TDS on Payment to a Foreign Company

Payments to a foreign company are taxed similarly to payments to non-resident individuals under Section 393(2), but with generally higher 'other income' rates and different surcharge slabs.

FY 2026-27 · Section 393(2)

Quick answer

Indicative rate

Nature-dependent — 20% (royalty/FTS) up to ~35-40% (other income)

Section & code

Section 393(2), Sl. No. 17, Code 1057

Forms typically needed:

Form 15CA Form 15CB

Cross-Border TDS Decision Helper

Nature of payment

Payee has valid PAN?

TRC + Form 41 furnished?

Indicative Act rate

20%

Domestic Act rate under Section 393(2) for royalty/FTS to a non-resident non-company — doubled from 10% by Finance Act 2023 (effective 1 April 2023), unchanged since. Classify carefully: royalty and FTS have different treaty definitions.

Without a TRC and Form 41, the treaty rate can't be applied — the Act rate above governs until documentation is furnished.

This is a decision aid, not a filing determination — always confirm classification and the exact treaty article with a professional before remitting.

Company vs. individual non-resident: why the payee type matters

Section 393(2) applies to payments to both non-resident individuals and foreign companies, but the payee's status affects two things: the surcharge structure applied on top of the base rate, and — for the residual 'other income' category not covered by a specific concessional rate — the effective top rate, which tends to be higher for foreign companies than for individuals once surcharge is layered on.

For most commonly seen payment types (royalty, FTS, interest, capital gains), the base Act rate is the same regardless of payee type — it's the surcharge slabs and, in specific transactions, procedural requirements (like whether the foreign company has any Indian PE-related filing obligations) that diverge.

Permanent establishment changes the entire analysis

If the foreign company has a Permanent Establishment (PE) in India — a fixed place of business, a dependent agent habitually concluding contracts, or a service PE under specific treaty definitions — income attributable to that PE is taxed as business income, generally at higher rates than the concessional royalty/FTS/interest rates, and the PE itself typically has its own return-filing and TDS-compliance obligations as if it were a resident entity for that income stream.

Determining PE status is one of the most fact-intensive, dispute-prone areas of international tax — it depends on the actual conduct of the business in India, not just the contractual structure, and is genuinely a specialist question requiring case-specific analysis rather than a generic rule.

Group and related-party payments need extra scrutiny

Payments to a foreign parent, subsidiary, or group company for management fees, royalty on group IP, or intercompany services attract the same Section 393(2) TDS analysis as third-party payments, plus an additional layer: transfer pricing scrutiny to confirm the payment reflects an arm's-length price. A related-party FTS or royalty payment that's TDS-compliant can still be challenged on transfer-pricing grounds if the amount itself is considered inflated relative to comparable third-party arrangements.

Documentation expectations scale with payment size and frequency

For a one-off, modest payment to a foreign company, a straightforward classification and Form 15CA/15CB filing is usually sufficient. For large or recurring payments — an ongoing royalty arrangement, a management services agreement, or repeated consultancy fees — maintaining a documented classification file, updated TRC on record, and a clear record of the underlying agreement terms materially reduces risk in the event of a later assessment or transfer-pricing audit.

Worked example

A ₹25 lakh annual management fee paid to a foreign parent company

An Indian subsidiary pays its Singapore parent company ₹25,00,000 annually for centralized management and support services. This is classified as FTS. Absent a lower DTAA rate (with valid TRC and Form 10F), 20% TDS (₹5,00,000) applies, requiring Form 15CA and Form 15CB. Separately, the subsidiary should maintain transfer-pricing documentation confirming the fee reflects an arm's-length charge for comparable management services, since related-party payments attract additional scrutiny beyond the TDS analysis itself.

Common mistakes & litigation traps

Confusing TDS compliance with transfer-pricing compliance

Correctly withholding tax on a related-party payment doesn't address whether the payment amount itself is at arm's length — these are two separate compliance requirements.

Missing a PE that exists in substance but not on paper

A foreign company can have a taxable presence in India through the actual conduct of employees or agents here, even without a formally registered branch or office.

Applying individual surcharge slabs to a foreign company payment

Surcharge structures differ between non-resident individuals and foreign companies — using the wrong slab under-deducts or over-deducts tax.