Withholding Tax & Permanent Establishment Advisory

Section 195 requires anyone in India paying a non-resident or foreign company any sum that is taxable in India to deduct tax at source before making the payment. Unlike domestic TDS sections, there is no minimum threshold — even a single rupee that is chargeable to tax in India must have TDS considered. The rate depends on the nature of the payment (royalty, fees for technical services, interest, business profits, capital gains, and so on) and whether a more beneficial rate is available under the applicable DTAA.

A PE is the threshold under a DTAA that determines whether a foreign enterprise's business profits become taxable in India. An Indian business paying a foreign vendor should care because the manner in which that vendor's personnel operate in India — where they sit, who they report to, whether an Indian party is negotiating or signing contracts on the vendor's behalf — can create a PE for the vendor, and Indian tax authorities increasingly examine both sides of a cross-border arrangement together during scrutiny.

The deductor must still assess taxability before making the payment — the DTAA exemption or reduced rate is only available if properly claimed with supporting documentation (Tax Residency Certificate and Form 10F at minimum). If the payer simply assumes non-taxability without this analysis and documentation, and the tax authority later disagrees, the payer faces a demand for short deduction with interest, regardless of what the treaty may ultimately have allowed.

A TRC is a certificate issued by the tax authority of the payee's country of residence confirming their tax residency status for a given year. Under Section 90(4) of the Income-tax Act, a non-resident cannot claim any benefit under a DTAA (a reduced rate, an exemption, or relief) unless they furnish a valid TRC. Form 10F supplements the TRC with details the TRC itself may not contain — status, nationality or place of incorporation, tax identification number, and period of residence.

Royalty typically covers payments for the use of, or the right to use, a patent, trademark, copyright, know-how, or similar intangible right. Fees for technical services (FTS) cover payments for managerial, technical, or consultancy services, including the provision of technical or other personnel. The distinction matters because different treaty articles apply different rates and different taxability tests, and the characterisation is not always obvious — a software payment, for example, has been the subject of extensive litigation over whether it is royalty (for use of a copyrighted right) or business profits (a sale of a copyrighted product), with the position evolving through various court rulings over the years.

The deductor becomes an 'assessee in default' under Section 201, liable for the shortfall in tax, interest under Section 201(1A) (currently 1% per month for non-deduction and 1.5% per month for deduction-but-non-deposit, calculated from the date it should have been deducted/deposited to the date of actual deduction/deposit), and potential penalty under Section 271C equal to the amount not deducted. The expenditure may also face disallowance considerations under the Act for domestic payers in certain scenarios, adding a further tax cost beyond the direct TDS shortfall.

The non-resident payee bears the cost initially (unless the contract requires the Indian payer to gross up the payment, in which case the Indian payer bears it) and must then file an Indian tax return to claim a refund of the excess TDS, which involves obtaining a PAN if not already held, and a filing and processing timeline that can take a considerable period. Over-withholding also creates unnecessary friction with the foreign vendor, who may push back on future contracts or price in the withholding uncertainty.

Section 195(2) allows the person responsible for paying a non-resident to apply to the Assessing Officer, where they believe only a portion of the sum is chargeable to tax in India (or none of it is), for a determination of the appropriate proportion on which tax should be deducted. It is deductor-initiated and is typically used where the payment is a composite sum — part taxable, part not — and the deductor wants certainty before remitting rather than deducting on the full amount and leaving the payee to claim a refund.

Section 197 allows the non-resident payee (not the payer) to apply to the Assessing Officer for a certificate authorising a lower or nil rate of TDS on income to be received, where the payee's total income justifies a lower rate than the standard withholding rate would produce. It is payee-initiated, while Section 195(2) is payer-initiated. Both aim to avoid the mismatch between a high upfront withholding rate and the payee's actual final tax liability, but the applicant and the underlying test differ.

A Fixed Place PE arises when a foreign enterprise has a fixed place of business in India — an office, branch, factory, workshop, or similar — through which its business is wholly or partly carried on, and that place is at the enterprise's disposal with a reasonable degree of permanence. It does not require the place to be owned by the foreign enterprise; premises used under an informal arrangement, or even a desk within an Indian group company's office used regularly by the foreign enterprise's staff, can qualify depending on the facts.

An Agency PE arises when a person in India — other than an independent agent acting in the ordinary course of their own business — habitually exercises authority to conclude contracts in the name of the foreign enterprise, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, or habitually maintains a stock of goods from which deliveries are regularly made on the enterprise's behalf (depending on the specific treaty's wording).

A Service PE arises under specific treaty articles (present in India's treaties with the USA, UK, Singapore, and several others) where a foreign enterprise furnishes services in India — including through employees or other personnel — for more than a specified aggregate period, commonly 90 days within any 12-month period. The India-UAE DTAA, by contrast, does not contain a standalone Service PE article, meaning a UAE-resident enterprise's service delivery in India is instead tested against the Fixed Place PE and Agency PE provisions of that treaty — a materially different and often higher threshold to meet.

Most treaties count days on which services are furnished, including days where personnel are present in India in connection with the project even if not actively working every single calendar day (weekends and short breaks within a continuous engagement are commonly included in the count under prevailing interpretation), and require aggregation across connected projects or a series of related contracts to prevent threshold avoidance through artificial contract-splitting.

Most DTAAs provide that a building site, construction, assembly, or installation project (and related supervisory activities) constitutes a PE only if it continues beyond a specified duration — commonly 6 months (India-UK), 9 months (India-UAE, India-Mauritius), 120 days aggregated over 12 months (India-USA, for connected projects), or 183 days (India-Singapore) — with the exact threshold varying by treaty. Time spent on connected or successive contracts for the same project is generally aggregated to prevent the threshold being circumvented by splitting a single project into shorter, formally separate contracts.

Only the profits attributable to the PE are taxable in India, determined under Article 7 of the applicable treaty — generally following the principle that the PE is treated as a distinct and separate enterprise dealing at arm's length with its head office, using functions performed, assets used, and risks assumed by the PE as the attribution basis (broadly aligned with the OECD's Authorised OECD Approach, though the precise mechanics can vary by treaty and by the specific facts of the case).

A liaison office is permitted by RBI specifically for representing the parent company, promoting exports/imports, and facilitating technical/financial collaboration — and is expressly prohibited from undertaking any commercial, trading, or industrial activity, or earning any income in India. If a liaison office in practice exceeds this mandate — negotiating deals, securing orders, or otherwise conducting business — it risks being treated as a PE regardless of its RBI registration classification, because tax treaty PE tests look at actual activity, not the regulatory label under which the office was permitted.

Generally yes for tax purposes — a project office or branch office established under FEMA regulations is typically, by its nature and permitted activities, already conducting business in India through a fixed place, and is expected to register for PAN and file Indian tax returns on the profits attributable to that office. This is different from a liaison office, which is not meant to generate any India-taxable profit if it stays within its permitted scope.

For a country with no DTAA with India, the domestic rate under Section 115A applies without any treaty relief — typically around 20% (plus applicable surcharge and cess) on royalty and fees for technical services, and other applicable domestic rates for interest, dividends, and other income categories, with the payer required to deduct at these rates (or the rate under Section 206AA if higher, which applies where the payee does not furnish a PAN). Treaty countries generally offer a lower negotiated rate — commonly 10% to 15% on royalty/FTS — provided the payee furnishes a valid TRC and Form 10F.

Grossing up arises when the contract specifies that the non-resident payee will receive a fixed net amount and the Indian payer bears the tax burden — in that scenario, the payment must be grossed up under Section 195A so that after TDS is deducted at the applicable rate, the payee still receives the agreed net sum, meaning the payer's actual TDS deposit (and hence cost) is higher than a simple percentage of the invoice amount.

Where the payment is between related parties (an Indian subsidiary paying its foreign parent, for instance), the arrangement is simultaneously an 'international transaction' for transfer pricing purposes, requiring the payment to be benchmarked at arm's length and documented under Form 3CEB, in addition to the withholding tax analysis under Section 195. A payment that is correctly withheld from a Section 195 standpoint can still be challenged and adjusted upward or disallowed from a transfer pricing standpoint if it is not at arm's length, and vice versa — the two analyses are related but distinct and both must be addressed.

Pure import of goods on standard commercial terms, where the payment represents the sale price of goods and no separate service, royalty, or technical fee element is embedded, is generally outside the scope of Section 195 because it is not chargeable to tax in India in the hands of the foreign seller under ordinary circumstances. Complexity arises where the import contract is on CIF terms with a separately identifiable freight or insurance component paid to a non-resident carrier or insurer, or where the 'purchase' in substance bundles a licence, technical service, or after-sales support fee — those elements require separate analysis.

Whether a SaaS or cloud subscription payment constitutes 'royalty' (for use of a copyrighted right or process) or a payment for a standard commercial service/product not chargeable as royalty has been a heavily litigated area, with the position evolving through various judicial rulings that have generally moved toward not treating standard, non-exclusive, end-user software licensing as royalty in several circumstances — though the analysis remains fact-specific and is not a blanket exemption for every cloud payment.

Not necessarily — Rule 37BB lists specified categories (including aggregate remittances up to ₹5 lakh in a financial year in certain cases, and various listed categories such as personal travel, education, or medical expenses) where Form 15CA Part A (self-declaration) suffices without a CA-certified Form 15CB. For payments above the threshold and not in the exempt list — the most common scenario for ongoing business payments — Form 15CB certification by a CA is required before filing Form 15CA Part C.

In most cases yes, subject to the foreign tax credit rules of the payee's own country of residence and the terms of the applicable DTAA — the non-resident typically claims credit for Indian tax withheld against their home-country tax liability on the same income, preventing double taxation, provided they have the correct documentation (the Indian TDS certificate, Form 16A) to support the claim.

The original contract, the invoice, the TRC and Form 10F obtained at the time, the contemporaneous DTAA/rate analysis and characterisation working, the Form 15CB issued, the Form 15CA filed, proof of TDS deposit, and the Form 27Q return and Form 16A issued — retained for at least the statutory limitation period applicable to reassessment, and ideally longer given that PE-related disputes can look back over an extended history of payments.

The treaty text sets the legal test, but whether a specific arrangement meets that test is a factual and often judgment-heavy question — we review actual contracts, actual personnel movement and reporting lines, actual decision-making authority, and actual day-to-day conduct, rather than relying on how the arrangement is formally labelled in an intercompany agreement or job description. Tax authorities increasingly do the same during scrutiny, so a paper structure that does not match actual conduct offers limited protection.

Short, occasional visits for governance purposes — attending board meetings, strategic reviews, or occasional oversight visits without conducting the enterprise's core business activity or concluding contracts — generally carry low PE risk on their own, but the analysis changes if such visits become frequent, extend in duration, or if the visiting executives begin performing operational or client-facing work while in India, since the pattern of actual activity (not the original stated purpose of the visit) is what treaty tests examine.

The MLI is a multilateral treaty developed under the OECD/G20 BEPS project that modifies the application of covered bilateral tax treaties without requiring a fresh bilateral renegotiation of each one — India has adopted the MLI for a number of its treaty partners, and its provisions can affect PE thresholds (notably anti-fragmentation and anti-contract-splitting rules for Agency PE and Construction PE) and treaty benefit eligibility (through the Principal Purpose Test). Whether and how the MLI modifies a specific treaty depends on whether both India and the counterparty jurisdiction have both adopted the MLI and made matching notifications for that specific provision.

Fees depend on the complexity and scope of the engagement — a single Form 15CB certification for a routine, already-characterised payment is priced very differently from a full PE risk assessment involving contract review, personnel tracking, and DTAA analysis across multiple jurisdictions. We provide a written scope and fee estimate after the initial fact-gathering conversation, before any substantive work begins, rather than quoting a placeholder figure that does not reflect the actual complexity of your arrangement.

Withholding tax rate determination and PE risk assessment both require judgment applied to actual facts — the underlying contract terms, the actual conduct of personnel, and the specific treaty article and its judicial interpretation — not a lookup table. A generic compliance platform can process a Form 15CA filing once the rate and characterisation are already settled, but it cannot tell you whether your arrangement has created a PE, or whether a payment your finance team labelled 'reimbursement' actually has a taxable services element embedded in it.

Yes. We regularly represent clients through ongoing assessment and reassessment proceedings on cross-border payment and PE matters — including responding to faceless assessment notices, preparing detailed submissions on characterisation and treaty entitlement, and pursuing appeals before the Dispute Resolution Panel, CIT(Appeals), and the Income Tax Appellate Tribunal where the demand raised is not sustainable on the facts and law.

Yes — our Dubai office works alongside our India teams on India-UAE flows daily, giving us direct, current familiarity with the India-UAE DTAA's specific PE and withholding provisions (which differ meaningfully from the India-USA/UK Service PE model), UAE Corporate Tax interaction, and the practical realities of how UAE-based businesses and individuals structure their India-facing operations — rather than relying solely on a desk review of the treaty text from an India-only office.

Treating the withholding-rate decision and the PE-risk decision as two separate, disconnected questions — a business will often get a CA to certify Form 15CB on the payment amount and rate, without anyone separately asking whether the pattern of activity behind that payment (personnel present in India, contracts being concluded here, a fixed place being used) is itself creating a PE exposure that dwarfs the withholding question. We treat every engagement as covering both questions together from the outset.