By CA Surekha S Ahuja
"Global income is taxable, but structured compliance transforms complexity into efficiency — every foreign fee has its pathway and precautions."
Introduction
Resident directors of Indian companies or professionals may also provide services to foreign entities, ranging from consultancy and advisory to board-level decision-making. While globally lucrative, such payments trigger Indian tax, FEMA, and DTAA obligations.
Key challenges include:
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Tax classification: Distinguishing director fees vs professional consultancy
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Foreign Tax Credit (FTC) under DTAA or Section 91
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FEMA and remittance compliance for inward and outward payments
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Schedule FA disclosure to avoid penalties
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TDS compliance on cross-border payments
This article provides a comprehensive, analytical, 360° guide on handling such foreign payments for resident directors, with all ifs, buts, and triggers, ensuring fully defensible tax planning.
Taxation of Fees from Foreign Companies
Income Classification
| Nature of Payment | Income Head (Resident) | Notes / Analysis |
|---|---|---|
| Director Fees / Sitting Fees | PGBP (Profits & Gains from Business or Profession) | Active service rendered; treated as business income. 44ADA not generally allowed unless services are purely professional, not governance |
| Professional Consultancy Fees | PGBP | Separate from director role; must be supported by clear contracts |
| Commission linked to profits of foreign company | PGBP / Salary | Fact-based; if director is employed, may attract salary classification in India |
Insight: Indian tax authorities analyze substance over form. A foreign “consultancy fee” can be treated as director remuneration if role overlaps with management.
TDS Considerations
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Foreign payer: Indian TDS under Section 195 applies only if payment is routed via India.
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Foreign-sourced fees received directly abroad: No Indian TDS, but income must be reported in ITR-3 under PGBP, along with Schedule FA for foreign assets and income.
Key Trigger:
Misreporting foreign director fees can invoke Section 271FA penalty of ₹10 lakh per omission.
DTAA and Foreign Tax Credit (FTC)
Resident directors can claim FTC for taxes withheld abroad, reducing double taxation.
| Parameter | Detail | Practical Insight |
|---|---|---|
| Applicable Law | DTAA (specific country) or Section 91 | FTC is capped at Indian tax on that income |
| TDS Rate | Country-specific (5-30%) | Reduced by treaty rate; claimable via Form 67 |
| Documentation | TRC (Tax Residency Certificate) + Form 10F | Mandatory to claim DTAA benefits; apostille recommended if foreign authority requires |
Analytical Note: Indian courts consistently uphold FTC claims only if TRC and Form 10F are provided. Absence of documentation → 20-40% statutory TDS risk.
FEMA & Remittance Compliance
Payments from foreign companies involve foreign exchange rules, including Form 15CA/15CB for remittances exceeding ₹5 lakh:
| Document | Purpose | Responsibility |
|---|---|---|
| Form 10F | DTAA residency proof | Director / Service provider |
| TRC | Treaty benefits | Foreign tax authority |
| Form 15CB | CA certification of taxability | Indian payer |
| Form 15CA (Part C) | Remittance declaration | Indian payer |
| Service Contract | Proof of consultancy / director service | Both parties |
| BO Declaration | Prevent conduit claims | Service provider |
| Bank Details | Facilitate net remittance | Foreign entity |
Insight: Proper compliance ensures DTAA rate TDS deduction, avoids statutory 20-40% TDS, and guarantees credit in India.
Structuring Professional Fees vs Director Fees
Pure Professional Fees
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Eligibility: Specified professions under 44AA(h) – CA, CS, lawyer, doctor, technical consultancy.
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Presumptive Scheme: 44ADA – 50% deemed profit; effective tax 15–20% after FTC/TDS.
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Safeguard: Avoid referencing directorship in invoices, contracts, or communications.
Director Fees from Foreign Company
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Classified under PGBP.
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No 44ADA presumptive benefit, unless role is fully independent and not governance-linked.
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TDS: If remittance is routed via India, Section 195 applies.
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Schedule FA disclosure: Mandatory; omission penalized under 271FA.
Professional Insight: Structuring consultancy outside of director role can optimize tax to 15–20%, compared with 30%+ if incorrectly classified.
Triggers and Caution Points (All “Ifs & Buts”)
| Trigger / Scenario | Section / Law | Consequence | Mitigation / Best Practice |
|---|---|---|---|
| Director role referenced in invoice | 194J(1)(ba) / PGBP | Disallowance, audit query | Separate consultancy agreement; avoid board references |
| Payment routed via India, no 195 compliance | 195 | Statutory TDS 20-40% | Form 15CA + 15CB compliance |
| Missing TRC/Form 10F | DTAA claim | FTC denied, higher effective tax | Obtain upfront, apostilled if required |
| Foreign service rendered in India >60 days | PE risk u/s 9(1)(i), Art 5 DTAA | Income may be taxable as branch profit | Keep services outside India |
| Mixed professional + governance service | 28(va) vs 194J(1)(ba) conflict | Audit addition, TDS dispute | Clearly segregate roles |
| FA omission | 271FA | ₹10 lakh penalty | Mandatory annual Schedule FA disclosure |
Insight: The risk matrix is amplified if multiple triggers coincide. Professional structuring mitigates CASS risk, audit scrutiny, and excessive tax exposure.
Analytical Tax Comparison
| Scenario | Effective Rate | Key Observations |
|---|---|---|
| Pure Professional Fee (foreign client) – 44ADA | ~15–20% | Post-FTC and 50% presumptive profit; safe if role segregated |
| Director Fee (foreign company) | ~30% | Full slab; no presumptive scheme; FA disclosure mandatory |
| Mixed Director + Professional | 25–35% | Risk of disallowance and TDS disputes; high audit scrutiny |
Takeaway: Proper classification drives optimal tax planning, leveraging DTAA and 44ADA only where legally defensible.
Optimized Workflow for Resident Directors
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CLASSIFY services: Director vs professional consultancy.
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STRUCTURE invoices via LLP/firm for consultancy (not personal name).
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CAP receipts: ₹75L per annum for 44ADA; quarterly invoices recommended.
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DOCUMENT upfront: TRC + Form 10F for foreign clients.
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ENSURE digital remittance: Bank trail for audit-proofing.
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FILING: ITR-3 + Schedule BP, FSI, FA; Form 67 for FTC claim.
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RECORD retention: Minimum 7 years; contracts, bank statements, TRC, 15CB/CA certifications.
Professional Insight: Workflow ensures DTAA-safe remittance, audit-proof classification, and minimal effective tax.
Strategic Recommendations
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Segregate roles: Consultancy should not overlap with directorship.
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Domestic clients: Simplifies TDS and compliance.
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Foreign clients: Proceed only if DTAA savings ≥5%.
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High-volume foreign work: Use LLP/firm structure; cap receipts per presumptive thresholds.
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Documentation is king: Missing TRC or Form 10F undermines FTC.
Ultimate Professional Insight: With structured planning, foreign professional fees can yield an effective tax of 15–20%, vs 30–35% on misclassified director fees, while remaining fully compliant under Income Tax Act, 195, 44ADA, FEMA, and DTAA.
Closure — Professional Analytical Saying
“Global engagement rewards, but compliance protects — classify, document, and segregate. Every rupee earned abroad is legitimate only when law, form, and substance align.”
