TDS Default Notice - Section 195 on Management Fee to US Parent

The Problem

A Global Capability Centre (GCC) operating in Hyderabad as an Indian subsidiary of a US technology company was paying an annual management fee of ₹2.8 Cr to its US parent for shared services — IT infrastructure, HR systems, legal support, and executive oversight. The payments were made without deducting TDS under Section 195, relying on the India-USA Double Taxation Avoidance Agreement (DTAA).

The Income Tax Officer issued a notice under Section 201(1)/201(1A) holding the GCC to be an "assessee in default" for failure to deduct TDS. The demand included:

• TDS on ₹2.8 Cr at 10% (DTAA rate for FTS) = ₹28L
• Interest under Section 201(1A) at 1.5% per month = ₹14L
• Total: ₹42 lakhs

Why This Happens

Section 195 requires TDS deduction on any payment to a non-resident if the amount is chargeable to tax in India. The key question is whether the management fee is "Fees for Technical Services" (FTS) or "Business Income" of the US parent. Under the India-USA DTAA, FTS is taxable at 10% but business income is taxable only if the US company has a Permanent Establishment (PE) in India. The problem: even when relying on DTAA, Indian law requires the payer to obtain a Tax Residency Certificate (TRC) from the foreign party and file Form 15CA/15CB. Without these, the TDS exemption claim is procedurally defective.

What We Did

Obtaining TRC from US Parent We immediately coordinated with the US parent's tax team to obtain an IRS-issued Certificate of Residency (equivalent to TRC) for the relevant financial years. This was obtained within three weeks.

PE Analysis We prepared a detailed PE analysis memo demonstrating that the US parent had no fixed place of business, no dependent agent, and no construction activity in India. The shared services were managed and delivered from the USA. This ruled out taxability as business income in India.

FTS vs. Business Income Classification Separately, we analysed whether the management fee constituted FTS under the India-USA DTAA Article 12. Our memo argued that the services were management and co-ordination in nature — not technical in the DTAA sense — and therefore fell outside the FTS definition under the "make available" clause of the India-USA treaty.

Retrospective Form 15CA/15CB Filing We worked with the CA certifying authority to file backdated Form 15CA (Part C) declarations and obtain Form 15CB certificates from a practising CA. CBDT's circular on condonation of delay was cited to support the retrospective filings.

Representation Before the TDS Officer A comprehensive written submission was filed with the TDS assessing officer attaching the TRC, PE memo, FTS classification analysis, and Form 15CA/15CB documentation.

The Result

The TDS officer accepted that the US parent was a tax resident of the USA (TRC established) and that the management fee did not constitute FTS under the India-USA DTAA. The demand of ₹42L was reduced to nil. No interest was levied.

Key Takeaway: Any GCC or Indian subsidiary paying management fees, royalties, or service charges to a foreign parent must collect the TRC before the first payment of the financial year and ensure Form 15CA/15CB is filed — even if the ultimate tax conclusion is zero.