International Taxation & DTAA — Sections 159, 160 & 393 (TDS on Non-Residents)

Key Takeaways

• Section 5(2) defines the scope of income taxable in India for non-residents — only income that accrues or arises in India or is received in India is taxable.
• Section 9 deems certain income to accrue or arise in India even if received outside India — this covers business connection, salary for services in India, interest, royalty, and fees for technical services (FTS).
• Section 159 (Income Tax Act, 2025; formerly Section 90) empowers the Central Government to enter into Double Taxation Avoidance Agreements (DTAAs) with foreign countries, and taxpayers can choose the more beneficial provision between the Act and the DTAA.
• Section 160 (Income Tax Act, 2025; formerly Section 91) provides unilateral relief for income earned in countries with which India does not have a DTAA — the taxpayer gets credit for tax paid in the foreign country.
• Section 393 (Table: Sl. No. for payments to non-residents) (Income Tax Act, 2025; formerly Section 195) mandates TDS on all payments to non-residents (other than salary, which is covered under Section 392), with no threshold limit. The payer must determine the appropriate rate under the Act or DTAA.
• Form 15CA (information about foreign remittance) and Form 15CB (CA certificate for remittances exceeding Rs. 5 lakh) are mandatory for most foreign payments.
• A Tax Residency Certificate (TRC) under Section 159(4) is a prerequisite for claiming DTAA benefits, along with Form 10F for additional particulars.

Section 5(2) — Scope of Income for Non-Residents

For a non-resident, only the following income is taxable in India:

| Income Category | Taxable in India? | |----------------|-------------------| | Income received or deemed to be received in India | Yes | | Income accruing or arising in India | Yes | | Income deemed to accrue or arise in India (Section 9) | Yes | | Income accruing outside India from a business or profession outside India | No | | Income accruing outside India from any source outside India | No |

This is the fundamental distinction between residents (globally taxable) and non-residents (Indian-source income only).

Section 9 — Income Deemed to Accrue or Arise in India

Section 9 creates a deeming fiction whereby certain income is treated as Indian-source income even though the actual payment may be made outside India.

Categories Under Section 9

| Sub-section | Nature of Income | Deemed to Accrue in India When | |-------------|-----------------|-------------------------------| | 9(1)(i) | Business income | Arises through or from any business connection in India | | 9(1)(ii) | Salary | For services rendered in India (subject to exemptions for short stays under DTAA) | | 9(1)(iii) | Salary — Government | Salary payable by Government of India to an Indian citizen for services outside India | | 9(1)(v) | Interest | Payable by: (a) Government of India; (b) resident (unless for business outside India); (c) non-resident for business in India | | 9(1)(vi) | Royalty | Payable by: (a) Government of India; (b) resident (unless for business outside India); (c) non-resident for business in India | | 9(1)(vii) | Fees for Technical Services (FTS) | Same nexus rules as royalty |

Business Connection — Key Principles

"Business connection" is broadly defined and includes:

• A person acting on behalf of the non-resident who habitually exercises authority to conclude contracts
• A person who habitually maintains stock of goods from which deliveries are made on behalf of the non-resident
• A person who habitually secures orders mainly or wholly for the non-resident
• Significant Economic Presence (SEP) — introduced to capture digital economy transactions where there is no physical presence but systematic economic activity in India

Section 159 — Double Taxation Avoidance Agreements (DTAA)

(Income Tax Act, 2025; formerly Section 90 of the Income Tax Act, 1961)

Purpose and Mechanism

Section 159 authorises the Central Government to enter into bilateral agreements with foreign governments for:

1. Avoidance of double taxation — ensuring the same income is not taxed in both countries
2. Exchange of information — facilitating tax administration and preventing evasion
3. Recovery of tax — mutual assistance in collection of taxes

The "More Beneficial" Rule — Section 159(2)

This is the cornerstone provision: where a DTAA exists, the taxpayer can apply the provisions of the Income Tax Act, 2025 or the DTAA, whichever is more beneficial to the assessee. The assessee is not bound to follow only the DTAA — they can pick the more favourable provision.

Tax Residency Certificate (TRC) — Section 159(4)

A non-resident claiming DTAA benefits must obtain a Tax Residency Certificate from the government of the country in which they are resident. Without a TRC, DTAA benefits cannot be claimed.

Form 10F: In addition to TRC, the non-resident must furnish Form 10F containing:

| Particular | Detail | |------------|--------| | Status (individual, company, etc.) | As applicable | | Nationality/Country of incorporation | Country of residence | | TIN in the country of residence | Tax identification number | | Period for which residential status as mentioned in TRC is applicable | Start and end dates | | Address in the country of residence | Full address |

Compliance requirement: Form 10F must be filed electronically on the Indian e-filing portal. Non-residents without a PAN can use the TIN of their home country for registration.

Section 159A — Agreements Between Specified Associations

(formerly Section 90A)

Section 159A allows the Central Government to adopt agreements entered into by specified associations (such as the Institute of Chartered Accountants of India, medical associations, or professional bodies) with foreign counterparts for relief from double taxation. This is less commonly invoked than Section 159 but provides an additional framework for mutual recognition.

Section 160 — Unilateral Relief

(Income Tax Act, 2025; formerly Section 91 of the Income Tax Act, 1961)

Where a resident of India has income that is taxed in a country with which India has no DTAA, Section 160 provides unilateral relief by allowing a deduction from the Indian tax payable.

Computation of Unilateral Relief

The relief is the lower of:

1. Indian tax attributable to the doubly-taxed income (Indian rate x doubly-taxed income / total income), OR
2. Foreign tax actually paid on the doubly-taxed income

Conditions for Section 160 Relief

| Condition | Detail | |-----------|--------| | Assessee must be a resident of India | Non-residents cannot claim Section 160 relief | | Income must be doubly taxed | The same income must have been taxed both in India and in the foreign country | | No DTAA exists | Relief under Section 160 is available only for countries without a DTAA with India | | Tax must have been actually paid | The foreign tax must have been paid, not merely assessed or demanded |

Section 393 — TDS on Payments to Non-Residents

(Income Tax Act, 2025; formerly Section 195 of the Income Tax Act, 1961. TDS on non-resident payments is now consolidated in Section 393, Table: Sl. No. for payments to non-residents.)

General Rule

Any person responsible for paying to a non-resident (not being a company) or to a foreign company, any sum chargeable to tax in India, must deduct TDS at the time of credit to the account of the payee or at the time of payment, whichever is earlier.

Key Features of Section 393 (Non-Resident TDS)

| Feature | Detail | |---------|--------| | Threshold | No threshold — TDS must be deducted on any amount payable to a non-resident that is chargeable to tax | | Rate | As prescribed under the Act (Section 207 rates) or DTAA rate, whichever is lower | | Grossing up | If the payer bears the tax, the payment must be grossed up to determine the TDS amount | | PAN of payee | If the non-resident does not have a PAN, TDS is deductible at the rate in the Act or DTAA rate (higher rate for no-PAN embedded in TDS tables under Section 393) |

Common TDS Rates Under the Act (Section 207)

| Nature of Payment | Rate (Non-Resident) | Rate (Foreign Company) | |-------------------|--------------------|-----------------------| | Interest | 20% | 20% | | Royalty | 10% | 10% | | FTS (Fees for Technical Services) | 10% | 10% | | Long-term capital gains (Section 197) | 20% | 20% | | Short-term capital gains (listed equity) | 15% | 15% | | Dividend | 20% | 20% | | Other income | 30% | 40% |

Rule 21AB of the Income Tax Rules, 2026 prescribes the detailed rate schedule and manner of TDS on various categories of payments to non-residents.

Application for Lower/Nil Deduction (Section 395)

The payer can apply to the Assessing Officer for a certificate for lower or nil TDS if the actual income chargeable to tax (after deducting expenses, applying DTAA benefits, etc.) is lower than the gross payment. The AO issues a certificate specifying the appropriate rate or amount. (Formerly Section 195(2).)

Application by Non-Resident for NIL TDS (Section 395)

Certain categories of non-residents (banking companies, persons carrying on business in India through a branch) can apply for a certificate authorising the payer to pay without deduction or at a lower rate. (Formerly Section 195(3).)

Form 15CA and Form 15CB — Foreign Remittance Compliance

Rule 37BB — Information to Be Furnished

Rule 37BB of the Income Tax Rules, 2026 categorises foreign remittances into different categories for Form 15CA/15CB purposes.

Form 15CA — Information for Foreign Remittance

| Part | Applicability | CA Certificate Needed? | |------|--------------|----------------------| | Part A | Remittance not chargeable to tax and does not exceed Rs. 5 lakh | No | | Part B | Remittance chargeable to tax, AO has issued certificate u/s 195(2)/195(3)/197 for lower/nil TDS | No (AO order suffices) | | Part C | Remittance chargeable to tax exceeding Rs. 5 lakh — no AO certificate | Yes — Form 15CB required | | Part D | Remittance not chargeable to tax and exceeds Rs. 5 lakh | No |

Form 15CB — Chartered Accountant Certificate

Form 15CB is a certificate issued by a CA certifying:

| Certification | Detail | |--------------|--------| | Nature of remittance | Category and purpose of payment | | Taxability under the Act | Whether the remittance is chargeable to tax under the Income Tax Act | | Applicable DTAA | Whether a DTAA applies and the relevant article | | TDS rate | The rate at which TDS has been or should be deducted | | TRC verification | Whether TRC and Form 10F have been obtained from the non-resident | | Gross and net amounts | Amount of remittance, TDS deducted, net remittance |

The CA must independently verify the TRC, Form 10F, nature of services, and applicability of DTAA before issuing Form 15CB. Issuing an incorrect Form 15CB can result in professional liability and proceedings by ICAI.

DTAA — Key Concepts

Permanent Establishment (PE)

PE is a central concept in DTAAs. If a non-resident has a PE in India, India gets the right to tax business profits attributable to that PE. Without a PE, business profits are taxable only in the country of residence.

| Type of PE | Example | |-----------|---------| | Fixed place PE | Branch, office, factory, workshop, mine, oil well | | Construction PE | Building site or construction project lasting more than threshold period (usually 6-12 months) | | Service PE | Furnishing of services through employees present in India for more than threshold days (usually 90-183 days in 12 months) | | Agency PE | Dependent agent habitually exercising authority to conclude contracts | | Digital PE/SEP | Significant Economic Presence (under domestic law) — not universally accepted in DTAAs |

Beneficial Ownership

Many DTAA articles on interest, dividend, and royalty provide reduced rates only if the recipient is the beneficial owner of the income. Conduit arrangements (where a shell entity in a treaty country receives income and passes it to a third-country entity) can be challenged for lack of beneficial ownership.

Tie-Breaker Rules (Article 4 of DTAAs)

When a person is resident of both India and another country (dual residency), the DTAA tie-breaker rules determine the country of residence for treaty purposes:

| Tie-Breaker Test (in order) | Detail | |-----------------------------|--------| | Permanent home | Country where the individual has a permanent home | | Centre of vital interests | Country with closer personal and economic relations | | Habitual abode | Country where the individual habitually lives | | Nationality | Country of which the individual is a national | | Mutual Agreement Procedure (MAP) | If none of the above resolves it, competent authorities decide through MAP |

For companies, the tie-breaker is typically the Place of Effective Management (POEM).

Mutual Agreement Procedure (MAP)

MAP allows taxpayers to approach the competent authority of either contracting state when they believe taxation is not in accordance with the DTAA. The competent authorities of both countries then negotiate to resolve the dispute.

Most Favoured Nation (MFN) Clause

Certain Indian DTAAs (e.g., with France, Netherlands, Switzerland) contain an MFN clause stating that if India subsequently enters into a DTAA with another OECD member country providing a lower rate or more restrictive scope for royalty/FTS, the same beneficial treatment automatically applies to the earlier treaty. The Supreme Court in the Nestle SA case (2023) held that the MFN clause is not automatically applicable and requires a separate notification by the Government — this has significant practical implications.

India's Key DTAA Network

India has DTAAs with over 90 countries. Key treaties include:

| Country | Key Features | |---------|-------------| | USA | FTS article absent (taxed as business profits, PE required); interest 15%; royalty 15% | | UK | FTS 15%; interest 15%; royalty 15%; capital gains — shares taxable in source state | | UAE | Historically no tax in UAE; interest 12.5%; royalty 10%; no FTS article — taxed as business profits | | Singapore | Capital gains on shares — grandfathering post-2017 amendment; interest 15%; royalty 10%; FTS 10% | | Mauritius | Post-2016 amendment: capital gains on shares fully taxable in India (for shares acquired after 1 April 2017); interest 7.5%; no FTS article | | Germany | FTS 10%; interest 10%; royalty 10%; liberal PE definition | | Japan | FTS 10%; interest 10%; royalty 10%; comprehensive MAP provisions |

Landmark Judgement

Worked Example — NRI Selling Property in India with DTAA Benefit

Scenario: Mr. Sanjay Patel, a US tax resident (NRI, Indian citizen), sells a residential flat in Mumbai for Rs. 1,20,00,000 in January 2026. He purchased the property in April 2014 for Rs. 40,00,000 (indexed cost: Rs. 62,40,000 using CII). Mr. Sanjay wants to determine his Indian tax liability and complete the foreign remittance compliance.

Step 1 — Capital Gains Computation

| Particulars | Amount (Rs.) | |-------------|-------------| | Sale consideration | 1,20,00,000 | | Less: Indexed cost of acquisition (Rs. 40,00,000 x CII 2025-26 / CII 2014-15) | 62,40,000 | | Long-term capital gains | 57,60,000 |

Step 2 — Tax Under Indian Act vs. DTAA

| Parameter | Under Indian Act | Under India-US DTAA | |-----------|-----------------|---------------------| | Tax rate on LTCG | 20% (Section 197) + surcharge + cess | Article 13 — Capital gains from immovable property taxable in the state where property is situated (India) — DTAA does not provide a lower rate for immovable property gains | | Effective rate | ~20.8% (including cess) | Same — DTAA defers to Indian domestic rate |

Since the India-US DTAA does not provide a lower rate for capital gains on immovable property (both countries have the right to tax), Mr. Sanjay pays tax at the Indian domestic rate.

Step 3 — TDS Under Section 393 (formerly Section 195)

The buyer must deduct TDS under Section 393 (TDS on non-resident payments) at 20% (plus surcharge and cess) on the capital gains amount. Alternatively, Mr. Sanjay can apply under Section 395 for a lower TDS certificate by demonstrating indexed cost and claiming deduction under Section 82/85 (formerly Sections 54/54EC).

| TDS Computation | Amount (Rs.) | |----------------|-------------| | LTCG | 57,60,000 | | TDS @ 20% | 11,52,000 | | Add: Surcharge (if applicable) | Nil (below Rs. 50 lakh LTCG surcharge threshold for NRI) | | Add: Health & Education Cess @ 4% | 46,080 | | Total TDS | 11,98,080 |

Step 4 — Foreign Remittance Compliance (Form 15CA/15CB)

When Mr. Sanjay repatriates the sale proceeds to the US:

| Compliance Step | Detail | |----------------|--------| | Form 15CB | CA verifies: TDS deducted under Section 393, DTAA applicability, no lower rate available under India-US DTAA for immovable property, TRC obtained from IRS | | Form 15CA (Part C) | Filed electronically before remittance; amount exceeds Rs. 5 lakh and is chargeable to tax | | Bank submission | Authorised dealer (bank) processes remittance only after receiving Form 15CA acknowledgement | | TRC from US | Mr. Sanjay obtains IRS Form 6166 (US Tax Residency Certificate) | | Form 10F | Filed on Indian e-filing portal with US address, TIN (SSN), and period of residency |

Step 5 — US Tax Credit

Mr. Sanjay reports the capital gain in his US tax return (Form 1040, Schedule D) and claims Foreign Tax Credit (Form 1116) for the Indian tax paid, avoiding double taxation. The credit is limited to the US tax attributable to the Indian-source income.

Expert Tip: For NRI property sales, always apply under Section 395 for a lower TDS certificate before the transaction closes. The buyer deducts TDS on the gross sale consideration unless you demonstrate the net capital gain (after indexation and exemptions under Sections 82/85, formerly Sections 54/54EC) is lower. Without a Section 395 certificate, TDS is deducted on the full sale amount at 20%, leading to a large refund claim and delayed refund processing. Additionally, ensure the TRC and Form 10F are in place before claiming any DTAA benefit — the AO will reject the claim without these documents.

Section Interconnect

• Chapter 1 — Basis of Charge (Residential Status): Residential status under Section 6 determines whether a person is taxed on global income or Indian-source income only. This is the gateway to international taxation.
• Chapter 6 — Capital Gains (Sections 67-91): NRI capital gains on Indian assets are computed under domestic law, subject to DTAA benefits. Indexation and exemptions under Sections 82/85/86 (formerly Sections 54/54EC/54F) are available to NRIs.
• Chapter 10 — TDS, TCS & Advance Tax: Section 393 TDS on NRI payments (formerly Section 195) interacts with general TDS provisions. Form 26AS must reflect the TDS deducted for the NRI to claim credit.
• Chapter 20 — Transfer Pricing (Sections 161-171): International transactions between associated enterprises must comply with both DTAA provisions and transfer pricing regulations under Sections 161-171 (formerly Sections 92-92F).

Frequently Asked Questions

1. Can a non-resident claim DTAA benefits without a Tax Residency Certificate?

No. Section 159(4) makes the TRC a mandatory requirement for claiming DTAA benefits. Without a valid TRC from the country of residence, the provisions of the Income Tax Act, 2025 apply without any treaty relief. Additionally, Form 10F must be furnished with additional particulars. The Azadi Bachao Andolan ruling confirmed that a valid TRC is sufficient proof of residency.

2. Is Form 15CA/15CB required for all foreign payments?

Form 15CA is required for most foreign remittances. However, certain categories are exempted under Rule 37BB, including: remittances by the Government; imports covered by bills of lading; remittances for personal travel (up to LRS limits); and payments covered in the specified exclusion list. Form 15CB (CA certificate) is required only for remittances chargeable to tax that exceed Rs. 5 lakh and where no AO certificate under Section 395 (formerly Section 195(2)/195(3)) has been obtained.

3. If a US company provides software to an Indian company, is the payment "royalty" requiring TDS?

This is one of the most litigated issues. The Supreme Court in Engineering Analysis Centre of Excellence v. CIT (2021) held that payment for purchase of shrink-wrap/off-the-shelf software is not royalty under the India-US DTAA or the Copyright Act — it is a business payment and, absent a PE in India, is not taxable. However, if the payment is for a customised software licence or grants rights to reproduce, modify, or distribute the software, it may constitute royalty. The characterisation depends on the specific rights granted under the licence agreement.

4. What is the difference between Section 159 and Section 160 relief?

Section 159 (formerly Section 90) applies where India has a DTAA with the foreign country — the taxpayer gets the benefit of the treaty provisions (lower rates, PE protection, etc.) and can choose the more beneficial provision. Section 160 (formerly Section 91) applies where there is no DTAA — the taxpayer gets a credit for foreign tax paid, limited to the lower of the Indian tax attributable to the foreign income or the foreign tax actually paid. Section 160 provides only tax credit, not the comprehensive protections (PE, lower rates, etc.) available under a DTAA.

5. Can an NRI open a bank account in India and receive rental income without TDS?

The rental income is taxable in India under Section 5(2) regardless of where it is received. The tenant paying rent to an NRI must deduct TDS under Section 393 (TDS on non-resident payments, formerly Section 195 — not the domestic rent TDS table which applies to residents). The rate under the Act is 30% (plus surcharge and cess) for non-residents, unless a lower rate is available under the applicable DTAA. The NRI can apply under Section 395 for a lower TDS certificate by demonstrating deductible expenses (municipal taxes, 30% standard deduction, interest on housing loan). The NRI must file an Indian income tax return to claim refund of excess TDS.

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