Introduction
In today’s globalised business landscape, Indian entities often engage foreign service providers for design, consultancy, marketing, technology, and support services. However, many compliance complications arise when payments are made to countries without a Double Taxation Avoidance Agreement (DTAA) with India. This post provides a legally exhaustive guide on how to deal with such payments — with clear interpretation of Section 195, judicial positions, practical procedures, and a global list of commonly dealt-with countries vis-à-vis DTAA status.
What the Law Says: Section 195 of the Income-tax Act, 1961
Section 195(1) – The Charging and Withholding Provision
“Any person responsible for paying to a non-resident… any interest… or any other sum chargeable under the provisions of this Act… shall, at the time of credit… or payment thereof… deduct income-tax thereon at the rates in force…”
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The obligation to deduct TDS arises only if the amount is “chargeable under the Act”.
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However, in absence of DTAA, you cannot claim a beneficial lower rate, and must deduct as per domestic rate.
When DTAA Exists – The Relief Framework
Where a DTAA exists (e.g., India–USA, India–UK), non-residents can claim a lower withholding rate if:
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The income is classified under specific articles like "Fees for Technical Services" (FTS) or "Independent Personal Services".
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The non-resident provides Tax Residency Certificate (TRC) and Form 10F along with no PE (Permanent Establishment) declaration, if applicable.
Such treaties override the Act under Section 90(2).
When No DTAA Exists – What to Do
If India does not have a DTAA with the country of the non-resident, the following rules apply:
a. Full TDS Deduction under Section 195
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TDS must be deducted as per domestic rates.
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No concessional treaty rates are available.
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Deduction is compulsory, regardless of amount, if sum is chargeable under the Act.
b. No Treaty Shield: Risk of Double Taxation
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In absence of DTAA, the foreign party cannot claim credit in their home country unless their local law allows for unilateral relief.
c. Rate of TDS
As per Section 115A, for services like design, consultancy, and technical services:
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TDS is 10% (plus applicable surcharge and cess).
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If PAN is not provided, Section 206AA mandates 20%.
d. Form 15CA/15CB Required
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Even in low-value transactions, Form 15CB by a Chartered Accountant is mandatory in most cases.
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Form 15CA (Part C) must be uploaded before remittance.
Interpretation by Courts: The Chargeability Principle
The Hon’ble Supreme Court in GE India Technology Centre Pvt Ltd vs CIT [(2010) 327 ITR 456 (SC)] held:
TDS under Section 195 is only required when the sum is chargeable to tax in India.
Therefore, examine whether the foreign party has a business connection or permanent establishment (PE) in India, and whether the service qualifies as taxable FTS under Explanation 2 to Section 9(1)(vii).
Common Services and TDS Implications (With or Without DTAA)
| Nature of Service | Taxable u/s 9(1)(vii) | DTAA Required | TDS in Absence of DTAA |
|---|---|---|---|
| Logo Design from Nigeria | Yes – falls under FTS | No DTAA with India | 10% under 115A + cess |
| Business Consultancy from Kenya | Yes – consultancy service | No DTAA with India | 10% under 115A + cess |
| Software License from Colombia | Yes – Royalty/FTS | No DTAA with India | 10% or higher |
| Training from USA | Yes – if technical | Yes – DTAA exists | 15% or lower (Art. 12) |
| Cloud Hosting from UAE | Usually not taxable | Yes – DTAA exists | Nil (if no PE in India) |
List of Key Countries and DTAA Status with India
| Country | DTAA with India? | Remittance Planning Note |
|---|---|---|
| USA | ✅ Yes | Art. 12 FTS – TDS @15%, TRC + 10F needed |
| UK | ✅ Yes | FTS taxable, TRC + PE clause important |
| Nigeria | ❌ No | Full 10%+ TDS u/s 195, no DTAA benefit |
| Kenya | ❌ No | Apply domestic rate, mandatory 15CA/15CB |
| Colombia | ❌ No | Royalty/FTS – 10%+ TDS |
| UAE | ✅ Yes | Check PE and business connection – may be tax-exempt |
| Germany | ✅ Yes | Art. 12 – FTS/royalty taxable unless excluded |
| Bangladesh | ✅ Yes | FTS taxable – rate as per DTAA |
| Hong Kong | ✅ Yes | Limited scope – check if service covered |
| Argentina | ❌ No | Domestic law TDS – full deduction |
What if You Fail to Deduct TDS?
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Disallowance under Section 40(a)(i): Entire expense can be disallowed while computing taxable income.
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Interest under Section 201(1A): For late deduction/payment of TDS.
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Penalty u/s 271C: For failure to deduct TDS.
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Prosecution under Section 276B: In extreme cases.
Best Practice Strategy in Absence of DTAA
✅ Step 1: Examine if the income is taxable in India under Section 9(1)(vii)
✅ Step 2: Verify if any exemption applies (no PE, business connection)
✅ Step 3: Collect basic documents from the payee:
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Invoice
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Passport copy
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Communication trail
✅ Step 4: Obtain Form 15CB and file Form 15CA (Part C)
✅ Step 5: Deduct TDS at 10% + cess or higher (if no PAN – 20%)
✅ Step 6: File TDS return and issue Form 16A
Conclusion
When no DTAA exists, Section 195 and Section 9 become your only guides — and their interpretation determines whether TDS applies. For services like logo design, consultancy, technical services, and digital services, taxability under Indian law is often assumed. In such cases, deducting TDS without fail is the safest approach, supported by proper documentation and Form 15CA/15CB filing.
For Indian businesses, proactive planning, maintaining compliance records, and understanding DTAA status country-wise is not just good practice — it is essential risk management.
