Overview on Payments to Project Offices of Foreign Companies in India

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www.carajput.com: Introduction of Form15CA & 15CB

Payments to Project Office (PO) of a Foreign Company in India

Treatment of Payments to Project Offices of Foreign Companies in India under TDS & Form 15CA/15CB compliance:

Payments made to a Project Office of a foreign company in India attract TDS u/s 195 of the Income Tax Act, 1961, and require compliance with Form 15CA/15CB filing requirements. A Project Office is typically regarded as a permanent establishment of the foreign company in India. Consequently, income attributable to the activities carried out in India through such an office is taxable in India as business income.

TDS Obligations

TDS Applicability : Any person (resident or non-resident) making a payment to the Project Office of a foreign company must deduct TDS if the payment is chargeable to tax in India. The Project Office is treated as a non-resident entity for tax purposes (except in specific cases governed by the POEM rules).
Taxable Income : The PO’s income from operations in India is taxable at rates applicable to foreign companies, 40% (plus applicable surcharge and cess) on net taxable income, or at a beneficial DTAA rate, whichever is lower.
Rate of TDS : Without DTAA benefit: Standard TDS rates under the Income Tax Act apply (e.g., 20% for royalty/FTS, 40% on business profits if not covered under specific provisions).
With DTAA benefit: The lower of the Indian domestic rate or the DTAA rate applies, subject to submission of Tax Residency Certificate (TRC) from the foreign tax authority, and Form 10F duly completed by the foreign company.
Lower/Nil TDS Certificate (Optional) : The PO may apply to the Assessing Officer (AO) under Section 197 for a certificate of lower or nil deduction of tax. This is often recommended because the final tax liability is computed on net income, while TDS is typically applied on a gross payment basis.

Comparison: Project Office vs Liaison Office vs Branch Office of Foreign Company

Particulars	Project Office	Liaison Office	Branch Office
1. Legal Status	Extension of the foreign company set up to execute specific projects in India.	Representative office of the foreign company for liaison/communication activities only.	Extension of the foreign company to carry out full-fledged business operations in India.
2. Permitted Activities (as per RBI)	Execution of specific projects/contracts awarded in India.	Communication channel between Head Office and Indian parties; no commercial activity permitted.	Same activities as parent company — trading, consultancy, professional services, etc. (as per RBI approval).
3. Tax Residency Status	Non-resident (considered PE of foreign company).	Non-resident, but not taxable unless it earns income in India (which it generally cannot).	Non-resident (PE of foreign company).
4. Taxability in India	Taxable – Business income attributable to Indian operations is taxable in India as PE income.	Not taxable – If it confines itself to permitted liaison activities (no income generation).	Taxable – Income attributable to Indian operations taxable in India.
5. Typical Tax Rate	40% + surcharge + cess (on net income) or DTAA rate.	Nil (if no income activity); taxed if engaged in business in violation of approval.	40% + surcharge + cess (on net income) or DTAA rate.
6. TDS Applicability (Section 195)	Applicable – on payments made to PO (e.g., FTS, professional fees, project revenue).	Not applicable – since LO cannot receive income; only reimbursement allowed.	Applicable – for payments made to BO (royalty, FTS, interest, etc.).
7. Common Payment Types Attracting TDS	Technical fees, project receipts, consultancy income.	None (only HO reimbursements).	Consultancy fees, royalties, service income, etc.
8. Form 15CA / 15CB Requirement	Required – payment treated as remittance to non-resident entity.	Not required – no remittance of taxable income (only expense reimbursement).	Required – payment is remittance to non-resident foreign company.
9. Applicable Compliance Forms	Form 15CA (Part C) & Form 15CB (if > ₹5 lakh/year).	None (if reimbursement only).	Form 15CA (Part C) & Form 15CB (if > ₹5 lakh/year).
10. Lower/Nil TDS Certificate (u/s 197)	Can be obtained to avoid excess TDS on gross payments.	Not applicable (no taxable income).	Can be obtained for reduced TDS on recurring remittances.
11. DTAA Benefit	Available (with TRC + Form 10F).	Not applicable (no income).	Available (with TRC + Form 10F).
12. Common RBI Regulation Reference	FEMA Notification No. FEMA 22(R)/2016-RB – Regulation 5(d).	FEMA Notification No. FEMA 22(R)/2016-RB – Regulation 5(c).	FEMA Notification No. FEMA 22(R)/2016-RB – Regulation 5(b).
13. Example of TDS Nature	TDS @ 20% on FTS, 40% on business income (subject to DTAA).	No TDS (if no taxable activity).	TDS @ 10%-20% depending on nature (interest, royalty, etc.).
14. Typical Risk Area in Audit	Misclassification of payments as reimbursements to avoid TDS.	Engaging in revenue activity (tax evasion risk).	Misreporting of foreign income vs Indian operations.
15. Key Documentation Required	Project contract, RBI approval, PAN, TRC, Form 10F, lower TDS certificate (if any).	RBI approval, expense details, proof of reimbursement, bank statements.	RBI approval, PAN, TRC, Form 10F, audited branch accounts.

Liaison Office: Cannot earn income in India; only acts as a communication channel. Any income-generating activity would violate RBI approval and attract tax under Section 9 and FEMA penalties.

Project Office: Treated as a Permanent Establishment (PE) of the foreign company. All profits attributable to Indian projects are taxable in India.

Branch Office: Also treated as PE; all income attributable to Indian business operations is taxable. Full TDS and Form 15CA/CB compliance required for payments/remittances.

Office Type	Taxable in India?	TDS u/s 195	Form 15CA/15CB	Remarks
Liaison Office	No (if only liaison activity)	No	No	Only reimbursements permitted.
Project Office	Yes	Yes	Yes	Treated as PE of foreign company.
Branch Office	Yes	Yes	Yes	Business income taxable in India.

An Indian company makes a payment of technical fees to a project office of a foreign company operating in India.

A project office of a foreign company in India is not a separate legal entity; it is merely an extension of the foreign parent company.
For income tax purposes, a project office is generally treated as a non-resident, unless it constitutes a Permanent Establishment (PE) in India under a Double Taxation Avoidance Agreement .
Therefore, payments such as technical fees, royalty, or consultancy charges made to a PO are deemed to accrue or arise in India under Section 9(1)(vii).
These are taxable as Fees for Technical Services : typically at 20% plus applicable surcharge and cess, subject to relief under the DTAA (if applicable).
TDS under Section 195 applies, as payment is made to a non-resident entity (the foreign company via its project office).

Form 15CA / Form 15CB Compliance

1. Form 15CA (Declaration by Remitter)

Filed online by the remitter before making the payment through an authorised dealer/bank. It provides details such as nature of payment, amount, TDS deducted, and purpose code. Mandatory for most foreign remittances unless specifically exempt under Rule 37BB, e.g.: Certain import payments, Specified personal remittances by individuals

2. Form 15CB (Certificate by Chartered Accountant)

Income Tax Form 15CB Issued by a practicing CA Certifying the nature of remittance, taxability under Indian law, and TDS compliance. Required when The remittance is taxable in India, and The aggregate of such remittances exceeds ₹5 lakh in a financial year, and No lower/nil TDS certificate has been obtained from the AO. Flow of Compliance, as mentioned below:

Step	Action	Responsibility
1	Determine taxability of payment to PO	Remitter / CA
2	Deduct TDS under Section 195 (if applicable)	Remitter
3	Obtain Form 15CB (if applicable)	Chartered Accountant
4	File Form 15CA (appropriate Part A/B/C/D)	Remitter
5	Submit acknowledgement and CA certificate to bank	Remitter

Form 15CA / 15CB Compliance : Summary Table payment of technical fees to a project office of a foreign company operating in India.

Particular	Treatment
Entity Status	Project Office = Extension of foreign company (Non-resident)
Nature of Income	Business income taxable in India (as PE of foreign company)
TDS Section	Section 195
Tax Rate	40% + surcharge + cess (or lower DTAA rate)
Form 15CA/15CB	Mandatory (unless exempt)
Option for Lower/Nil TDS	Available under Section 197

Even if the payment is made to an Indian bank account held by the project office, the beneficial owner of the income is the foreign company. Hence, such remittance is considered a foreign remittance for Rule 37BB compliance. Accordingly, Form 15CA and 15CB must be filed before making the payment.

Particulars	Details
Payee	Project Office of a Foreign Company (in India)
Tax Residency	Non-Resident (Foreign Company)
Applicable Section	Section 195 – TDS on payments to non-residents
Nature of Payment	Technical Fees (FTS)
TDS Rate	20% + surcharge + cess (or as per DTAA)
Form 15CA / 15CB	Required
Reason	Payment ultimately to non-resident entity; taxable under Section 9(1)(vii)