Payment in USD to an Indian Company or Foreign Entity: When Does TDS Actually Apply

By CA Surekha S Ahuja

A Practical Decision Framework — Updated for the Income-tax Act, 2025

The one sentence to remember: TDS follows the legal recipient, the nature of the payment, and its taxability — not the currency symbol on the invoice.

A USD Invoice Often Creates the Wrong TDS Question

An Indian company may invoice in USD. It may be wholly owned by a US, UK, or Singapore parent. It may even receive payment through an overseas bank account.

None of these facts, by themselves, make the payment a payment to a non-resident.

The correct starting point is:

Who is legally entitled to the payment?
What is the payment for?
Is it chargeable to tax in India?

The Quick Answer

Situation	Correct TDS Approach
Invoice is in USD	Currency is irrelevant
Indian company has a foreign parent	Foreign ownership does not make it non-resident
Payment goes to a foreign bank account	Examine the legal recipient
Payee has PAN/GSTIN	Registrations do not by themselves establish legal identity or residence
Payment is directly to foreign parent	Examine Indian taxability and DTAA
Payment is to a branch/project office	Identify the foreign legal entity and tax position
Payment is called "reimbursement"	Test whether it contains any income/service element
Indian subsidiary later pays foreign parent	Analyse the second payment separately

The Four-Step Rule

Every foreign-linked payment should pass through four questions:

Step	Question
1. Recipient	Who is legally entitled to receive the payment?
2. Nature	What is the payment actually for?
3. Chargeability	Is that income chargeable to tax in India?
4. Provision	Which TDS provision, rate, and compliance requirement follows?

The mistake is to start with Step 4:

"It is in USD, so Section 195-type withholding must apply."

That is not the correct analysis.

Indian Subsidiary of a Foreign Parent

Suppose: Foreign Parent → ABC India Pvt Ltd → Customer

ABC India is:

incorporated in India;
the contracting party;
the invoicing party; and
legally entitled to the consideration.

The fact that its parent is foreign does not make ABC India a non-resident.

An Indian-incorporated company is resident in India under the company residence rules. A foreign company's POEM can separately affect its residence — not the residence of its Indian subsidiary.

Therefore: USD invoice + foreign parent ≠ non-resident recipient

The payment to ABC India should first be examined under the domestic TDS provisions applicable to the nature of the payment.

Direct Payment to the Foreign Parent

The analysis changes where the customer contracts directly with the foreign company:

Indian Customer → Foreign Company

Now determine:

Nature of income
Whether it is chargeable in India
Business connection or PE, where relevant
Domestic law
Applicable DTAA
Withholding and remittance compliance

The Supreme Court's decision in GE India Technology Centre Pvt. Ltd. v. CIT establishes the fundamental principle that withholding on payments to non-residents is linked to chargeability to tax in India.

Therefore, the correct chain is: Foreign recipient → Nature → Chargeability → Domestic law/DTAA → TDS

not simply: Foreign recipient → TDS

Indian Subsidiary vs. Branch vs. Project Office

Recipient	Broad Position
Indian subsidiary	Separate Indian-incorporated legal entity
Branch office	Generally an extension of the foreign company
Project office	Generally an extension of the foreign company
Liaison office	Restricted presence, subject to applicable conditions

A branch or project office may have an Indian:

PAN
GSTIN
Bank account
Address
Employees

But these registrations do not necessarily make it a separate Indian company.

The decisive question remains: Which legal entity is the recipient, and what is its tax status?

The Two-Leg Trap

Consider: Customer → Indian Subsidiary → Foreign Parent

Suppose the customer pays ₹10 crore to the Indian subsidiary, and the subsidiary subsequently pays ₹8 crore to its foreign parent.

These are two separate payment legs.

Leg 1 — Customer → Indian Subsidiary Analyse the payment under the applicable domestic TDS provision.

Leg 2 — Indian Subsidiary → Foreign Parent Separately examine:

Nature of payment
Chargeability
DTAA
Withholding
Transfer pricing
PE implications

The second payment does not automatically convert the first payment into a payment to a non-resident.

However, if the Indian entity is merely a conduit, nominee, collection agent, or intermediary — and the foreign parent is substantively entitled to the consideration — the analysis may change.

Reimbursement: The Label Is Not the Answer

Calling something a "reimbursement" does not automatically take it outside withholding.

Ask:

Was the cost genuinely incurred on behalf of the payer?
Is it recovered exactly at cost?
Is there any markup?
Is there an embedded service or profit element?

A genuine cost-to-cost reimbursement with no income element may have a different withholding treatment.

The file should support the position through:

Agreement + underlying invoices + cost calculation + allocation + proof of payment + no-markup analysis

POEM: The Foreign Company Exception

A foreign-incorporated company can potentially become resident in India if its Place of Effective Management (POEM) is in India.

This is a factual determination and should not be inferred merely from the existence of:

an Indian subsidiary;
Indian employees; or
Indian operations.

But where substantive strategic and commercial management is effectively exercised from India, POEM requires careful consideration.

The Practical Decision Matrix

Recipient / Transaction	Key Question	Broad Outcome
Indian company	What is the nature of payment?	Apply relevant domestic TDS provision
Indian company	Genuine reimbursement?	Examine income/service element
Foreign company	Is income chargeable in India?	Withholding if chargeable, subject to DTAA
Foreign company	Business income	Examine business connection / PE
Foreign company	Royalty / FTS / interest	Domestic law + DTAA analysis
Branch / project office	Who is the legal entity?	Foreign-entity analysis
Liaison office	Genuine expense reimbursement?	Fact-specific
Foreign company with POEM concern	Where is effective management?	Specific residence analysis
Indian subsidiary → foreign parent	What is the second payment for?	Independently analyse
Conduit / agency arrangement	Who is substantively entitled?	Substance and legal entitlement must be reconciled

The Decision Tree

START
  │
  ▼
Who is legally entitled to the payment?
  │
  ├── Indian incorporated company
  │       │
  │       ▼
  │   Identify nature of payment
  │       │
  │       ▼
  │   Apply relevant domestic TDS provision
  │
  └── Foreign company / non-resident
          │
          ▼
      Identify nature of income
          │
          ▼
      Is it chargeable in India?
          │
          ├── NO
          │    │
          │    ▼
          │  No withholding on that basis
          │  + complete applicable documentation
          │
          └── YES
               │
               ▼
          Domestic law + DTAA
               │
               ▼
          Determine withholding
               │
               ▼
          Complete remittance compliance

Special caution: branch/project office, reimbursement, conduit arrangements, PE, POEM, and back-to-back structures require additional factual analysis.

Case Study: USD 1.2 Million Invoice

ABC India Pvt Ltd is an Indian subsidiary of a US company. The Indian customer contracts with ABC India. ABC India raises an invoice for USD 1.2 million.

The customer asks:

"Since the invoice is in USD and ABC India belongs to a US group, should we deduct non-resident TDS?"

Answer: Not merely for those reasons.

The legal recipient is ABC India Pvt Ltd — an Indian-incorporated company.

Therefore, the first payment is examined under the domestic TDS framework applicable to the nature of that payment.

If ABC India later pays USD 900,000 to its US parent, that is a separate cross-border payment requiring an independent analysis.

Lesson: Follow the legal payment leg, not merely the ultimate movement of money.

Income-tax Act, 2025: The Compliance Transition

The Income-tax Act, 2025 reorganises the TDS framework, including the provisions now contained in Section 393.

For cross-border remittances, the familiar forms have also changed:

Earlier Form	Current Form
Form 15CA	Form 145
Form 15CB	Form 146

The important practical point is:

Do not confuse TDS liability with remittance reporting.

Whether tax is deductible and what remittance form must be furnished are related but distinct questions.

During the transition, finance teams should also maintain a clear record of the date of accrual, credit, payment, and remittance, because the applicable substantive and procedural rules can depend on the relevant period.

Five Questions Before Releasing the Payment

Who is the legal recipient? Match the contract, invoice, payment instructions, and accounting records.
What are we actually paying for? Service, royalty, interest, commission, rent, reimbursement, or something else?
Is the income chargeable in India? Consider domestic law, source rules, PE, and DTAA.
Which TDS provision applies? Only determine the provision after the first three questions.
What evidence supports the conclusion? Document the analysis before the payment, not after a tax notice.

Five Mistakes That Create TDS Risk

Mistake	Why It Fails
"USD means non-resident TDS"	Currency does not determine residence
"Foreign parent means foreign recipient"	Parent and subsidiary can be separate taxpayers
"PAN/GSTIN means Indian company"	Branches and project offices may also have Indian registrations
"Reimbursement means no TDS"	Substance and income element must be tested
"Later payment to parent changes the first payment"	Each payment leg requires separate analysis

Final Takeaway

When a finance team sees a USD invoice from a foreign-linked business, the first question should not be:

"Should we deduct non-resident TDS?"

It should be:

"Who is legally entitled to the payment, what are we paying for, and is that income chargeable to tax in India?"

The complete framework is:

Recipient → Nature → Chargeability → Provision → Documentation

USD does not make an Indian company foreign. A foreign parent does not make its Indian subsidiary non-resident. And a foreign remittance does not automatically mean TDS.

The answer follows from the legal recipient, the substance of the transaction, and chargeability under the applicable law.

Professional Caution

Cross-border withholding requires particular care where transactions involve foreign parents, branches, project offices, reimbursements, treaty claims, PE, POEM, agency/conduit structures, or back-to-back payments.

For material transactions, maintain a contemporaneous taxability analysis based on the exact facts, contractual structure, and law applicable to the relevant period.

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Friday, September 4, 2026