ITR to be filed by non-residents in case earning royalty/FTS

Impact on ITR has to be filed by non-residents in the case earning royalty/FTS income

key implications of the Section 115A amendment and its impact on ITR filing for non-residents earning royalty/FTS income:

• Amendment in Section 115A (2023): The withholding tax rate for fee for technical services (FTS) increased to 20% + surcharge + cess, making the effective rate 20.8%. This is significantly higher than the rates available under most Double Taxation Avoidance Agreements.
• Double Taxation Avoidance Agreements Benefit & Lower Withholding Tax: Many tax treaties (e.g., with the US, UK, and Canada) provide a 15% tax rate. Other treaties (e.g., Belgium, Netherlands, Singapore) offer a 10% tax rate. And Non-residents prefer the Double Taxation Avoidance Agreements rate since it is lower than 20.8%.
• Sec 90(2) – More Beneficial Treatment: A non-resident taxpayer can choose between the domestic tax law (115A) or Double Taxation Avoidance Agreements, whichever is more beneficial. Since Double Taxation Avoidance Agreements rates are lower, non-residents opt for Double Taxation Avoidance Agreements

Income tax return filing requirement under Sec 115A(5):

• Exemption from income tax return filing applies only if taxes are withheld at the 115A rate (20.8%). If Double Taxation Avoidance Agreement rates (10-15%) are applied, the non-resident must file an Income Tax Return Filling in India to report and validate the correct tax rate.
• Non-residents who claim a lower Double Taxation Avoidance Agreements rate for fees for technical services (FTS) must now file an income tax return in India. This ensures compliance with Indian tax laws and proper tax reporting.

Withholding tax obligations under Indian tax laws for both resident and non-resident entities

Summary of withholding tax (WHT) obligations under Indian tax laws for both resident and non-resident entities. Here are the key points from the information provided:

WHT for Payments to Resident Companies:

1. Purchase of Goods: TDS applies on purchases exceeding INR 5 million at a rate of 0.1%.
2. Specified Type of Interest: No threshold, tax rate 10% (reduced to 5% in some cases).
3. Non-Specified Type of Interest: TDS applies on payments exceeding INR 5,000, taxed at 10%.
4. Professional and Technical Services: Payments above INR 30,000 are subject to 10% (professional) and 2% (technical) withholding tax.
5. Royalty and FTS: TDS of 10% applies for amounts above INR 30,000 (reduced to 2% for certain royalties).
6. Perquisites and Dividends: Tax rate of 10% for perquisites above INR 20,000, dividends above INR 5,000.
7. Payments on Property Transfers & Other Transactions: Various rates, including 1% for property purchases above INR 5 million.

WHT for Payments to Non-Resident Companies:

1. Interest on Foreign Currency Borrowings: TDS at 5%.
2. Royalty and FTS: Tax rate is 20% (with exceptions for certain treaties).
3. Capital Gains: Long-term capital gains taxed at 10% for equity shares on which STT is paid, 20% for others.
4. Other Income: Tax rates range from 30% for gaming winnings to 35% for other income.
5. No Threshold for Non-Residents: Withholding tax is applicable on all payments to non-residents without any minimum threshold.

Special Considerations:

1. Liberalized Remittance Scheme (LRS) & Overseas Tour Packages: TCS on LRS for education/medical reduced from 20% to 5%; 20% TCS applies on overseas tour package purchases beyond INR 700,000.
2. A PAN is required for financial transactions exceeding INR 250,000. If the deductee does not provide PAN, withholding tax is applied at the higher of the relevant tax rate or 20%.

Tax Treaty Rates:

Tax treaties between India and other countries may offer lower WHT rates. For example:

• Australia: Dividend 15%, Interest 15%, Royalty 10%/15%, Technical Services 10%/15%
• Mauritius: Dividend 5%/15%, Interest 7.5%, Royalty 15%, Technical Services 10%

Applicability of TDS on Interchange Fees and Payment Gateway Charges

tax deducted at source is generally not applicable on interchange fees, payment gateway charges, or the merchant discount rate. This position is supported by the Central Board of Direct Taxes notifications, the Reserve Bank of India guidelines, and consistent judicial pronouncements, including a landmark The Income Tax Appellate Tribunal ruling in 2025.

CBDT Clarification – Notification Exempting Interchange Fees

The Central Board of Direct Taxes issued Notification No. 47/2016, F. No. 275/53/2012-IT(B) dated 17 June 2016, stating that No TDS shall be deducted on payments of interchange fees in respect of credit card or debit card transactions between acquiring banks and issuing banks. This specifically exempts such payments from tax deducted at source under Chapter XVII-B of the Income Tax Act. Interchange fees paid by banks, payment aggregators, or gateways are outside the TDS net.

Not a Commission/Brokerage : Section 194H Not Attracted

Courts have held that merchant discount rate, interchange fee, or payment gateway charges do not constitute “commission” or “brokerage” u/s 194H because there is no principal-agent relationship. The payment gateway/acquirer operates on a principal-to-principal basis. Charges are merely service fees for enabling electronic payments.

Important Judicial Observations: Payment gateways and aggregators do not collect money on behalf of merchants as “agents.” They provide technology and processing infrastructure, not commission-based services. Therefore, Section 194H does not apply.

RBI Guidelines Reinforce Independent Role of Gateways

The Reserve Bank of India Guidelines on Regulation of Payment Aggregators and Payment Gateways, issued via circular dated 17 March 2020, classify payment aggregators and payment gateways as outsourced service providers, not agents of the merchant. The Reserve Bank of India explicitly states their role is technical and operational, not fiduciary. This supports the Central Board of Direct Taxes’s and the judiciary’s view that tax deducted at source on merchant discount rate/interchange fees is not required.

Key Judicial Rulings – Including Landmark ITAT Ruling (2025)

The Income Tax Appellate Tribunal held No tax deducted at source is deductible under Section 194H on payments made to payment gateway service providers. (One Mobikwik Systems Ltd. vs. JCIT (ITAT Delhi), Sept 2025 )

Key Findings of The Income Tax Appellate Tribunal: Payment gateways do not act as agents of merchants. The charges for the merchant discount rate/payment gateway fee are not commission. Section 194H, therefore, does not apply. The activity is akin to providing technical services, not commission services. This ruling aligns with earlier CIT(A), Tribunal, and High Court decisions on similar matters. (Cases: ITA Nos. 7830/Del/2018, 273 & 274/Del/2025 )

Industry Practice Supported by Law : Based on CBDT, RBI, and ITAT clarifications:

Conclusion

tax deducted at source is not required to be deducted on interchange fees, payment gateway charges & Merchant Discount Rate.  Supported by the Central Board of Direct Taxes Notification No. 47/2016, the Reserve Bank of India guidelines (2020) & Multiple Tribunal and court rulings like The Income Tax Appellate Tribunal Delhi’s 2025 decision in One Mobikwik Systems Ltd. This provides a clear, consistent legal foundation that such charges do not fall under Section 194H and therefore attract no TDS.