Key takeaways
A familiar situation
An overseas consultant finishes a project for your company. With its invoice it sends a Tax Residency Certificate (TRC), a declaration that it has no permanent establishment (PE) in India, and a note that the fee is payable net of Indian taxes. Everything seems to be in the file, and the payment is ready to go. The real question is not whether the documents are there, but whether they support the tax treatment you are about to apply.
The order in which to decide
Section 393(2) of the Income-tax Act, 2025 (Table, serial number 17) is the general withholding provision for specified payments to non-residents, read with the nature of the income and any more specific entry. As the Supreme Court held in GE India Technology Centre (P) Ltd. v. CIT (2010) 327 ITR 456 under the earlier Act's section 195, sending money abroad does not by itself create a duty to deduct tax: the payment must be chargeable in India.
The Income-tax Act, 2025 generally came into force on 1 April 2026. Before treating a payment due on an older invoice as a new withholding event, check the transitional provisions and whether tax was already due when the amount was credited.
What the TRC proves, and what it doesn't
Under section 159(8), a non-resident claiming treaty relief must obtain a certificate of residence from its government and give the prescribed further information, which Rule 75 requires in Form 41, with supporting documents kept for verification. The department treats the electronic filing of Form 41 with the TRC as a condition for treaty benefits.
- Identity: the legal entity on the TRC matches the contract, the invoice and the bank account receiving the money.
- Period: the certificate covers the period of the income.
- Filing: the Form 41 acknowledgement is on file and agrees with the TRC.
- Entitlement: beneficial ownership is examined where the treaty article requires it.
- Exceptions: any difference between the contracting, invoicing and receiving entities is explained with evidence.
In Authority for Advance Rulings (Income Tax) v. Tiger Global International II Holdings (Civil Appeals 262 to 264 of 2026, decided 15 January 2026), the Supreme Court rejected the idea that holding a TRC always shuts out further examination of treaty entitlement. That case was about a Mauritius investment structure and capital gains, not an ordinary vendor invoice, so read it carefully: a TRC is essential, but it is no answer to contradictory facts or an abusive arrangement. It does not mean every overseas supplier should be presumed to lack substance.
Reading a no-PE declaration
A declaration that the vendor has no PE in India is evidence, not an assessment. It matters for business income, where a treaty usually lets India tax only profits of a PE here. It does not settle whether the payment is a royalty or fees for technical services, which many treaties tax separately. And PE still matters for those, because income effectively connected with a PE can be taxed differently. Test the declaration against the facts: staff visits, access to your premises, how long the project ran, what was done in India, and the role of any Indian representative.
| Situation | Why the document falls short | What to review |
|---|---|---|
| A consultant gives a TRC and a no-PE declaration | Neither decides the character of the service income | The agreement, the deliverables and the treaty article |
| The invoice comes from an affiliate of the entity on the TRC | The TRC may belong to a different earner | Which entity earns the income; any agency or collection arrangement |
| The vendor declares no Indian presence, but project records show its staff in India | The declaration may not match the facts | Visits, activities, locations and duration against the treaty's PE tests |
| One invoice covers services, a licence and reimbursements | A single description can hide separate streams | Each component and the basis for splitting the amount |
Pricing the gross-up
When the contract makes you bear the vendor's Indian tax, section 393(10) requires the income to be increased so that the agreed amount is left after deduction. The formula is: grossed-up amount = agreed net amount ÷ (1 − effective withholding rate). Use the effective rate, including surcharge and cess, not just the headline rate. Where section 207(2) applies, the domestic base rate on covered royalties and fees for technical services is 20%.
An Indian company agrees to pay a foreign company ₹50,00,000 net of Indian income tax. With treaty relief at an assumed effective rate of 10%: ₹50,00,000 ÷ 0.90 = ₹55,55,555.56, so the company bears ₹5,55,555.56 of tax. Under domestic law at 20% plus 4% cess (20.8%, no surcharge): ₹50,00,000 ÷ 0.792 = ₹63,13,131.31, so it bears ₹13,13,131.31. The difference is about ₹7.58 lakh, a cost procurement should see before accepting a net-of-tax clause. (Rates are illustrative; 10% is not a universal treaty rate.)
| Treaty relief available | Domestic law | |
|---|---|---|
| Agreed net payment | ₹50,00,000.00 | ₹50,00,000.00 |
| Effective withholding rate | 10.0% | 20.8% |
| Grossed-up amount | ₹55,55,555.56 | ₹63,13,131.31 |
| Tax borne by the payer | ₹5,55,555.56 | ₹13,13,131.31 |
A gap in the paperwork does not automatically push every payment to 20.8%: chargeability, the category of income and the rate still have to be worked out.
Two certificates, two routes
Which application is which
- 1The payee's lower or nil deduction certificate
The vendor applies under section 395(1) and Rule 213 in Form 128. Before relying on one, confirm it is genuine and current, the recipient's name and tax identity, the period and nature of payment, the deductor it covers, the amount and the balance left, and the rate and conditions. A pending application is not a certificate.
- 2The payer's application
You apply under section 395(2) and Rule 214 in Form 129 for the Assessing Officer to decide what proportion of a payment is chargeable. It suits composite payments with a taxable part. You don't need it for payments genuinely outside Indian tax.
- 3No PAN
Relief from the higher rate for a missing PAN (section 397(2), Rule 217) needs the recipient's name, email, phone, overseas address, TRC and foreign tax identification number. A TRC alone is not the whole package.
Reporting the remittance
| Your situation | What to file |
|---|---|
| Chargeable payments up to ₹5 lakh in the tax year | Form 145, Part A |
| Above ₹5 lakh, with the Assessing Officer's certificate | Form 145, Part B |
| Above ₹5 lakh, without that certificate | Form 145, Part C, with an accountant's certificate in Form 146 |
| Not chargeable to Indian tax | Form 145, Part D, unless an exemption in Rule 220 applies |
The ₹5 lakh figure decides the reporting route only; it is not an exemption from deducting tax on chargeable income. Neither form is a tax clearance.
Build a file that defends itself
- A short note on what the payment is and why it is (or isn't) taxable in India.
- The contract and the invoice.
- The treaty analysis.
- The TRC and the Form 41 acknowledgement.
- PE representations, checked against project facts.
- PAN, or the documents for the no-PAN exception.
- Any Assessing Officer's or lower-deduction certificate.
- The gross-up working, and Forms 145 and 146 as filed.
Give each team its part: procurement flags tax-bearing clauses, operations confirm what was delivered and where, finance reconciles the payment, and a tax reviewer signs off the conclusion and its assumptions.
If the vendor has a TRC, can we always apply the treaty rate?
Only if the vendor is entitled to the treaty: the TRC must match the earner and the period, Form 41 must be filed, and conditions such as beneficial ownership must be met. Contradictory facts still need examination.
Does a no-PE declaration mean no tax?
No. It helps for business income, but royalties and fees for technical services can be taxable without a PE under many treaties.
Do we need Form 146 for every foreign payment?
No. It is needed for chargeable payments above ₹5 lakh in the year where there is no Assessing Officer's certificate (Form 145, Part C).
Is a payment under ₹5 lakh free of TDS?
No. ₹5 lakh only decides which part of Form 145 you file; chargeable income still attracts withholding.
Paying overseas vendors regularly?
Aypa can review the characterisation, treaty position and gross-up before each remittance and prepare Forms 145 and 146 with you.
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