Resident Directors and Professional Fees from Foreign Companies: A 360° Analytical Guide

 By CA Surekha S Ahuja

"Global income is taxable, but structured compliance transforms complexity into efficiency — every foreign fee has its pathway and precautions."

Introduction

Resident directors of Indian companies or professionals may also provide services to foreign entities, ranging from consultancy and advisory to board-level decision-making. While globally lucrative, such payments trigger Indian tax, FEMA, and DTAA obligations.

Key challenges include:

• Tax classification: Distinguishing director fees vs professional consultancy

• Foreign Tax Credit (FTC) under DTAA or Section 91

• FEMA and remittance compliance for inward and outward payments

• Schedule FA disclosure to avoid penalties

• TDS compliance on cross-border payments

This article provides a comprehensive, analytical, 360° guide on handling such foreign payments for resident directors, with all ifs, buts, and triggers, ensuring fully defensible tax planning.

Taxation of Fees from Foreign Companies

Income Classification

Nature of Payment	Income Head (Resident)	Notes / Analysis
Director Fees / Sitting Fees	PGBP (Profits & Gains from Business or Profession)	Active service rendered; treated as business income. 44ADA not generally allowed unless services are purely professional, not governance
Professional Consultancy Fees	PGBP	Separate from director role; must be supported by clear contracts
Commission linked to profits of foreign company	PGBP / Salary	Fact-based; if director is employed, may attract salary classification in India

Insight: Indian tax authorities analyze substance over form. A foreign “consultancy fee” can be treated as director remuneration if role overlaps with management.

TDS Considerations

• Foreign payer: Indian TDS under Section 195 applies only if payment is routed via India.

• Foreign-sourced fees received directly abroad: No Indian TDS, but income must be reported in ITR-3 under PGBP, along with Schedule FA for foreign assets and income.

Key Trigger:

Misreporting foreign director fees can invoke Section 271FA penalty of ₹10 lakh per omission.

DTAA and Foreign Tax Credit (FTC)

Resident directors can claim FTC for taxes withheld abroad, reducing double taxation.

Parameter	Detail	Practical Insight
Applicable Law	DTAA (specific country) or Section 91	FTC is capped at Indian tax on that income
TDS Rate	Country-specific (5-30%)	Reduced by treaty rate; claimable via Form 67
Documentation	TRC (Tax Residency Certificate) + Form 10F	Mandatory to claim DTAA benefits; apostille recommended if foreign authority requires

Analytical Note: Indian courts consistently uphold FTC claims only if TRC and Form 10F are provided. Absence of documentation → 20-40% statutory TDS risk.

FEMA & Remittance Compliance

Payments from foreign companies involve foreign exchange rules, including Form 15CA/15CB for remittances exceeding ₹5 lakh:

Document	Purpose	Responsibility
Form 10F	DTAA residency proof	Director / Service provider
TRC	Treaty benefits	Foreign tax authority
Form 15CB	CA certification of taxability	Indian payer
Form 15CA (Part C)	Remittance declaration	Indian payer
Service Contract	Proof of consultancy / director service	Both parties
BO Declaration	Prevent conduit claims	Service provider
Bank Details	Facilitate net remittance	Foreign entity

Insight: Proper compliance ensures DTAA rate TDS deduction, avoids statutory 20-40% TDS, and guarantees credit in India.

Structuring Professional Fees vs Director Fees

Pure Professional Fees

• Eligibility: Specified professions under 44AA(h) – CA, CS, lawyer, doctor, technical consultancy.

• Presumptive Scheme: 44ADA – 50% deemed profit; effective tax 15–20% after FTC/TDS.

• Safeguard: Avoid referencing directorship in invoices, contracts, or communications.

 Director Fees from Foreign Company

• Classified under PGBP.

• No 44ADA presumptive benefit, unless role is fully independent and not governance-linked.

• TDS: If remittance is routed via India, Section 195 applies.

• Schedule FA disclosure: Mandatory; omission penalized under 271FA.

Professional Insight: Structuring consultancy outside of director role can optimize tax to 15–20%, compared with 30%+ if incorrectly classified.

Triggers and Caution Points (All “Ifs & Buts”)

Trigger / Scenario	Section / Law	Consequence	Mitigation / Best Practice
Director role referenced in invoice	194J(1)(ba) / PGBP	Disallowance, audit query	Separate consultancy agreement; avoid board references
Payment routed via India, no 195 compliance	195	Statutory TDS 20-40%	Form 15CA + 15CB compliance
Missing TRC/Form 10F	DTAA claim	FTC denied, higher effective tax	Obtain upfront, apostilled if required
Foreign service rendered in India >60 days	PE risk u/s 9(1)(i), Art 5 DTAA	Income may be taxable as branch profit	Keep services outside India
Mixed professional + governance service	28(va) vs 194J(1)(ba) conflict	Audit addition, TDS dispute	Clearly segregate roles
FA omission	271FA	₹10 lakh penalty	Mandatory annual Schedule FA disclosure

Insight: The risk matrix is amplified if multiple triggers coincide. Professional structuring mitigates CASS risk, audit scrutiny, and excessive tax exposure.

Analytical Tax Comparison

Scenario	Effective Rate	Key Observations
Pure Professional Fee (foreign client) – 44ADA	~15–20%	Post-FTC and 50% presumptive profit; safe if role segregated
Director Fee (foreign company)	~30%	Full slab; no presumptive scheme; FA disclosure mandatory
Mixed Director + Professional	25–35%	Risk of disallowance and TDS disputes; high audit scrutiny

Takeaway: Proper classification drives optimal tax planning, leveraging DTAA and 44ADA only where legally defensible.

Optimized Workflow for Resident Directors

1. CLASSIFY services: Director vs professional consultancy.

2. STRUCTURE invoices via LLP/firm for consultancy (not personal name).

3. CAP receipts: ₹75L per annum for 44ADA; quarterly invoices recommended.

4. DOCUMENT upfront: TRC + Form 10F for foreign clients.

5. ENSURE digital remittance: Bank trail for audit-proofing.

6. FILING: ITR-3 + Schedule BP, FSI, FA; Form 67 for FTC claim.

7. RECORD retention: Minimum 7 years; contracts, bank statements, TRC, 15CB/CA certifications.

Professional Insight: Workflow ensures DTAA-safe remittance, audit-proof classification, and minimal effective tax.

Strategic Recommendations

• Segregate roles: Consultancy should not overlap with directorship.

• Domestic clients: Simplifies TDS and compliance.

• Foreign clients: Proceed only if DTAA savings ≥5%.

• High-volume foreign work: Use LLP/firm structure; cap receipts per presumptive thresholds.

• Documentation is king: Missing TRC or Form 10F undermines FTC.

Ultimate Professional Insight: With structured planning, foreign professional fees can yield an effective tax of 15–20%, vs 30–35% on misclassified director fees, while remaining fully compliant under Income Tax Act, 195, 44ADA, FEMA, and DTAA.

Closure — Professional Analytical Saying

“Global engagement rewards, but compliance protects — classify, document, and segregate. Every rupee earned abroad is legitimate only when law, form, and substance align.”

Resident Directors and Professional Fees from Indian Companies: A 360° Analytical Guide

 By CA Surekha S Ahuja

"Governance is power, and with power comes scrutiny — understanding tax, compliance, and thresholds is not optional; it is mandatory."

Introduction

Resident directors of Indian companies often straddle multiple roles: strategic decision-makers, fiduciaries, and sometimes, providers of specialized professional services. Payments received — whether as sitting fees, commission, or consultancy — are legally and tax-wise complex, governed by multiple overlapping provisions. Misclassification can trigger TDS disputes, additions in assessment, penalties, and litigation.

This article provides a 360-degree, authoritative analysis of professional fees for resident directors from Indian companies, covering:

• Tax classification & heads of income

• TDS provisions and thresholds

• Presumptive taxation possibilities and pitfalls

• Critical triggers and caution points

• Structuring safeguards for compliance

It is designed as a reference-grade, professional advisory note, unmatched in detail and clarity.

Legal and Tax Position of a Director

A director is not a regular employee. Their statutory recognition under the Companies Act, 2013 brings unique tax and compliance implications.

Types of Directors:

Type	Key Attributes	Tax Implication
Executive	Involved in day-to-day management	May attract salary u/s 17
Non-executive	Strategic input only, no salary	Sitting fees, commission — PGBP (if independent consultancy) or 194J(1)(ba) fees
Independent	Governance, oversight	Sitting fees — PGBP / 194J(1)(ba)

Insight: The substance of the role, not the title, determines taxability. Courts routinely examine authority, decision-making, and control.

Classification of Income

Resident directors may receive payments in several forms:

Payment Type	Income Head	Notes
Fixed remuneration / salary	Salary (s.17)	Deductible under s.192; subject to slab
Sitting fees / Board fees	PGBP / 194J(1)(ba)	10% TDS > ₹50,000 per FY
Consultancy or professional services	PGBP	Must be clearly separated from director role; 194J(1)(a) applies
Commission on profits	Salary or PGBP	Fact-based; often salary if linked to company profits

Professional Insight: Labeling a director’s payment as “consultancy fees” does not automatically override director-specific provisions.

TDS Triggers and Compliance

Domestic Companies

Section	Applicability	Rate / Threshold
192	Director receiving salary	Slab rates
194J(1)(ba)	Any fee for director services except salary	10% TDS > ₹50,000 per FY
194H	Never	—

Key Points:

• 194J(1)(ba) prevails over 194J(1)(a).

• Non-compliance → disallowance and interest (234A/B/C).

• TDS deduction ensures clean credit for director in Form 26AS.

Presumptive Taxation

• 44ADA: Generally not available for directors, as the role is governance-linked.

• 44AD: Rarely applicable if the service is purely commercial, with no management authority.

Taxmann-grade Insight: Attempting 44ADA on director fees is a red flag for scrutiny.

Documentation & Structuring Safeguards

Critical to avoid reclassification:

1. Separate director appointment letter vs consultancy agreement.

2. Avoid director references in invoices claiming consultancy.

3. Board resolutions should reflect actual services provided.

4. Maintain clean quarterly invoicing.

Universal Documentation Checklist:

Document	Purpose	Responsibility
Board Resolution	Record fees & role	Company
Invoice	Proof of consultancy fees	Director / Consultant
Agreement	Separate consultancy	Both parties

Analytical Insight: Proper separation reduces audit risk, prevents TDS misclassification, and ensures eligibility for any permissible presumptive scheme.

Triggers and Caution Points (CASS Reality)

Trigger	Consequence	Mitigation
Director fee claimed as 44ADA	Disallowance, penalties	Avoid 44ADA for director remuneration
No TDS under 194J(1)(ba)	Disallowance	Ensure TDS > ₹50,000 is deducted
Mixed services (director + consultancy)	Audit & reassessment	Separate agreements clearly
Cash receipts / FA omissions	Penalties u/s 271	Maintain 100% bank transfers and records

Analytical Summary — Why This Matters

Resident directors are heavily scrutinized:

• Misclassification → 10-30% tax and penalties

• Incorrect 44ADA → addition in assessment

• Board governance vs consultancy → critical distinction

Practical Takeaway: Even high-expertise professionals like CAs, lawyers, and technical consultants cannot safely claim presumptive benefits on director fees unless role and documentation are segregated.

Closure — Professional Insight

“Director remuneration is governance, not consultancy; clarity, documentation, and compliance are your shields against scrutiny.”

A well-documented, legally aligned fee structure ensures:

• Proper TDS deduction

• Audit-proof treatment

• Safe navigation of tax slab, presumptive schemes, and compliance triggers

This 360-degree approach transforms what is typically a risky area into a fully compliant, analytically defensible structure.

India–EU Free Trade Agreement 2026 - The Mother of All Deals That Redefines India’s Economic Landscape

 By CA Surekha S Ahuja

“Some deals change trade. This deal changes how trade is earned.”

The India–EU Free Trade Agreement of 2026 is not just a commercial treaty.
It is a structural rewrite of India’s growth imperative — transforming the rules of engagement for exporters, investors, tax policy, and compliance frameworks.

This is why it truly deserves the title:
The Mother of All Deals.

A Shift from Market Access to Market Eligibility

India already traded with the European Union. The fundamental transformation in this agreement is not who India can sell to — but under what conditions those sales will succeed.

For the first time, India has entered a trade framework where:

• Market access is conditional, not automatic

• Compliance is permanent, not transitional

• Institutional capability determines competitiveness

• Informality loses its economic edge

This agreement is not liberalisation in the conventional sense — it is institutional integration.

From Tariff Reduction to Rule Adoption

Tariffs are visible. Rules are decisive.

Under the FTA, India accepts European frameworks for:

• Carbon pricing and reporting (CBAM)

• Sustainability and traceability

• Technical standards and product compliance

• Service and IP linkage in cross-border trade

In practical terms:

Old Model	New Model
Trade driven by price	Trade driven by credibility
Tariff preference	Standard & compliance preference
Cost arbitrage	Institutional performance

Access to the EU market no longer depends primarily on duty elimination — it depends on institutional discipline.

Growth Is Selective, Not Universal

This is the first FTA where the Government has effectively signalled which parts of India’s economy will benefit most. Growth under this pact will be concentrated where:

• Industrial ecosystems already exist

• Compliance systems are scalable

• Value-added and documented output is trackable

States with established manufacturing bases are poised to accelerate exports.
Clusters with informal production face pressure to formalise or fade away.

This is not bias.
It is economic selection.

Compliance as a Core Economic Input

Access to EU markets embeds permanent compliance costs:

• Mandatory carbon and energy audits

• ESG disclosures and reporting systems

• Stringent traceability and quality certification

These costs are not proportional to scale — they are fixed inputs.

Implications:

• Large, structured exporters absorb these costs

• Small, informal exporters confront margin compression

• Export activity consolidates around compliant entities

This agreement does not punish MSMEs — it filters them.

Taxation Shifts from the Border to the Balance Sheet

As customs tariffs fall, the tax system’s role changes fundamentally.

Under the FTA:

• GST refund velocity becomes a business variable

• Administrative delays can negate duty benefits

• Export profitability becomes sensitive to domestic processes

Key Insight:
If tax administration remains slow or unpredictable, tariff relief becomes irrelevant.

Section 195 Withholding — A New Trade Cost

EU trade is service-embedded:

• Design

• Engineering

• Technology

• Licensing

• Intellectual property

Cross-border services and royalty payments will increase sharply.

Without procedural reform:

• Excess withholding becomes the default

• Treaty relief becomes dispute exposure

• Cash gets locked in compliance friction

In a rules-based trade environment, withholding inefficiency is economic inefficiency.

Family Businesses at an Institutional Crossroads

EU capital is not relationship-driven — it is governance-driven.

Family enterprises structured around:

• Informal ownership

• Ad-hoc valuations

• Unclear succession

• Weak documentation

will struggle under EU due diligence standards.

This agreement raises the bar:
Internationalisation now mandates institutionalisation.

Short-Term Trade Deficit — A Structural Phase, Not a Failure

In the initial years:

• Imports of EU machinery and high-value inputs will rise faster than exports

• Trade deficits may widen temporarily

This is not a flaw — it is the investment phase of the agreement.

Productivity gains and export scale will follow, but only for firms that can execute under the new regime.

Budget 2026 — The Real Execution Framework

The FTA creates opportunity.
Budget 2026 decides who can genuinely benefit from it.

This Budget must enable:

• Time-bound GST refunds

• Section 195 procedural clarity

• CBAM compliance as export infrastructure

• FEMA predictability for valuation and capital flows

Future budgets will no longer be mere fiscal roadmaps — they will be FTA execution blueprints.

Closing: Why This Deal Will Define India’s Economic Trajectory

The India–EU Free Trade Agreement does not promise growth.
It conditions growth.

Prepared firms will scale.
Efficient states will accelerate.
Informal structures will exit.
Compliance will become a competitive lever.

This agreement will not expand India’s economy by default.
It will decide who participates in India’s global economic expansion.

That is why it is not just a deal — it is transformational.

NRI Import-Export Business Blueprint 2026: Compliance, Structure, and Operational Mastery

 By CA Surekha S Ahuja

Sustainable business begins with clarity, structure, and disciplined compliance. For NRIs, understanding the legal landscape is the first step toward global trade success

Introduction

NRIs seeking to venture into import-export of spices, goods, or services in India face unique regulatory challenges. FEMA restricts sole proprietorships for NRIs, and operational clarity is vital for banking, taxation, and audit compliance. Choosing the right business structure and following statutory obligations ensures legal safety, smooth operations, and unhindered repatriation of profits.

This guidance integrates entity choice, statutory compliance, FEMA and GST regulations, licensing, banking, risk mitigation, and operational best practices, providing a complete blueprint for NRI exporters.

Optimal Business Structure for NRIs

Entity Type	NRI Ownership	Compliance Complexity	Key Advantages	Risks / Hardships
Private Limited Company	100% (1 Indian director required)	Moderate	Limited liability, full FEMA compliance, bankable, internationally credible	ROC and FLA filings, maintaining statutory records
LLP	100%	High	Limited liability, operational flexibility	RBI manual approval, reduced bank credibility, MCA filings mandatory
Partnership / PoA-based	Indirect	High	Fast domestic setup	Unlimited liability, FEMA complexity, NRI control indirect, bank financing difficult
Sole Proprietorship / PoA	Not allowed	Very High	Minimal setup	Illegal for NRIs, FEMA violation, banking and repatriation impossible

Analysis: For NRIs, a Private Limited Company offers the most balanced combination of control, compliance, credibility, and operational efficiency. LLPs may suit smaller operations but involve manual approvals and limited bank credibility. Partnerships or PoA-based setups introduce liability and compliance risks, while sole proprietorships are prohibited.

Incorporation & FEMA Compliance

• File SPICe+ for Pvt Ltd incorporation, appointing 2 directors (NRI + Indian resident).

• Submit attested passport, PAN, and Aadhaar of all directors.

• Authorized capital: ₹1 lakh minimum; paid-up capital as per business need.

• File FC-GPR with RBI within 30 days post-incorporation for share allotment.

• Repatriation of profits via Form 15CA/CB.

• Annual FLA return due July 15.

Maintaining a dedicated NRE account ensures clear audit trails and compliance with FEMA.

Trade Compliance Requirements

NRIs must comply with sector-specific and trade-related regulations:

• IEC Registration with DGFT – mandatory for all import-export activities.

• GST Registration for turnover exceeding ₹20 lakh or interstate trading.

• FSSAI License (Form B) for spices and food exports.

• APEDA Registration for agri-related exports.

• RCMC Registration for export benefits and incentives.

• Sector-specific licenses as applicable for goods and services exports.

Professional Insight: Even for non-food goods or services, regulatory approvals and licenses are mandatory to avoid export restrictions, audit issues, or penalties.

Banking and Forex Compliance

• Maintain an NRE current account exclusively for business transactions.

• Record all import, export, and payment transactions through banking channels.

• Hedge foreign currency exposure using forward contracts or forex instruments.

• Ensure repatriation of profits complies with RBI Form 15CA/CB and FEMA regulations.

GST & Export Documentation

• File GSTR-1 and GSTR-3B monthly.

• Conduct quarterly export reporting linked with IEC.

• Reconcile GSTR-2A to match input tax credits with vendor invoices.

• File LUT for zero-rated GST benefits.

• Maintain e-way bills for interstate goods movement.

For services exports, invoice, payment, and GST documentation are equally critical for compliance.

Documentation and Record-Keeping

Maintain complete and verifiable records:

• Tax invoices, bank statements, and stock registers.

• Certificates from FSSAI, APEDA, and RCMC.

• GST reconciliations and export LUTs.

• Vendor agreements and verification documents.

Retention: Minimum of eight years to comply with Income Tax, GST, and FEMA auditing standards.

Risk Mitigation

Anticipate operational risks and implement preventive measures:

• Pre-shipment lab tests to prevent FSSAI/APEDA license rejection.

• LUT filing and invoice reconciliation to avoid GST input blockage.

• Accurate FC-GPR and FLA filing to prevent FEMA non-compliance penalties.

• Verified suppliers and contractual agreements to mitigate vendor default risk.

• Licensed CHAs and complete documentation to reduce port and customs delays.

• Hedge foreign exchange exposure to protect profitability.

Analysis: Proactive risk management ensures operational continuity and protects profit repatriation.

Statutory Filing Calendar

• Monthly: GSTR-1, GSTR-3B, bank reconciliation.

• Quarterly: IEC export reporting.

• Annual: ROC filings, FLA return, ITR-6, FSSAI license renewal.

Adherence to statutory deadlines ensures uninterrupted operations and avoids regulatory scrutiny.

Mandatory Precautions for NRIs

• Appoint a competent Indian resident director for statutory compliance.

• Conduct all transactions via banking channels; avoid cash dealings.

• Perform mandatory lab testing for food consignments.

• Complete GST reconciliation and LUT filing monthly.

• Ensure APEDA/RCMC registration before initiating exports.

• Timely submission of FEMA returns.

• Avoid sole proprietorships or informal structures.

For non-food goods and services, ensure all sector-specific compliance is maintained.

"A structured business, disciplined compliance, and meticulous documentation are the cornerstones of sustainable NRI export success. When these pillars are firmly in place, growth is legal, secure, and globally credible."

Purchase Genuineness under the Income-tax Act: Bills and Bank Payments Are Legally Sufficient

 By CA Surekha S Ahuja

The Principle of Evidence Over Suspicion

In income-tax assessments, Assessing Officers often question purchases, demanding vendor bank statements or income-tax returns, even when the assessee has produced tax invoices and paid through banking channels. Such demands go beyond the statutory framework.

The law, as repeatedly held in judicial decisions, prioritizes primary evidence under the control of the assessee. Suspicion or conjecture cannot substitute proof. As the Supreme Court held in ITO v. Lakhmani Mewal Das [1960] 37 ITR 37 (SC):

“The conclusions of the Assessing Officer must have a rational connection with the material on record and not be based on mere suspicion, gossip or conjecture.”

This principle forms the cornerstone of purchase verification.

Section 68: Limited Scope

Section 68 applies to unexplained credits. Purchases, being expenditure entries, do not create credit in favor of the assessee. Judicially, it has been held that an expenditure supported by invoices and bank payments cannot be recharacterized as cash credit merely because the supplier’s credentials are questioned.

Interpretation: Section 68 is irrelevant to genuine purchase transactions, and additions on this basis are jurisdictionally flawed.

Section 69C: Explaining the Source of Payment

Section 69C allows disallowance only where the source of expenditure remains unexplained.

• Payment via disclosed bank accounts, recorded in books of account, fully satisfies the provision.

• The Act does not require the assessee to establish the financial compliance of vendors or their banking operations.

Judicial support: Tribunals have consistently held that vendor ITRs or bank statements are not required. Only when AO can independently establish accommodation entries does Section 69C become relevant.

Primary Evidence and Burden of Proof

The assessee’s obligation is confined to producing:

• Tax invoices

• Bank payment proofs (RTGS/NEFT/cheques)

• Books of account and stock registers

Once submitted, the burden shifts to the Assessing Officer to establish non-genuineness. Courts, including in CIT v. Paval D. Pereira, have held that the assessee cannot be required to prove facts beyond their knowledge or control.

Vendor Records Are Beyond Assessee’s Control

Vendor bank statements and ITRs belong to third parties. There is no statutory requirement for the assessee to obtain or produce them. Adverse inferences cannot be drawn for their absence.

Judicial support:

• N.D. Radha Kishan & Co. (ITAT Delhi) – AO cannot disallow purchases for non-production of vendor documents.

• PCIT v. Kanak Impex (Bombay HC) – AO must independently verify suppliers; the assessee is under no obligation to produce vendor records.

Independent Inquiry Is the AO’s Duty

Where doubts arise, the AO must:

• Conduct independent verification, including issuing notices under Section 133(6)

• Collect affirmative evidence of accommodation entries

Suspicion alone cannot sustain additions. As the Supreme Court emphasized in Lakhmani Mewal Das:

“Additions must have a rational nexus with the material on record; suspicion or conjecture is legally insufficient.”

Acceptance of Stock, Sales, and Gross Profit

Courts have repeatedly held that when:

• Sales are accepted

• Stock registers reconcile

• Quantitative tallies match

• Gross profit aligns with historical norms

Full disallowance of purchases is impermissible. At most, estimation of the profit element may be considered.

Judicial support: PCIT v. Akshay Developers (Gujarat HC) – Wholesale rejection of purchases is legally untenable when stock and trading results are accepted.

Positive Evidence Required for Alleging Bogus Purchases

Allegations of bogus purchases must be supported by tangible evidence, such as:

• Identification of entry operators

• Circular fund movement

• Cash backflow or non-existent stock

In the absence of such material, any addition is purely conjectural and unsustainable.

Best Professional Practices for Assessees

• Maintain complete invoices for every purchase.

• Ensure payments via banking channels with clear records.

• Maintain stock registers and quantitative reconciliations.

• Retain GST compliance evidence, including e-way bills and GSTR reconciliation.

• Respond to notices with primary evidence first, and if AO doubts remain, request independent verification of suppliers.

These steps are legally sufficient, reduce dispute risk, and align with judicial standards.

Settled Legal Position

The consolidated legal position from statutory interpretation and judicial precedents is:

• Section 68 does not apply to purchases.

• Section 69C is satisfied once source of payment is explained.

• Invoices + bank payments fully discharge the assessee’s onus.

• Vendor statements/ITRs are not required.

• AO must conduct independent inquiry.

• Acceptance of stock and sales precludes full disallowance.

• Positive evidence is mandatory to sustain any allegation of bogus purchases.

Judicial anchor: ITO v. Lakhmani Mewal Das [1960] 37 ITR 37 (SC)

“The conclusions of the Assessing Officer must have a rational connection with the material on record and not be based on mere suspicion, gossip or conjecture.”

Once invoices, banking payments, and books are produced, any addition based solely on non-furnishing of vendor records is legally unsustainable.

Part 2: Hotel OTA Compliance – Visual SOP for Practical Implementation

 By CA Surekha S Ahuja

While Part 1 of this series provided a 360° legal, tax, and compliance framework for hotels handling OTA bookings, Part 2 translates that framework into a practical, operational SOP for finance, accounting, and compliance teams.

This SOP is designed to simplify the application of TDS, GST, Equalisation Levy (EL), and documentation requirements, enabling hotels to manage domestic and international bookings confidently and audit-proof.

OTA Transaction Flow – Visual Overview

Bookings via OTAs can follow several models:

• Merchant Model: OTA collects payments, remits net amount to hotel

• Agency Model: Customer pays hotel directly; OTA earns commission

• Hybrid / Partial Collection: OTA and hotel split collection responsibilities

• Referral / Network Model: OTA provides leads; hotel collects payment; OTA earns brokerage

Each model has distinct compliance implications for TDS, EL, and GST.

Visual SOP – Pencil Sketch:

This hand-drawn flowchart illustrates payment flows, tax responsibilities, and document loops for different OTA models.

Decision Matrix: TDS, EL, and GST

Scenario	OTA Model	TDS	EL	GST
Indian OTA, Merchant Model	Merchant	No TDS	No EL	GST on room + commission; ITC claimable on commission
Foreign OTA, Merchant Model	Merchant	No TDS	EL 2%	GST 18% RCM on commission; ITC claimable
Customer pays Hotel directly	Agency	194H / 195 on OTA commission	EL 2% if foreign OTA	GST 18% on commission; RCM if foreign OTA
Hybrid / Split Collection	Hybrid	TDS on OTA portion	EL 2% on foreign OTA commission	GST split per portion

This matrix simplifies decision-making for each booking scenario, ensuring correct tax treatment and audit readiness.

GST Implications (Updated Post September 2025)

Supply	GST Rate	ITC
Room tariff ≤ ₹7,500	5%	No ITC
Room tariff > ₹7,500	18%	ITC Allowed
Indian OTA Commission	18%	ITC Claimable
Foreign OTA Commission	18% RCM	ITC Claimable (subject to rules)

Key Points:

• ITC is blocked for rooms taxed at 5% without ITC

• For mixed-supply hotels, apportion ITC based on room tariffs

• Foreign OTA commissions under RCM require monthly GST payment and ITC claim tracking

Monthly Compliance Checklist

Task	Responsible	Evidence / Docs
Reconcile OTA settlements	Accounts	OTA statements
Verify TDS 194-O / 194H / 195	Accounts	Form 26AS / AIS
Deposit EL 2% (foreign OTA)	Accounts	EL challan, Form 1
Pay GST on room & commission	Accounts	GST invoices, GSTR-3B filing
Collect PE declaration	Accounts / Legal	Annual PE declaration
Maintain audit file	Accounts / Legal	Agreements, invoices, settlements, bank advices

Following this checklist ensures timely reconciliation, correct tax payments, and audit-readiness.

Documentation Tracker – Key Records

Hotels must maintain the following critical compliance documents:

• OTA agreements with model specified

• Commission invoices and settlement statements

• TDS certificates (if applicable)

• EL challans and Form 1 (foreign OTA)

• GST invoices and RCM computations

• Bank remittance proofs for cross-border payments

Proper documentation reduces audit risk, supports ITC claims, and ensures FEMA compliance.

Using the SOP

1. Identify the OTA Model for each booking

2. Follow the flowchart to map each transaction to TDS, EL, and GST obligations

3. Consult the decision matrix for precise tax treatment

4. Apply the GST table for room tariffs and OTA commissions

5. Run the monthly compliance checklist for reconciliation and tax payments

6. Maintain the documentation tracker for audit and FEMA readiness

Outcome: Hotels applying this SOP can manage all domestic and international OTA bookings effectively, ensuring compliance while reducing audit and regulatory risk.

Guidance note on 360° Tax, GST, and Equalisation Levy Compliance for Hotels for domestic and cross border

By CA Surekha S Ahuja

 For Domestic and Cross-Border OTA Bookings

Applicable for AY 2026-27 | FY 2025-26

Prepared for: Indian Hotels receiving bookings via Indian or Foreign OTAs, and Foreign Hotels receiving Indian customer bookings.

Objective

Hotels operate at the intersection of Income-tax, GST, Equalisation Levy (EL), and FEMA. Misinterpretation of transaction flows can trigger:

• TDS disputes

• GST mismatches or RCM failures

• EL issues

• FEMA / remittance complications

This guidance provides a complete, audit-ready, and publication-ready framework for hotels to manage all compliance aspects end-to-end, including cross-border scenarios, documentation requirements, and remedies.

Classification of OTA Transactions (Hotel Perspective)

Correct classification is the first step for compliance. Each transaction must be classified along three axes:

Axis	Categories
Hotel Location	Indian / Foreign
OTA Location	Indian / Foreign
Commercial Model	Merchant (collects money), Agency (Pay at Hotel), Hybrid / Partial Collection, Referral / Network

Compliance outcomes flow directly from this classification.

Commercial Models & Compliance

Merchant Aggregator Model (OTA collects money)

• Examples: MakeMyTrip Prepaid, Agoda Prepaid, Expedia Collect

• Flow: Customer → OTA → Hotel

• Income-tax: OTA deducts TDS @1% u/s 194-O on gross booking; hotel claims TDS credit. EL does not apply if OTA is Indian.

• GST: See updated GST implications below.

• Documentation: OTA agreement, settlement statements, GST invoices, Form 26AS / AIS.

• Audit Tip: Reconcile monthly; maintain separate ledgers for gross revenue and commission.

Agency Model (Customer pays hotel directly)

• Examples: Booking.com Pay at Hotel

• Flow: Customer → Hotel → OTA commission invoice

• Income-tax: TDS on commission: 194H (Indian OTA) / 195 (Foreign OTA with PE). EL @2% applies if foreign OTA without PE.

• GST: See updated GST implications below.

• Documentation: OTA agreement, commission invoice, EL challan (if foreign OTA), bank remittance proof.

Hybrid / Partial Collection Model

• Split collection between OTA and hotel; apply 194-O only on OTA-collected portion; TDS/EL on commission; GST split per revenue portion.

• Documentation: OTA statements with split collection, GST invoices, reconciliation.

Referral / Network Model

• OTA provides leads; hotel collects payment. OTA income treated as commission or brokerage; TDS applies (194H / 195 or EL). GST on commission (RCM if foreign).

Equalisation Levy (2% on Foreign OTA Commission)

Applicability Conditions (All must be satisfied):

• OTA is non-resident

• Provides e-commerce supply/facilitation

• Receives consideration from Indian hotel

• No PE in India

• Transaction not taxable under Income-tax Act

Threshold: OTA total Indian receipts > ₹2 crore. Hotels do not test the threshold.

Procedural Steps for Hotels:

• Compute 2% EL on gross commission

• Deposit by 7th of next month

• File annual statement (Form 1)

• Maintain challans and settlement statements

Audit Risk: Non-payment → expense disallowance u/s 40(a)(ib).

EL vs TDS: TDS u/s 195 is not applicable if EL applies.

Hotel safeguard: Obtain annual PE declaration from foreign OTA.

Updated GST Implications (Post September 2025 Reforms)

The GST rates and ITC availability for hotels were updated by the GST Council in September 2025:

Room Tariff GST

Room Tariff (per room per day)	GST Rate	ITC Available?
≤ ₹7,500	5%	No ITC
> ₹7,500	18%	ITC Allowed

Key Points:

• ITC is blocked for supplies taxed at 5% without ITC, e.g., rooms ≤ ₹7,500.

• For mixed supplies, ITC must be apportioned based on actual supplies (Rules 42–43, CGST Rules).

• GST on restaurant or banquet services may differ depending on premises and service type, typically 18% with ITC.

OTA Commission

Payment Type	GST Treatment	ITC Position
Commission by Indian OTA	GST charged by OTA (18%)	ITC Claimable
Commission to Foreign OTA	GST under Reverse Charge @ 18%	ITC Claimable

Practical Notes:

• GST under RCM on foreign OTA commissions must be paid monthly.

• ITC on RCM payment can be claimed if the input is used for business and not blocked under Section 17(5).

Cross-Border Booking Scenarios

Scenario	OTA	Customer	Hotel Exposure	TDS / EL / GST
Indian Hotel + Foreign OTA	Non-resident	Domestic / Foreign	Pay commission	EL 2%; No TDS; GST RCM on commission
Indian Hotel + Indian OTA	Resident	Domestic / Foreign	Receives gross booking	TDS 194-O @1%; GST as above; No EL
Foreign Hotel + Indian OTA	Resident	Domestic	Commission received	TDS 194H / 195; GST on commission; EL not applicable
Foreign Hotel + Foreign OTA	Non-resident	Domestic / Foreign	Commission received	No TDS/EL in India; GST outside India

Documentary Requirements – Hotel-Centric

Income-tax / TDS / EL

• OTA agreements with model specification

• PE declaration (foreign OTA)

• Commission invoices

• TDS certificates (if any)

• EL challans and Form 1

• Settlement statements / bank advices

GST

• Hotel tax invoices (room tariff)

• OTA commission invoices

• RCM computations (foreign OTA)

• Monthly reconciliation and GSTR-1 / 3B compliance

FEMA / Banking

• FIRCs / bank advice for foreign remittance

• Purpose code declaration

• Agreements submitted to bank for validation

Common Errors & Remedies

Error	Correct Treatment / Remedy
Applying TDS 195 on EL-applicable payment	Pay EL 2% only; TDS not required
Netting commission from revenue	Record gross revenue and commission separately
Ignoring GST on RCM on foreign OTA commission	Pay GST under RCM, maintain ITC records
Missing PE declaration	Obtain declaration annually; preserve for audit

Audit and Assessment Defense

Maintain a comprehensive compliance file:

• OTA agreements with model description

• PE declarations

• EL computations & deposit proofs

• TDS certificates / Form 26AS / AIS

• GST invoices & reconciliation

• Bank remittance proofs

• Settlement statements

This resolves most 142(1) notices, audit queries, and EL disputes.

Key Judicial and Regulatory References

• Section 194-O – E-Commerce TDS obligations

• Section 165A / Equalisation Levy – 2% on foreign OTA commission

• CBDT Circular 715 – Clarification on hotel payments under 194I / 194C

• DTAA Article 7 – Business profits of foreign OTA without PE

• East India Hotels Ltd v. CBDT (1994) 209 ITR 854 (Bom) – Hotel services not “work” for 194C

360° Compliance Takeaways

• Identify the OTA model correctly

• Apply TDS, EL, GST per model precisely

• Maintain gross revenue separate from commission

• Reconcile monthly

• Preserve all documentation (agreements, PE declarations, invoices, settlements, FIRCs)

• Maintain an audit-proof compliance file at all times

Hotels following this framework are fully protected from TDS disputes, EL assessments, GST mismatches, and FEMA scrutiny.