Navigating TDS Deductions for Non-Resident Shipping Companies: What Happens with DTAA and Branches in India?

Dear All,

Please clarify my doubt. When making any payment for services obtained from a non-resident shipping company, section 194C will not be attracted. However, section 195 states that TDS must be deducted while making payments to a non-resident shipping company. Consequently, when assessed under section 172, a 7.5% tax on income is paid.

My doubt is, do we need to deduct TDS when making payments to such a non-resident foreign shipping company? If the non-resident shipping company has a branch in India and provides services on their behalf, do we still need to deduct TDS if the countries have a Double Taxation Avoidance Agreement (DTAA)?

For instance, if the company has a No Objection Certificate (NOC) as per DTAA, do we need to deduct TDS when paying freight for exports to that non-resident shipping company? Does this provision override section 195?

Please also clarify, if such a branch obtains a PAN number or service tax number, why can't it be assessed as an Indian company, allowing TDS to be deducted accordingly?

Regards,
Sriguru

Dear Sriguru,

Sec 194C deals with tax deduction at source against any sum paid to a RESIDENT for carrying out any work in pursuance of a contract either at the time of credit of such sum or payment thereof, whichever is earlier. Furthermore, Explanation iv c to Section 194C defines work to include "carriage of goods or passengers by any mode of transport other than by railways." Hence, payments made to Non-Resident Shipping Companies for the carriage of goods or passengers will not attract any liability to deduct Tax at source u/s 194C since the payment is not to any RESIDENT. However, these non-resident shipping companies work through agents or representatives who are residents and hence generally liable for TDS u/s 194C.

Sec 195 deals with Tax deduction at source for any payments made to any Non-Resident. However, payment made to either Non-Resident Shipping companies directly or to their Resident agents or representatives does not come under the purview of either Sec 194C or Sec 195 by virtue of Sec 172 (1) which inter-alia states that "The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail, or goods shipped at a port in India." Hence, the levy and recovery of Tax from Non-Resident Shipping will only be governed u/s 172 and not 194C or 194I. Kindly also see Circular No. 723 dated 19-09-1995 of CBDT (attached) which further clarifies the same.

Since no TDS provision is applicable on Non-Resident Shipping Companies, hence the question related to DTAA is not relevant.