Date post: | 19-Oct-2014 |
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Economy & Finance |
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Section 195 of the Income-tax Act, 1961Withholding Tax on Foreign Remittances
Provisions and Issues
Susan Dias
Intent behind Sec 195
Regular inflow of revenue for Government
Checking of tax evasion
Collection of taxes at
earliest point of time
Importance of Sec 195 today
Increased international transactions
Department’s focus on cross border payments
Heightened vigilance through Forms 15CA, 15CB
What the section says…
Liability on payer to deduct tax on payment to non resident
Application by payer for lower/ NIL withholding
Application by payee for NIL withholding
195(1)
195(2)
195(3)
195(4) Validity of certificate of lower/ NIL withholding
…What the section says
195(5)
195(6)
Empowers CBDT to notify rules for 195(3)
Empowers CBDT to provide the manner for furnishing information
195(7) Empowers CBDT to notify class of payers mandated to furnish application to tax officer for determination of WHT rate
Sec 195 (1) – Scope and chargeability
Who is responsible to deduct tax?
Any person (As defined u/s 2(31))
Who should the payee be? All non residents whether having presence in India or not Does not include RNOR
Status of non resident ? Under sec 6 In case of dual residence if tie breaker clause exists - DTAA is
applied
Payments covered? Any sum chargeable under the IT Act Except salaries and dividend u/s 115O
Point of deduction? At the time of credit or payment whichever is earlier
Rate of TDS? Relevant rate in force
Sec 195 (1) – Recent amendment
Scope of WHT obligation u/s 195 extended to all persons including non residents irrespective of them having a residence or place of business or business connection or any other presence in India
Obligation to withhold tax even without any territorial nexus
Sec 195 (2) – Payer’s application for lower/ NIL WHT certificate
Application to be made to tax officer by the payer to determine portion of payment chargeable to tax
Sec 195 (3) – Payee’s application for lower/NIL WHT certificate
On payee’s application AO on determination to grant lower/ NIL WHT certificate
Form No 15C prescribed in case of banking companyForm No 15D in other cases
Conditions for grant of certificate prescribed under Rule 29B
Sec 195 (4) & (5) – Validity and rules for grant of certificate
Certificate granted u/s 195(3) valid till specified period or till cancellation by AO whichever is earlier
CBDT empowered to make rules for grant of a certificate u/s 195(3)
Sec 195 (6) – Furnishing information
Introduced in 2008
Rule 37BB introduced* Information to Department – Form 15CA CA Certificate to be obtained before payment – Form 15CB
Requires the payer to furnish payment related information
*Circular No 4/2009 gives manner for submitting and processing payments
Sec 195 (7) – Notification of class of persons
Introduced in 2012
Board empowered to notify class of persons (payees) required to apply to tax officer for determination of WHT, irrespective of whether payment is taxable in India or not
No class of persons notified yet
Rates of tax
Rates of tax specified in the Finance Act or rates specified in the DTAA, whichever is beneficial – Sec 2(37A)(iii)
Sec 206AA to apply
RBI’s TT buying rate on day on which TDS is required to be deducted to be considered
Sec 195A – Grossing up of taxes
Grossing up required in case of net of tax payments
Tax payable by non resident to be added to income remitted
Particulars Amount
Amount payable to non-resident (net of tax) INR100
Tax rate applicable 20%
Gross-up income: 100 * 100 . (100-20) INR 125
Tax payable (INR 125 * 20%) INR 25Net amount paid to non-resident (INR 125 – INR 25) INR 100
Tax payable by non resident determined on gross figure
Applicability at a glance
Taxable under IT
Act
DTAA available
DTAA rates
beneficial
Income taxable under DTAA
Deduct tax @ IT Act prescribed rates
Deduct tax @ DTAA prescribed rate No tax deducted
NoYes
No
No
Yes
Yes
Yes
No
Payment to Non Resident
Chargeability under IT Act or DTAA
Nature of Income IT Act DTAA
Business/Profession Section 9(1)(i) Article 7 &14 rw 5
Salary Section 9(1)(ii) Article 15
Dividend Section 9(1)(iv), section 115A Article 10
Interest Section 9(1)(v), section 115A Article 11
Royalties Section 9(1)(vi), section 115A Article 12
Fees for technical services/FTS
Section 9(1)(vii), section 115A Article 12
Capital Gains Section 9(1)(i), section 45 Article 13
Documents to be relied on by CA before issuing Form 15CB
Agreements Invoices Payment details Correspondences Technical advice Proof of services actually rendered in group company transactions Remitting bank details Rate of conversion of foreign currency Tax Residency Certificate Payee declaration/certificate (eg no PE, tax residency, beneficial
ownership, treaty entitlement etc)
Some focus areas in issuing Form 15CB
Nature of the income – FTS, royalty etc
Whether payee has a PE in India? If yes, attributable profit
TRC sufficient evidence for claiming treaty benefit?
Frequently asked questions
Whether tax is to be deducted by agent when making remittance to foreign principal
Whether transactions between Branch and HO attract sec 195
Whether tax is to be deducted u/s 195 in cases of payment in kind, barter transactions or adjustment against receivables
Frequently asked questions
Do forms 15CA and 15CB absolve payer from penal consequences
When is the payer required to deduct tax
What exchange rates are to be used while deducting tax
Frequently asked questions
Is TDS Certificate to be issued when tax is borne by payer as per Sec 195A
By what time is tax deducted required to be deposited
Do you need to issue TDS Certificate to non residents
Is NIL TDS Return to be filed in the quarter when no TDS is deducted u/s 195
Whether tax officer can take a contrary view than adopted while issuing certificate u/s 195
Is there a time limit for disposal of application u/s 195
Whether order under section 195(2) can be revised u/s 263
Frequently asked questions
Frequently asked questions
Whether Surcharge & Cess are to be added when treaty rates are applicable
Can payee claim credit for excess tax deduction due to sec 206AA
Whether Surcharge & Education Cess leviable if higher rate under 206AA applied
Some issues
Taxability of royalty and Fees for Technical Services (‘FTS’)
CA Certificate as alternative to Sec 195(2)
Applicability of Sec 195 to reimbursement of expenses
Key takeaways
In case of doubt and to determine attribution of income – Advisable to obtain WHT order u/s 195(2)
Sec 195 also applies to non residents payers on payments to residents and non residents
CA certificate route - where strong judicial precedents exist
Precautions to be taken while issuing Form 15CB – eg. Certificate cum-undertaking to be obtained from payee (such as no PE declaration)
Thank you
Consequences of non compliance
Applicable section Nature of default Consequence
40(a) Withholding tax not deducted or not deposited within prescribed time
Disallowance of expenses in computation of taxable income of payer; deduction in year of payment
201(1) Tax not withheld/ deposited appropriately
Recovery of tax not withheld/ deposited or short withheld/ deposited
201(1A) Tax not withheld/ deposited appropriately
Interest @ 1% per month or part of he month
221 Tax withheld not paid Penalty, not exceeding the amount of tax not paid
271C Tax not withheld or short withheld
Penalty, not exceeding the amount of tax not withheld
Refund of tax deducted u/s 195
Situation Condition for refund
Contract is cancelled No remittance is made to the non resident
Contract is cancelled No remittance is made to the non resident
Remittance is duly made to the non resident but contract is cancelled
Remitted amount is duly refunded to the payer by the payee
Contract cancelled after partial execution No remittance is made to the non resident for the non executed part
The contract is cancelled after partial execution and remittance related to non executed part is made to the non resident
Amount refunded to the payer or no remittance was made but tax was deducted and deposited when amount was credited to the account of the non resident
Reference: Circular No 7/2007 and Circular No 7/2011
Refund of tax deducted u/s 195
Situation Condition for refund
Amendment in law or by notificationunder the IT Act
There occurs exemption of the remitted amount from tax
Order passed under section 154 or 248 or 264 of the Act
Tax deduction liability of payer is reduced
Double deduction of tax amount Same amount deducted twice by mistake
Other than discussed above Grossing up not required or payment of tax at higher rate under domestic law while a lower rate is prescribed under DTAA
Reference: Circular No 7/2007 and Circular No 7/2011
Reimbursement of expenses – Judicial precedents
Nature of Expense Case Laws in favour of taxpayer Case laws against the Taxpayer
Reimbursement of cost of services of a third party engaged by non resident
Nathpa Jhakri Joint Venture - 37 SOT 160 (Mum)Modicon Network P Ltd – 14 SOT 204 (Del)
Wallace Pharmaceuticals P Ltd – 278 ITR 97 (AAR)
Reimbursement of allocated cost (ie cost sharing arrangements)
Dunlop Rubber Co - 142 ITR 493 (Cal) Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)
Payment for services rendered at cost
Timken India Ltd - 273 ITR 67 (AAR) AT&S P Ltd – 157 Taxman 198 (AAR)
Reimbursement of expenses – Judicial precedents
Nature of Expense Case Laws in favour of taxpayer Case laws against the Taxpayer
Reimbursement of incidental expenses in addition to payments of royalty & FTS
Telco Ltd - 245 ITR 823 (Bom)Industries Engg Project (P) Ltd - 202 ITR 1014 (Del)Clifford Chance - 82 ITD 106 (Mum)Mahindra and Mahindra Ltd - 1 SOT 896 (Mum)Fortis Healthcare Ltd - 45 SOT 190 (Chd)
Cochin Refineries Ltd - 222 ITR 354 (Ker)SRK Consulting - 230 ITR 206 (AAR)Ashok Leyland - 120 ITD 14 (Chennai)Bovis Land Lease – 36 SOT 166 (Bang)CSC Singapore Pte Ltd - 2012-TII-35-ITAT-DEL-INTL (Del)
Reimbursement of living allowance, etc of a person deputed to India by the non resident
Morgenstern Werner - 233 ITR 751(All) Goslino Mario - 241 ITR 3 12 (SC) BHEL - 252 ITR 218 (Del)
Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)