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TDS on Director’s Remuneration Payable to Non-Resident Directors: Rate and Case Laws
In today’s globalized corporate environment, it is common for Indian companies to appoint non-resident individuals as directors. However, the tax implications of paying remuneration or sitting fees to such directors are governed under the Indian Income Tax Act, 1961, particularly concerning Tax Deducted at Source (TDS). In this article, we explore the applicable TDS rates, relevant provisions, and important judicial pronouncements related to payments made to non-resident directors.
1. Relevant Legal Provisions
1.1 Section 195 of the Income Tax Act, 1961
Section 195 mandates TDS on any sum (excluding salary) paid to a non-resident, which is chargeable to tax in India. The payer must deduct TDS at the rates in force at the time of payment or credit.
1.2 Section 192 of the Income Tax Act, 1961
If the remuneration is classified as salary, TDS must be deducted under Section 192. This includes monthly remuneration for services rendered as an executive or whole-time director, even if the individual is a non-resident.
1.3 Section 194J – Professional Fees
In some cases, where the director is paid sitting fees or consultancy charges and is not treated as an employee, TDS under Section 194J (10%) may be applicable. However, for non-residents, Section 195 usually prevails.
2. Classification of Director’s Remuneration
| Type of Payment | TDS Section | Applicable Rate | Conditions |
|---|---|---|---|
| Monthly Remuneration (treated as salary) | Section 192 | As per slab rates (plus cess & surcharge) | Employment relationship must exist |
| Sitting Fees / Commission / Consultancy (non-salary) | Section 195 | 20% (plus surcharge and cess) | Applicable to non-resident, not covered under salary |
3. Applicable TDS Rate for Non-Resident Director
If the director is a non-resident and receives fees or remuneration **not** classified as salary, the following rates are applicable:
- Basic Rate: 20%
- Surcharge: 10% (if income exceeds ₹50 lakh), 15% (if income exceeds ₹1 crore)
- Health and Education Cess: 4%
Effective TDS rate may go up to: ~23.92% or higher depending on income slab.
4. Taxability Under DTAA
If the non-resident director resides in a country with which India has a Double Taxation Avoidance Agreement (DTAA), they can opt for DTAA benefits. However, the director must furnish a valid:
- Tax Residency Certificate (TRC)
- Form 10F
- Self-declaration of beneficial ownership
5. Recent Case Laws
5.1 PCIT vs. Dr. Reddy’s Laboratories Ltd. (2023) – Hyderabad ITAT
The company paid director fees and travel reimbursements to non-resident directors. The tribunal held that such payments were taxable in India and liable to TDS under Section 195. DTAA benefits were not admissible due to lack of TRC.
5.2 Enam Securities Pvt. Ltd. v. ITO (2021) (Mumbai ITAT)
Held that commission and sitting fees paid to non-resident directors without employment agreement is not salary and hence, TDS is applicable under Section 195, not 192.
5.3 DCIT vs. Bain Capital Advisors India Pvt. Ltd. (2022)
Company paid high remuneration to a non-resident whole-time director. The tribunal classified it under ‘salary’ and upheld deduction under Section 192, not 195, since an employment relationship existed.
6. Practical Considerations for Companies
- Always verify the residential status of directors before applying TDS.
- If treated as salary, deduct tax as per slab under Section 192.
- For sitting fees or commission, deduct TDS @ 20% plus surcharge & cess under Section 195.
- Check availability of DTAA and collect TRC, Form 10F, and declaration for reduced TDS.
- Consider obtaining a lower/nil TDS certificate under Section 195(2) if applicable.
7. Reporting and Compliance
| Form | Purpose | Due Date |
|---|---|---|
| Form 15CA/15CB | Required for remittances to non-residents | Before remittance |
| Form 27Q | TDS return for non-residents | Quarterly |
| Form 16 / Salary Slip | For payments treated as salary | Annually |
8. Conclusion
The taxation of director remuneration payable to non-resident directors depends on the nature of the relationship (employee or not) and the residential status. If treated as salary, TDS under Section 192 is applicable. In the absence of an employment contract, TDS under Section 195 at 20% or as per DTAA applies. Companies must ensure proper documentation and compliance to avoid penalties and litigation.
With increasing cross-border transactions and regulatory scrutiny, it is essential for companies to consult tax professionals and ensure that payments to non-resident directors are made in accordance with the Income Tax Act and DTAA provisions.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. For specific cases, consult a tax advisor or Chartered Accountant.
