Nature	Apply “make available” test
Agreement Language	Clearly classify advisory vs technical
Apply for 195(2) Cert.	In case of ambiguity
Deduct TDS Correctly	At DTAA or Act rate
File Form 15CA/15CB	Before remittance
Report in Form 27Q	Quarterly TDS return

Conclusion: Proactive Structuring = Tax Efficiency + Compliance

Section 195 is not just about deduction—it’s about right deduction, and sometimes no deduction at all, when legally justified.

Poor structuring or blind deduction leads to:

• Disallowed expenses

• Interest and penalty

• Loss of reputation during audits

But with correct classification, use of DTAA, and smart documentation, businesses can ensure:

• Tax optimization

• Regulatory compliance

• Peace of mind during scrutiny

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